Property investment terminology, benchmarking, and improving your return.

The return on investment you can expect from your property as a percentage of the purchase amount or amount invested. You can find your expected gross (before tax) annual rental yield by considering the weekly rent amount multiplied by 52 weeks (one year), then divide by the purchase price of the property, and finally multiply by 100 to find the percentage.

For example, if you were to buy a property for $600,000 that will generate $500 rent per week, the gross rental yield calculation would look like this: Gross rental yield = (500 x 52) / 600,000 x 100 = 4.3%.

There are 2 types of rental yield: gross and net.
1. Gross yield is calculated through annual rental income and property value.
2. Net yield is calculated by including all expenses involved.

Cash flow is the amount of money you can pocket at the end of each month, after all operating expenses (including mortgage repayments) have been paid. If you spend less money than you earn, your cash flow will be positive. If you spend more money than you earn, your cash flow will be negative.

Rental income - all operating expenses (including loan payments) = Cash flow  

The gross rate of return is the total rate of return on an investment before the deduction of any fees, commissions, or expenses. The gross rate of return is typically quoted over a year.

The interest rate is the amount charged on top of the principal by a lender to you for the use of the loan. The interest rate on a loan is typically noted on an annual basis known as the annual percentage rate (APR).

An offset account is an everyday bank account that’s linked to your home loan. You can deposit your salary and savings into the account and the balance is then offset against the amount owing on your home loan. Because the offset account acts like an everyday account, your money is still accessible whenever you need it, even while it’s working to reduce your overall interest payments.

Negative gearing occurs when the expenses associated with owning your investment property are higher than any income received from the property. While the long-term property investment goal is to make a capital gain, negative gearing can allow you to use your investment property expenses as a tax deduction.

When the income received from your investment property more than covers the expenses associated with owning the property, this is called positive gearing. The profit made from owning the investment property is classed as taxable income, and so you will be required to pay tax on it.

The increased value of a property or other asset over time. Appreciation takes place for a number of reasons, including market trends, demand, improvements and upgrades.

The amount of money you gain through selling your property compared to your original purchase price. Your property is referred to as a capital purchase, and the increase in value is the gain. If you purchased your investment property for $600,000 and after 12 months you sell the home for $700,000, you have made a capital gain of $100,000.  

Capital gain or loss is the difference in the value of a property compared to its purchase price. If there is a gain, it is realized after the asset is sold. A short-term capital gain is one year or less; a long-term gain is more than a year. Both must be claimed on your income taxes, but short-term capital gains have a higher tax rate than long-term capital gains.

The decrease in value of a property or other asset over time. This is the opposite to ‘appreciation’. When an investment property depreciates it could be used as a tax deduction.