Capital Growth or Rental Yield: Where should you focus?

One of the most common questions we get asked by potential investors is: What is more important – Capital Growth Or Rental Yield?

Before we answer this question, let’s define what we mean by "Capital Growth & Rental Yield."

Capital growth or capital appreciation is an increase in the value of an asset or investment over time, measured by its current value compared to its purchase price.

For example, in the case of a property, if the property was purchased 10 years ago at a purchase price of $500,000 and the current market value of the property is $900,000, then the capital growth achieved is $400,000.

Capital growth is one of the most important reasons why people invest in properties. Real estate has been and is one of the most common and popular ways to build long-term wealth for ordinary people. Capital growth is also attractive as it can protect your wealth from inflation as an investment in property increases in value and rises with inflation.

Rental Yield is another factor to consider when investing in properties. As a property investor, understanding the rental yield can help you better evaluate your property returns.

Rental Yield simply means the Income you generate each year from your investment property as a percentage of its Market Value.

There are two types of yields, Gross Yield & Net Yield. Below are the simple ways to calculate:?

• ?????????? ?????????? = [???????????? ???????????? ?? ???? (??????????) / ???????????????? ??????????] ?? ??????
• ?????? ?????????? = [{???????????? ???????????? ?? ???? (??????????) – ???????????? ????????????????} / ???????????????? ??????????] ?? ??????

For example, consider that the property’s market value is $550,000, its weekly rental income is $450, and the annual expenses are $8000 (excluding mortgage interest). Then:

• ?????????? ?????????? = [(450 x 52) / 550,000] x 100 = 4.25%
• ?????? ?????????? = [{(450 x 52) – 8,000)} / 550,000] x 100 = 2.8%

Let’s consider some important facts before responding to this question on what is better – Capital Growth or Rental yield:

FACTS:

• Most investors chase capital growth.
• Most investors sell their property within the first five years of their purchase, which does not even cover one full property cycle.
• More than 90% of investors never get past 1 to 2 investment properties (as per ATO figures).

Melbourne (Metro) House Stats*:

• Median House Price: $1.12m
• Median House Rent: $485 per week
• Median House Yield: 2.3%

Melbourne (Metro) Unit Stats*:

• Median Unit Price: $684k
• Median Unit Rent: $400 per week
• Median Unit Yield: 3.0%

*????????????: REIV

Other factors to contemplate.

If property prices grow at an average annual capital growth of 5%, it will take 14 years and 4 months for the property value to double. With an 8% average annual growth rate, it would take 9 years for the property value to double.

So, the most important factor is to be able to hold on to your investment property until you achieve the desired capital growth. The longer you hold, the better the returns are, and compounding magic kicks in.

However, it is the rental yield that will help you manage your cash flow while the property appreciates in value over time.

Many investors undermine the POWER OF RENTAL YIELD. It is immaterial if you buy a property but cannot hold on to it for a long enough time. To be successful, what you really need is a balance in your portfolio. A balance that allows you to have sufficient cash flow from the investment properties to cover most of the expenses. Cash flow also plays a significant role in determining your serviceability or the ability to borrow to invest further. Hence, having a balanced portfolio is critical to having long-term success as a property investor.

We love educating everyone on simple principles like these and work with each client to strategize their investments, based on their financial situation. This ensures they build a balanced and sustainable portfolio.

Feel free to reach out to me if you would like to learn more.

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