Key terms to understand before you start investing in property

When you first start thinking about investing in property, it can seem a bit daunting…but you shouldn’t let that get between you and your first investment! 

There’s no denying the sector can be full of jargon and seemingly complicated concepts, but to be armed and ready for your initial discussions with agents, realtors, developers, property managers, mortgage advisors, financial planners, conveyancers…and more…you need to be up to speed with a few key terms first! To help get you started, this article steps you through all of the common terms you’ll be hearing!

The property

Commercial property refers to real estate used for business purposes, and can include office buildings, retail spaces, warehouses, industrial buildings, hotels and more…all used for commercial purposes. It can be owned by individuals, companies or investors, and leased to businesses or organisations. Popular commercial real estate segments in Australia include office, retail, hotels, healthcare, childcare, medical and government sectors.

Residential property refers to real estate that is used for housing individuals and families. It includes a variety of different types of accommodation, from stand alone homes and townhouses, through to multi-story units and apartments. Residential property is generally considered to be one of the safer and more stable types of real estate investments, because everyone needs somewhere to live!

Building development is the process of constructing, renovating, or expanding a building or group of buildings in compliance with relevant building codes and regulations. It typically involves multiple stages, including site selection, design, construction and engaging appropriate experts. It can involve the creation of residential, commercial or even industrial structures, and means collaborating with of a variety of professional specialists such as architects, engineers, construction managers and contractors. The process can be complex and time-consuming, but the end result can create valuable assets.

Residential redevelopment A residential development is a planned community of homes or apartments built for people to live in. They can range from family homes on individual lots to multi-storey buildings with hundreds of units. The residences are typically built in a cohesive style, and can incorporate common features and shared amenities, green spaces, and high-end inclusions for communal use such as gyms, pools, bbq areas and even formal function spaces. The overarching goal of a residential development is to provide a consistent quality of living for residents in a convenient location.

Infill development New residential development that occurs on small sites in established suburbs.

Subdivision is the process of dividing a piece of land into smaller plots or lots that can be sold as individual properties.

Townhouse A townhouse is a type of residential building that is typically multi-storied and usually part of a row of similar buildings, with adjoining walls. While generally smaller in size than single-family homes, they offer more space than standard apartments. They are a popular option in urban areas where land is limited as they offer a more affordable alternative to larger house blocks, while still providing the privacy and independence of your own home.
 
Fittings In the context of real estate, fittings typically refer to things like light fixtures, plumbing fixtures, appliances, carpets and other items that are attached to the property and considered part of its overall value.

The location

Infrastructure refers to the physical systems and facilities that support the property and its surrounding location and includes planned and existing considerations like public transport, roads, water and sewer systems, power and telecommunications networks and all essential and desirable public utilities. It’s an important consideration for investors as it can directly impact the value and potential return on the property investment. Properties with access to reliable and well-maintained infrastructure are generally more attractive to potential tenants and buyers, and so command higher rents or sales prices. On the other hand, properties that are located in areas with insufficient or outdated infrastructure can be less desirable and have lower market value.

Crown land is land that is held and managed by the government.

Local Government Area (LGA) The geographical area for which an incorporated local government council provides and manages a range of services and facilities to the community, including local planning and development.

Central Business District (CBD) Commonly used in urban planning to describe the heart of a city or area’s economic and social activity. It’s usually where the majority of financial, commercial and government services are located, and is typically the most economically and culturally significant area of a city. CBDs are often characterised by taller buildings, a mix of commercial and office uses, and limited residential use…along with high levels of land value, density and activity.

Urban fringe This refers to the area surrounding the urban centre of a city, where development starts to blend into suburban or even rural areas. This transition zone can also include satellite towns and communities (such as Melton, Pakenham and Sunbury).

The sale

Auction Accounting for around 30 per cent of all property sales, an auction is a competitive bidding process generally held on site, online or in a bidding room, and facilitated by a licensed auctioneer, real estate business or agent. It is a public sales process where the property for sale sells to the highest bidder (provided the vendor accepts the price). The winning bidder typically pays a deposit on the day of the auction, with the balance due within a specified time frame. The goal of an auction is to sell the property quickly and efficiently, and to secure the best possible price for the seller.

Vendor bid A vendor bid must be clearly announced, and occurs during the course of an auction when the auctioneer, seller or their representative places a bid on the property. A vendor bid is commonly used in situations where the seller wants to ensure that the property reaches a minimum sale price.

Private sale Where the property is sold directly between the seller and the buyer without the involvement of a third party such as a real estate agent or broker. Instead, the seller is responsible for marketing the property, negotiating the terms of the sale and closing the transaction. Private sales can seem like a more cost-effective way to buy or sell a property, however the process can also be more complex and time-consuming, as the parties are responsible for handling all aspects of the transaction themselves. Private sales account for a large percentage of all property sales, but become more common the further from the CBD the property is located.

Clearance rate The clearance rate refers to the percentage of properties successfully sold at auction over a given timeframe in a defined location. It can be used as an indicator of market sentiment and performance of the real estate market. A high clearance rate can indicate a strong demand for properties and a robust market, while a low clearance rate suggests that there could be a surplus of properties available or a lack of buyer confidence. The clearance rate varies greatly depending on the location, type of property and can also reflect the state of the overall economy.

Median price The median price in real estate refers to the midpoint price of a given set of properties. It is calculated by arranging all the properties in order of price from highest to lowest, and then finding the one that sits exactly in the middle – that is, where half of the sales are of lower value and half are of a higher value. If the number of properties in the set is even, the median price is the average of the two properties that are in the middle. It is a useful measure for determining the typical price of a property in a certain area, because it isn’t affected by outliers (very high or very low prices) in the same way that an average price can be. However, it’s important to note that median price only gives a general idea of the typical property price, and may not be representative of the price of a specific property.

