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Understanding lingo that trips up the smartest property investors

Understanding lingo that trips up the smartest property investors

by Sasha Karen | October 03, 2018 | 1 minute read

Understanding the lingo that banks and real estate agents use is key to knowing about the property and mortgage you’re looking to take on. Here we explain some of the more popular terms, and where investors get it wrong.

understanding lingo, property investor, tips, real estate
October 03, 2018

Blue chip

You might hear other investors striving to get into blue chip areas, but what exactly are they and are they worth your time?

According to Lachlan Walker of Place Advisory, blue chip can be defined as areas where there are “consistently strong rental yields, and steady, long term, capital growth”.

Marketers will often spruik the value of bluechip areas, but for investors looking for big returns, bluechip is not the only way to go.

However, as Victor Kumar of Right Property Group shared, focusing in on blue chip areas can mean you miss out on even more returns.

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“If you look at it from a longevity as a property investor, you need to really be buying within the affordable range. Affordable to you, in other words, whether you can afford to hold onto the property. Some people can afford to hold onto an $800,000 [blue chip] property, others can't; it needs to be matched to your financial fingerprint,” Mr Kumar said to Smart Property Investment.

“When you look at it dollar for dollar, you can buy two properties in Liverpool as opposed to one in AnnandaleAnnandale, NSW Annandale, QLD. Yet when you look at the growth, they're relatively the same, and your cash flow is much higher in your Liverpool area as opposed to Annandale,” Mr Kumar explained.

“You're getting the same end result but with far greater diversification, and that’s why all of these people are now contracting back to your Liverpools of each state,” he said.

GPO

While this one is not rare in general parlance, not knowing what GPO can mean from a property context could temporarily stump you.

GPO, originating from general post office, is a way of identifying a local business district in a city with a sprawling CBD. Some, like Propertyology’s head of research Simon Pressley, view the GPO as the heart of a town. This can particularly be the case in rural areas.

“Some city’s CBDs are quite large but the GPO is a generally well accepted point to mean the ‘centre of town’,” Mr Pressley said to Smart Property Investment.

If used incorrectly – or sneakily – the term ‘GPO’ could be some clever marketing from someone disguising a property’s distance from an accepted and known CBD area.

Low interest rates

Getting the lowest rate possible on your loan is the goal for any investor, but it’s one part of a much bigger picture when entering into a conversation with a prospective lender.

Aaron Christie-David, managing director of Atelier Wealth has had many people come to him asking for the best rate they can get, but they should be thinking about other factors which can save on how much your mortgage is costing.

Mr Christie-David likened it to using a budget airline. The upfront cost may appear lower, but once you factor in paying for necessary extras like luggage, you’re not necessarily helping your bottom line.

Some lenders might advertise low and attractive interest rates, but investors should be aware that they might be making up the cash in other areas, like charging for loan variations, documentation or account management fees.

LMI

LMI, or lender’s mortgage insurance, often has borrowers thinking it affords them some protections where they have a deposit of less than 20 per cent. However, this arrangement is entirely for the protection of the lender.

“Basically it’s the bank, when you don’t have the 20 per cent deposit, taking an insurance if the property value was to fall – they’ve got an insurance to cover that drop in price,” explained buyer’s agent Kellie Landrey.

“So, if the bank has to take back your house or you can’t pay the mortgage back and they sell the property and it sells for 10 per cent less or 20 per cent less, and your loan is greater than the sale amount, then they’ve got an insurance policy over your property to be able to pay, the bank will be able to recoup their loss in funds.”

Glen Hare, co-founder of Fox & Hare and ex-director at Macquarie Bank, added that it is a common misconception that LMI is insurance for the borrower.

“It’s for the bank, so you’re paying the insurance premium for the bank, so their position is secured,” Mr Hare said.

“They’re obviously, they’re securing [themselves], because you’re paying for their insurance, but if you do go down the path of increasing your loan to pay for their insurance, you’re obviously also paying interest for the loan for their insurance,” Mr Hare added.

Understanding lingo that trips up the smartest property investors
understanding lingo, property investor, tips, real estate
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