Terms first-time property investors need to know

The availability of rental homes has improved slightly in Melbourne, but there are still opportunities for investors, particularly in regional Victoria. Aspiring first-time investors should undertake research before buying their first property, and there are a few terms that they will need to know: 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 12 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% 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 three-bedroom house in Coburg is $20,000 and the median house price is $550,000, resulting in a gross rental yield of 3.6%.

Enzo Raimondo is CEO of the Real Estate Institute of Victoria.

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