One form of investment that has been extremely popular and lucrative for many years is property investment, and landlords with a portfolio of properties and a good knowledge of the industry are able to make big money from such investments. However, everyone has to start somewhere and as a rookie investor it is important to familiarize yourself with the market and with the terminology associated with property investment.
Like most other industries, the property and mortgage sector has its own jargon and terminology that might sound like double Dutch to those unfamiliar with it. If you are planning to make a success of property investment, it is vital that you develop a good knowledge of common terms used in the industry, as failure to do this could result in costly mistakes. Whether you are planning to buy existing homes to rent out or whether you are considering buying land in order to build property to rent out, knowing the industry jargon can help you to make a greater success of your investment.
Commonly used terms all property investors should know
If you are thinking of investing in property, there are some common terms that you should be aware of, many of which are related to the financial side of things. This includes:
- Void periods: The void period for a rental property is the period during which the property is empty rather than being tenanted. These are periods during which no rental income is being earned because there is no tenant in the property
- Equity: The equity in a property is the difference between the value of the property and the amount that you owe on the mortgage loan for the property
- LMI: This is lender’s mortgage insurance, and is usually a necessity in the event that you are borrowing in excess of 80 percent of the property value. LMI provides protection for the lender in the event that you, as the borrower, default on repayments
- Bridging loan: This is a short term loan that many investors and buyers use in order to bridge the gap between selling an existing property and buying a new one.
- Fixed rate: A fixed rate home loan is one where you pay the same rate of interest on the loan for a fixed period of time, so your repayments for those houses for sale remain the same for that period of time
- Credit check: Regardless of whether you purchase houses of land, this is a check that is carried out to determine your creditworthiness using information that is logged by credit reference agencies. This check will be carried out on you when you apply for finance to buy an investment property but is also something that you may want to carry out on potential tenants to determine the likelihood of them being able to keep on top of rental payments
- Capital gain: This simply refers to the sum by which your property has increased in value since you purchased it. So, if you buy a property for $100,000 and the value then increases to $150,000 a few years down the line, that additional $50,000 is your capital gain
- CGT: This stands for Capital Gains Tax and refers to the tax that you will have to pay in some countries if you sell your investment home and make a profit from the sale
- Tenancy agreement: This is a legal document that outlines the terms of the tenancy and is signed by both the landlord/letting agent and the tenant/s. Breach of this agreement on the tenant’s part could mean that you are able to evict or take legal action. Breach of the agreement on your part means that the tenant could potentially take action against you.
- Off plan: If you buy an investment property off plan, you are buying it before it is actually built based on the plans alone. This is something that many property investors do when looking to invest in and rent out apartments and properties that are planned but yet to be constructed.
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Iona Gray is a writer and an experienced property investor. She’s currently looking for land and houses for sale in Perth.