It’s easy to get confused and overwhelmed when confronted with the myriad of financial terms that get thrown around when talking about property as investment or the property market in general. To make things a little easier for you, here is a glossary of expressions explained as simply as possible. It is important to educate oneself so you can make wise, sensible and informed decisions about the long-term investment of property.

  1. Median Property Value

The median is not the average. This term simply means the middle price in a series of property sales, where half the sales are of a lower value and half the sales are of higher value. This means that should 15 property sales be recorded in a suburb and arranged in ascending order, the eighth sale price is the median price.

Median property values are generally more accurate true market indicators because the prices are unaffected by unusually or sporadically high or low prices.

  1. Mean Property Price

The mean or average property price is calculated by adding all the sales amounts together over a specific period of time and then dividing that total by the number of sales.  This is not a particularly accurate way of gauging the property market’s behaviour as the average will be affected by a particularly high sale or an unusually low one.

  1. Capital Return

A very important element of the calculation of return on investment, capital return shows the rate of growth in property prices. For instance, should you buy a house for R600 000 and one year later that house is valued a R720 000 the capital return made will be 20%.

  1. Income Return/Yield

This term is used to express the income return on a rental property investment, or the rental income that is received. This amount is generally calculated annually based on the rental property’s investment cost as well as its current market value.

  1. Gross Income Yield

Similar to the gross income of a business, the gross income yield of a property is calculated as the lump income from the rental before any deductions are made. The gross yield is then determined by dividing the total rent received per annum by the property’s value. This amount is then expressed as a percentage.

For example, should you have bought a house a year ago for R650 000 and have rented it out for a total income return of R60 000 for that year, your gross income yield will be 9.23%.

Gross income yield = Total annual rental income divided by property value times 100.

  1. Net Income Yield

The net income yield is much more significant than the gross income yield as the net amount represents what you are left with once all deductions and costs are taken in to account. Insurance, bond repayments, maintenance, rates and taxes or levies are all costs involved with property ownership. Using the same amounts from the previous example, let’s say the annual expenses amount to R14 500, which one can subtract from the annual rent amount of R60 000. This amount of R45 500 is then divided by the property value and multiplied by 100 to provide you with a percentage amount of 7%.

  1. Total Return

The concept of total return is relatively easy to understand. The total return is quite simply the net income and the capital return on a property added together.

  1. Home Equity

Home equity refers to the current market value of a property less the outstanding balance on the bond. Essentially the home equity is the amount of ownership that has been accrued by the bond-holder through payments made and escalation in value.

  1. Negative Home Equity

This term refers to the instance in which the outstanding loan balance is higher than the current value of the property. This happens when lenders purchase the home with a large loan amount and the economy decelerates resulting in the subsequent drop in property prices.

  1. Home Debtor

The term is often used to describe home owners with little or no equity in the home who are unlikely to ever pay off their home loan as a result of the high costs of rates and taxes, maintenance and repairs.

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