Wealth Plan book glossary

A

Asset: A resource owned by an investor that can produce a return (e.g. an investment property or a share/equity).

B

Boarding house: A type of yield property where tenants rent a single room or studio within a larger building, usually with shared kitchens and lounges.

C

Capital growth: The increase in the value of a property that happens over time as the market increases in value.

Cashflow: The amount of cash produced by an investment property per year (week or month); that is, the money left over once the rent has come in and the expenses have been paid. This can also refer to the amount of cash an investor needs to contribute to a property over a given timeframe (e.g. if the property is negatively-geared).

Central Bank: The organisation that regulates and sets rules for the other banks. See Reserve Bank of New Zealand.

Code Compliance Certificate: Sign-off from the council that a property meets the Building Regulations, and that the property complies with what was stated in its building and resource consent applications. Note: a property may still not be ‘finished’ even if it has its Code Compliance Certificate.

Commercial bank: A business that lends money for purchasing investment property. Also offers traditional money management services like credit cards, debit cards, savings and transaction accounts, revolving credits and term deposits. ANZ, Westpac, ASB and BNZ are all examples of commercial banks.

D

Debt consolidation loan: When a borrower takes out one larger loan to pay off multiple smaller loans. Used to merge many smaller payments into one regular payment. Used in the Debt Destroyer strategy.

Debt-free asset: An asset without any debt secured against it. See Net assets.

Debt-to-income ratio (DTI): The size of your mortgages compared with the total income you earn from rent and salary/wages. For instance, if your mortgages are worth $500,000 and you earn $100,000, you have a DTI of 5.

Deferred settlement: When you agree to purchase a property but don’t complete the transaction until more than four weeks later. Often used to renovate a property before you actually own it to minimise mortgage repayments and financing costs.

Depreciation: When the value of chattels within your property decreases in value over time. This depreciation is considered an expense and is used to decrease the amount of tax you need to pay.

Dual-key apartment: A unit where there are two separate apartments contained within one legal title (i.e. two separate apartments within one), usually sharing an entranceway.

Dwelling: A legal self-contained residence or unit. Typically lived in by one household.

Equity: The value of your property minus the value of the mortgage. For example, if a property is worth $1 million with a mortgage of $400,000, the investor has $600,000 worth of equity within the property.

E

F

Financial adviser: A person who is registered on the Financial Services Providers Register and is legally allowed to offer personalised financial advice.

Fixed rate/Fixed interest rate: An agreement with a lender or bank of the interest rate that you will pay for a set amount of time. For example, 4.5 per cent fixed for three years means that the bank will charge you an annual interest rate of 4.5 per cent and that rate will not change for three years.

Floating rate/Floating interest rate: An agreement with a lender or bank where the interest rate you pay can change at any time.

G

Gross yield: A measure of how much rental income your investment property generates.

Calculated by taking the annual rent and dividing it by the current value of the property. For example, $500 a week for a property currently worth $650,000 means a gross yield of 4 per cent. ($500 × 52) / $650,000.

Growth property: A property that will likely increase in value quickly, but will likely not have a high yield.

H

Healthy Homes Standards: The legal standards which every rental property needs to meet in New Zealand before being rented.

Home and income property: A type of property where there are multiple dwellings on the same title. The owner will often live in one dwelling and rent the other(s).

I

Interest deductibility: Whether the interest costs associated with your property’s mortgage count when calculating how much tax you pay. If your interest costs are deductible, you tend to pay less tax. If they are not deductible, you will tend to pay more tax.

Insurance premium/Premium: The regular payment that is made to an insurance company to pay for the insurance policy.

Interest-only loan/Interest-only mortgage: Where a borrower pays the bank for the privilege of using the money (the interest), but doesn’t pay back any of the original loan.

L

Landlord: Same thing as a property investor.

Leasehold: A property where you own the building on the land, but don’t own the land itself. You then have a long-term rental agreement with the landowner, which you then pay rent on. Investors should be very, very wary of leasehold properties, because – among other things – ground rents increase faster than rents generally. Leasehold properties can also be much harder to sell.

Leverage: The ability to borrow money to purchase a more expensive asset than you could afford. Specifically when that money is lent against the asset being purchased.

Loan-to-value ratio (LVR): The amount of mortgages you have compared with what your property is worth. For instance, if you have a $600,000 mortgage on a house worth $1 million, your LVR is 60 per cent.

Loan-to-value ratio restriction (LVR restriction): A piece of regulation where the Reserve Bank stops banks from lending above a certain threshold for properties. At the time of writing, at least 95 per cent of each bank’s lending to investors must be at 60 per cent or less. In effect, that means that the bulk of investors need a 40 per cent deposit or more when purchasing. However, there are exemptions.

Look-through company (LTC): An entity investors use to own their properties. Often used to minimise the amount of tax an investor needs to pay. Not appropriate for every situation and needs to be set up correctly for investors to receive the benefits.

Losses carried forward: When an investment property makes a taxable loss, that deficit is used in future years to decrease the amount of tax the investor needs to pay.

M

Minor dwelling: A building that is constructed on a piece of land that already has another house on it. Often used to create a home and income or increase the rent a property achieves.

Mortgage: The money a property investor or borrower raises from a bank to purchase a property.