The finances

Appraisal A professional evaluation of the value of a property.

Mortgage A loan taken out to buy a property, secured by the property itself.

Deposit The initial payment made towards the purchase of a property.

Principal The amount of money borrowed in a mortgage.

Equity The difference between the market value of a property and the outstanding debts against it. In other words, it is the portion of the property that is owned by the property owner, after accounting for any mortgage or loan balances. Equity can increase as the property increases in value or as the owner pays down the mortgage balance…and it can decrease if the property value decreases or if the owner takes out additional loans against the property. Importantly, when it comes to building a property portfolio, equity can be used as collateral for additional loans.

Loan to Value Ratio (LVR) is a lending risk assessment ratio used by financial institutions and other lenders to assist them in determining risk when assessing a mortgage application. It represents the ratio of the loan amount to the appraised value of the property being purchased, expressed as a percentage. For example, if the property being purchased is valued at $500,000, and you need to borrow $400,000 to pay for it, the loan is worth 80% of the property value, meaning your LVR is 80 per cent. Generally speaking, the higher the LVR, the less equity the borrower holds in the property and the higher the higher the perceived risk to the lender. To mitigate this risk, lenders may require a larger deposit, a higher interest rate, or lenders mortgage insurance (LMI).

Lenders Mortgage Insurance (LMI) is insurance that protects the bank or lender in case the borrower can’t pay their residential mortgage. It’s usually paid by borrowers who have an LVR higher than 80 per cent (that is, borrowers with a deposit of less than 20 per cent).

Refinancing is the process of obtaining a new mortgage to pay off an existing one, usually for additional benefits such as a lower interest rate.

Closing costs The costs incurred in the process of obtaining a mortgage and purchasing a property.

Capital gain The profit made from the sale of an investment, calculated by subtracting the original purchase price (the cost basis) from the sale price of the asset (if the sale price is less than the cost basis, the result is a capital loss). It’s important to keep track of your capital gains and losses, as they can have a significant impact on your overall financial situation and tax liability.

The conveyancer

Conveyancer A conveyancer is a professional specialising in the legal aspects of transferring property ownership from one person to another. They assist with the preparation and execution of legal documents, handle the transfer of funds and ensure that all necessary government regulations and requirements are met during the sales process. This may include reviewing and preparing contracts, conducting title searches, preparing settlement statements, coordinating with the parties involved, and overseeing the settlement process to ensure that all requirements are met and that the transfer of ownership is completed smoothly and efficiently.

Section 32 Also known as the ‘Vendor’s Statement’, the Section 32 is a document disclosing any matters that affect the sale of land, such as building permits, mortgage particulars, description of any easements, covenants or other restrictions, land zoning and electricity, gas, water, sewerage and telephone service details. It’s usually prepared by the vendor’s solicitor or conveyancer and must be available to potential purchasers separately and as part of the contract of sale.

Easement A property easement is a legally binding agreement that grants one party the right to use another party’s property for a specific purpose. An easement allows the holder of the easement to use the property in a specific way, such as for access, utilities, or even conservation purposes, while the property owner retains ownership of the land. Easements can be either permanent or temporary, and they can be granted in perpetuity, meaning they remain in effect even if the property is sold to a new owner. For example, under a right-of-way easement, an owner may be able to use a portion of their neighbour’s property to access their own property, even though the neighbour retains ownership of the land used as access. Or, if a property has a utility easement, a utility company may be granted the right to install and maintain power lines, pipes or other utility infrastructure on the property.

Settlement occurs when the buyer pays the balance of the selling price. Adjustments are made for water and council rates, and strata levies and body corporate fees for units. The buyer becomes the legal owner of the property after settlement.

Managing the property

Rent Payment made by a tenant to a landlord for the use of a property.

Gross rental yield A percentage used to express the return on a property investment. It is calculated by dividing the yearly rental income by the value of the property. For example, if a property is worth $500,000 and its annual rent is $25,000, the gross rental yield is $15,000 divided by $500,000 x 100, resulting in a gross rental yield of three per cent.

Cash flow The amount of money generated by a rental property after all expenses have been paid.

Owners corporation Also known as a body corporate, an owners corporation is an organisation responsible for managing the common areas and enforcing rules for units, apartments and medium-density housing where there is shared or communal property. If your property is part of a strata scheme or multi-unit residential property you will likely be liable for an owners corporation fee, also known as strata fee. This is a recurring fee that covers the costs of maintaining common areas, such as hallways, lifts, swimming pools and gardens, along with administrative expenses, insurance, and other costs associated with running the corporation. The fee is usually calculated based on the unit entitlement of each owner, which is a proportional representation of the unit’s size and usage of the common areas.

Vacancy rate is a metric used to measure the percentage of available rental properties that are unoccupied at a given time. A higher vacancy rate indicates a weaker demand for rental properties in a given area, while a lower vacancy rate suggests a stronger demand and a tighter rental market. The vacancy rate is often used by landlords, investors and real estate analysts to assess the health of a particular housing market to make informed decisions about buying, selling or renting properties.

Have you come across any other terms you need to know more about?

Then check out our FAQs, or just ask Hamish, One Haven’s Head of Property and absolutely down to earth and very approachable expert in all things property!

So if you’re keen to buy your next property but find navigating your way through the terminology a bit time consuming, then reach out to One Haven today. We’re more than happy to demystify the process, so that when you do take the leap into property ownership, you can be confident that you’re armed with all the knowledge you need!