So, you think you are interested in investing in property but you’re not really sure what some of the key terms mean; which is really important if you are going to be investing thousands of dollars into a dwelling. So, let’s have a closer look at the definitions of some of the key phrases aligned to the investment property industry.
Firstly, let’s define what an investment property is. An investment property is a real estate property that has been purchased with the intention of earning a return on the investment (purchase), either through rent (income), the future resale of the property, or both.
An investment property can be a long-term endeavour, such as an apartment building, or an intended short-term investment in the case of flipping (where a property is bought, remodelled or renovated, and sold at a profit).
Often when an investor buys a property, they will do so because they can negative gear it. But what does that mean? Let’s take a look.
Negative gearing is when a person borrows money to buy an investment asset without receiving enough income from the investment to cover the interest expenses and other costs involved in maintaining it. Depending on the investor’s home country, the shortfall between income earned and interest due can be deducted from current income taxes.
Countries that allow this tax deduction include Canada, Australia and New Zealand. When investing in property it is important to realise that the dwelling you are purchasing will take time to grow in value… to experience capital growth. Ha? What does this mean?
Capital growth is the increase in value of an asset or investment over time. It is measured on the basis of the current value of the asset or investment, in relation to the amount originally invested in it. Capital growth is one of the most fundamental investment objectives for investors and it generally indicates a higher appetite for risk as opposed to an income objective, which may signify lower risk tolerance.
Finally, if a person is investing in property, or other assets, they would be keen to receive a return on their investment. But what does this mean, and how can you calculate it?
Return on investment (ROI) is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment’s cost. To calculate ROI, the benefit (or return) of an investment is divided by the cost of the investment, and the result is expressed as a percentage or a ratio
The return on investment formula:
- In the above formula, “Gain from Investment” refers to the proceeds obtained from the sale of the investment of interest. Because ROI is measured as a percentage, it can be easily compared with returns from other investments, allowing one to measure a variety of types of investments against one another.
- If you are still confused and need some further information about property investment continue to do your research. Read, listen and question.
- Real Asset Conveyancing would like to say a special thanks to Investopedia for the definitions. It’s always better to ask an expert! All definitions are current at time of publication.