Capital Growth vs. Rental Yield

01.07.24 09:21 AM - Comment(s) - By Manik Sethi

 Understanding Capital Growth vs. Rental Yield: Which Should You Prioritise?

Investing in property is a proven strategy for building wealth, but it comes with a critical decision: should you prioritise capital growth or rental yield? Both have their merits, and understanding the difference can help you align your investment strategy with your financial goals. In this blog, we'll break down what capital growth and rental yield are, their benefits, and how to decide which to focus on.

What is Capital Growth?

Capital growth refers to the increase in the value of a property over time. When you invest in a property with strong capital growth potential, you aim to sell it at a significantly higher price than what you paid for it. This profit from appreciation can substantially boost your wealth.

Benefits of Capital Growth:
1. Long-Term Wealth Accumulation: Properties in high-growth areas can see significant appreciation over the years, contributing to building substantial long-term wealth.
2. Equity Building: As property values rise, so does your equity, allowing you to leverage this increased equity to finance further investments.
3. Inflation Hedge: Real estate often outpaces inflation, not only preserving but also adding to your capital's purchasing power.

Capital Growth vs. Rental Yield: Key Differences
While both capital growth and rental yield are vital metrics, they serve different investment strategies and goals. Here's a closer look at the key differences:

Investment Horizon: Property investment is a long term game as to see some real Capital growth investors should be willing to hold onto their property for several years or even decades. Rental yield, on the other hand, benefits those looking for a steady stream of income or to reduce how much does the property cost to hold. Most properties eventually would become positively geared but how long that will take depends on the rental yield. Finding a property with high capital growth and a high rental yield may be hard to achieve especially when you are on a budget.

Risk Tolerance: Capital growth investments can be riskier due to market volatility and longer time frames. No matter how a location has performed in the past, there is no guarantee that it will continue to perform the same way in the future, but the chances of it continuing to perform in a similar fashion is quite high unless something drastic happens. While rental yield investments offer a steady stream of cash flow, they also have their own risks, such as vacancy periods, unexpected maintenance costs, and potential changes in rental income over time.

Location Considerations: Properties in metropolitan or large regional locations often exhibit high capital growth, while properties in newer markets and regional towns might offer better rental yields.

How to Decide: Factors to Consider
Choosing between capital growth and rental yield depends on several factors, including your financial goals, risk tolerance, and investment timeline. Here are some key considerations to help you decide:

1. Your Financial Goals:
Long-Term Wealth: If your primary goal is to build substantial wealth over time, focusing on capital growth properties in high-demand areas may be the best strategy.
Cashflow: If you need a reliable stream of money coming in to cover expenses or support your lifestyle, high rental yield properties could be your focus.

2. Risk Tolerance:
High Risk, High Reward: If you're comfortable with higher risks for potentially greater rewards, capital growth properties might suit you.
Lower Risk, Steady Cashflow: If you prefer stable and consistent returns, consider higher rental yield properties in locations with a long term track record of capital growth. 

 3. Investment Timeline:
Patience for Growth: If you plan to hold your investment for many years, capital growth will most likely pay off significantly.
Shorter-Term Returns: If you need better returns within a shorter period, rental yield properties can provide the necessary cash flow but you may need to compromise a bit on the capital growth. Refer to the example stated below.

 4. Market Conditions: Several factors influence the overall market condition, including:
•Economic indicators: Economic growth, inflation, interest rates, and unemployment can all affect property values and investor sentiment.
•Supply and demand: The balance between available properties and buyer demand significantly impacts prices and rental yields.
•Government policies: Government policies like infrastructure projects, zoning regulations, and tax incentives can influence specific areas and market segments.
•Local factors: Specific features of a location, such as amenities, infrastructure, and proximity to employment hubs, can also play a role.

General trends: While acknowledging the complexity, we can still observe some general trends:
•Booming markets: Areas experiencing rapid development and increasing demand often see higher capital growth potential.
•Stable or regional markets: Areas with steady populations and less volatility may offer more favorable rental yields.

Example:

One graph that helps our customers choose one between the other is a scenario where we compare 2 properties – both worth $500K today – one in an area which historically has been growing by 7% on average over the last 20 years and has a 5% rental yield while the other is at a location which has historically grown by 5% over the 30 years and has a rental yield of 7%.





This is why choosing the right strategy is crucial to property investments. The difference may be negligible in the short run but the difference can be quite substantial when compounded over time.

 

So, what’s your choice? Capital Growth or Better Cashflow at the cost of capital growth? Don’t go by what someone says, look at the numbers, see what you can sustain comfortably. Speak to an investment savvy buyer’s agent, mortgage broker, financial planner or accountant to get a better insight. Call PBA or book in a free consultation and we’ll try to help the best we can, or direct you to a professional whom we feel may be in the best position to help you.


How Property Buyers Advisory (PBA) Can Help

 

Navigating the complexities of capital growth versus rental yield requires expertise and strategic insight. This is where Property Buyers Advisory (PBA) excels. As seasoned buyer's agents, we specialize in helping investors make informed decisions that align with their financial goals.

 

Property Buyer’s Advisory's Role in Your Investment Strategy:


1. In-Depth Market Analysis:

PBA conducts comprehensive market research to identify high-growth areas and rental yield hotspots. Our insights help you choose the right property at the right location to match your investment strategy.

 

2. Tailored Investment Plans:

We understand that every investor’s situation and journey is unique. PBA crafts personalized investment plans based on your goals, risk tolerance, and timeline, ensuring that your property portfolio aligns with your wealth objectives.

 

3. Access to Exclusive Opportunities:

PBA has access to off-market and pre-market properties and exclusive deals that might not be available to the general public. This gives you a competitive edge in securing high-potential investments. This does not mean that we don’t look at properties which are on the market. All options are considered to ensure that we help our clients with best results.

 

4. Expert Negotiation:

We focus is securing the best possible terms and/or prices for your investments. This helps maximize your returns, whether you prioritize capital growth or rental yield. We achieve this through:

·  In-depth market research: We have a comprehensive understanding of current market trends and property values, allowing us to negotiate from a position of strength.

·  Strategic negotiation tactics: We employ proven negotiation strategies to secure the best possible terms and prices for your specific investment goals.

·  Strong communication and relationship building: We build strong relationships with the selling agents, fostering trust and creating a collaborative environment for successful negotiations.

 

5. Ongoing Support and Guidance:

Property investment is an ongoing journey – which is why PBA provides continuous support and updates, helping you adapt your strategy as market conditions or situation undergo change.


Your Path to Property Investment Success

Understanding the balance between capital growth and rental yield is crucial for any property investor. Whether you aim for long-term wealth accumulation or steady cash flow, aligning your strategy with your financial goals is key.


At Property Buyers Advisory, we are dedicated to guiding you through this complex landscape with expertise and personalized support. Ready to embark on your property investment journey? Contact PBA today and let us help you achieve your investment dreams

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