Understanding real estate investment terms
12-Oct-2009
Victoria is currently experiencing some tightest rental market to date, which should provide some encouragement to investors to either enter the market or increase their residential property portfolio. If you are considering entering the residential property investment market there are some terms that you will see commonly used, equity, capital growth, investment return and gross rental yield.
Equity. This is the difference between the property purchase price and the amount owed on the loan. In other words what you own not what you owe. Generally equity increases over time in line with capital growth and a reduction in the debt.
Capital growth. The term capital growth is often used in real estate to describe the increase in the price or value of a property. Capital growth is the annual compound rate of growth in the value of the property. For instance if you bought a house in Coburg for $538,500 and twelve months later it was worth $550,000, the capital growth is the difference between the two, $11,500, divided by the purchase price. This equates to 2.1 per cent over a year. Capital growth is also known as capital appreciation.
Investment return . From a real estate perspective the term investment return is very similar to the capital growth figure. It is the percentage of change in value of the investment over a given period of time.
Gross rental yield. Gross rental yield is a term that is frequently used to compare the investment return on a property investment. To calculate the amount you divide the yearly rental income by the purchase price of the home. For instance the yearly rental income on a 3 bedroom house in Coburg is $20,000 and the median house price is $550,000 resulting in a gross rental yield of 3.6 per cent.
