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1 May 2015
 
 

Property Investment Terminology, Explained

Rent, property taxes, insuranceThe private property rental market is booming, yet according to the latest research, landlords remain alarmingly ignorant when it comes to industry terminology. Studies revealed that just 24% of landlords know what ‘return on investment’ means, 26% know what ‘gross yield’ is and just 12% could identify what ‘gross profit’ means. To clear up the confusion, we’ve put together an explanation of some common property investment terminology that every landlord should know.

Return on investment – As a performance measure, ROI evaluates the efficiency of a properties money making potential. It is calculated by dividing the return of an investment by the cost of the investment.

 

Gross yield – This is the total income a property has generated, before the deduction of taxes and expenses. In the property market it is expressed as a percentage calculated by dividing the annual return on investment by the current value of the investment.

 

Gross Profit – The total revenue generated by the property, minus any taxes and expenses. This is ultimately the cash that landlords pocket.

 

Depreciation – This represents any lost value that may have accumulated over time. Landlords will often face depreciation during a property price slump.

 

Capital gain – When a property increases in value from the original purchase price, landlords enjoy a capital gain.

 

Equity – For landlords that have a mortgage, equity is the proportion of ownership they possess. For example, if a landlord owns a property worth £200,000 and have a mortgage of £120,000, they have 40% equity.

 

Cashflow positive – When the amount of cash coming in is greater than the amount of cash flowing out, this is referred to as cashflow positive. It’s a great place for landlords to be in!

 

Landlords insurance – This refers to the insurance policy that protects a landlords investment from unexpected incidents. This could be anything from tenant arrears and vandalism to burst pipes and flood damage. A popular way for landlords to secure the cheapest deals is to visit quote compare websites.

 

Stamp Duty – When purchasing a property valued at over £125,000 landlords must pay stamp duty. This is a government tax that all property buyers must pay.

 

Buy-to-let insurance – When landlords purchase a property with the intention of leasing it out straight away, they’ll need to take out a buy-to-let specific insurance policy. Without the right cover landlords risk fines or invalidated insurance.

 

You’re welcome!