Mortgage adviser: A type of financial adviser who deals with a bank on an investor’s or borrower’s behalf. They usually offer their services with no charge to the purchaser. Instead they earn a commission from the bank/lender when a purchaser successfully borrows money.

Multi-income property: A property that has multiple dwellings, tenants or households. See Boarding house, Home and income property, Student accommodation, Yield property.

N

Negative gearing: When an investment property runs at a deficit and the investor needs to ‘top-up’ the property with their personal cash.

Net assets: The total value of your properties, minus the total value of your mortgages.

Net yield: A measure of how much rental income your investment property generates. Calculated by taking the annual rent, taking away the operating expenses and dividing it by the current value of the property. For example, if a property earns $500 a week in rent and has $10,000 of operating expenses per year and is currently worth $650,000, it has a net yield of 2.5 per cent. ([$500 × 52] – $10,000) / $650,000.

Non-bank lender: A company that lends money for the purposes of purchasing residential property (and other reasons), but is not a registered bank. Typically, it doesn’t offer traditional banking services like transaction accounts, credit cards, debit cards, revolving credits, term deposits or savings accounts.

NZ Property Investors’ Federation: The national body that represents property investors. It currently has 19 related associations around the country.

O

Offset facility/Offset loan: Similar to a revolving credit except there are two bank accounts – one with a mortgage on a floating rate, one for savings (the offset). The borrower is then charged interest on the mortgage, minus any savings in the offset account. For instance, if the borrower had a $30,000 mortgage on a floating rate and $10,000 in the offset, they would only be charged interest on $20,000.

Owner-occupier: A person who owns the home they live in. Also used to refer to the home itself (e.g. ‘an owner-occupier home’).

P

Passive income: Income that is generated from an asset, rather than generated from working (i.e. exchanging time for money).

Principal and interest loan/Principal and interest mortgage (P+I): When a portion of each mortgage repayment goes towards paying down some of the original loan, and another portion goes towards paying interest to the lender.

Property accountant: An accountant who specialises in residential real estate investment. Typically will give advice on how to structure the ownership of properties in order to minimise the amount of tax that must be paid.

Property investor: A person who purchases real estate with the intent of holding the property for the long term, and renting the dwelling to tenants. As distinct from a trader (or property trader) who buys and sells properties quickly.

Property Investors’ Association: A local membership organisation that seeks to educate property investors. There are currently 19 associations in New Zealand that are affiliated with the NZ Property Investors’ Federation.

Property manager: A person who property investors delegate responsibility to for finding tenants, managing rent collection, conducting quarterly property inspections, organising maintenance, and tenant communication. Usually charges a percentage of the rent collected.

R

Real Estate Institute of New Zealand (REINZ): A membership body that all real estate agents belong to. It is one of the main property-related data providers in New Zealand.

Refinance: When a borrower moves their mortgage from one lender to another. Also commonly used to refer to the process of restructuring loans; for instance, taking out a larger loan on a property after renovations have been completed.

Reserve Bank / Reserve Bank of New Zealand (RBNZ): The central bank of New Zealand, which regulates the main commercial banks. Also has responsibility for setting other policies that impact the housing market, such as LVRs, DTIs and bank capital requirements.

Residential Tenancies Act: The main piece of legislation that sets the rules of how landlords and tenants interact. It sets the rules for what both landlords and tenants can and cannot do.

Revolving credit: A specific type of mortgage that works like a large overdraft. The revolving credit is secured against a property, and the borrower can withdraw as much money as they like up to an agreed limit. The benefit is that the borrower is only charged interest when they take money out. They stop paying interest when they pay the money back.

S

Sale and purchase agreement: A contract between a buyer and a vendor to purchase a piece of property.

Student accommodation: A specific type of high-yield property where students rent by the room. Can also refer to a generic property that is intended to be tenanted by university students, rather than one that is specifically endorsed by a university.

Sunset clause: A clause within a sale and purchase agreement that allows the contract to be cancelled if the property isn’t completed by a certain date (usually the expected completion date + 12 months).

T

Table mortgage: Same as a principal and interest mortgage. The payments are set out on an amortisation table/schedule.

Tenancy Tribunal: The main body that decides and resolves disputes between landlords and their tenants.

Tenant: A person who rents a property off a landlord.

Title: The legal description of property, including the owner, the owner’s legal rights and any restrictions on the property.

Top-up: The cash an investor must transfer into their property’s bank account if the property is negatively-geared. Also called a cash contribution.

Trust: A legal entity used to own and hold property. Often used to protect the assets or lower the amount of tax that an investor has to pay.

U

Uncommitted monthly income (UMI): The amount of money the bank thinks you have left over at the end of the month – after they’ve run their financial stress test calculations. This is used to assess how much you can potentially borrow and be able to service.

Useable equity: The additional money that an investor could borrow against a property. Used to guarantee the deposit for an investment property.

V

Vacancy: The period where you don’t have a tenant in your property so it’s not earning any rent. To be conservative, we budget for two weeks a year.

Variable rate/Variable interest rate: See Floating rate.

Vendor: A person selling a property.

Y

Yield: A generic term used to describe the rental potential of the property compared with its purchase price or current value. Can refer to gross yield, net yield or cashflow, or the rental potential in general.

Yield property: A property that will likely receive a decent amount of cashflow, but may not increase in value as quickly as a growth property.