Many property investors often ask me – what should I be chasing from my investment, a higher property investment yield or stronger capital growth?
Before I go any further, it’s probably a good idea to provide some quick definitions and explain how they each affect your investment returns. Your investment property yield is the overall return of your investment, shown as a percentage of the amount you invested. For example, if you purchase a house for $400,000 and it rents for approximately $460 per week, it has a rental yield of around 6% per year. This is because your total annual rent adds up to approximately $24,000 which is around 6% of your initial investment of $400,000. A high yield property investment may be ideal for investors who require a higher cash flow to service their loan repayments.
The capital growth (or gain) is the amount your property has increased in value, relative to what you paid for it. If the property you purchased for $400,000 is now worth $550,000 you have made a capital gain of $150,000 before costs.
Property investors have long debated the merits of capital growth versus rental yield because it is rare to find a property that delivers both as generally they have an inverse relationship meaning yield may be achieved at the expense of capital growth and vice versa. The balance between yield and capital growth may change as your investment goes through different property cycles.
Apartments tend to occupy the high property investment yield category of investment since the ratio of rent to value is generally higher than that achieved for houses. However, houses usually provide better long term capital growth as they include the element of ‘land’ which apartments lack. Smart renovations on the right types of properties can also help to increase capital growth as well as rental yield.
High yields may be tempting in the short term however it is generally accepted that capital growth should be the primary objective of property investment as this is where the major gains are made. However, seeking capital growth from your property may result in a shortfall where your rental income does not cover your mortgage repayments and you need to work out if you are able to cover this shortfall in the longer term if required. This is known as negative gearing.
On the flipside, a high yield property investment may enable you to positively gear your property which occurs when the rental income received for the property is more than the mortgage repayments and costs of owning the property. In this scenario, you may be subject to income tax on the extra income derived from the property so it is important to seek professional advice to know which option is better suited to you.
Everyone’s financial position and investment objectives are different and that is why I believe your decision to focus on investment property yield or capital growth is a completely personal one which should be decided following advice from your Investment Specialist or Financial Advisor.
Whether you own one property or an investment portfolio, I believe a balance between capital growth and property investment yield is the best outcome. If you are able to forgo a little yield in the short term to get better capital growth in the long run, this strategy may prove advantageous. And if you are in a position where you have more than one investment property, focus on properties that represent overall good value and which are diversified by location and building type.
Whatever strategy you choose, careful planning and reputable advice should always be the first step in your property investment journey, if you have any questions or if you would just like to chat contact one of our property investments specialists, they will be happy to help.
DISCLAIMER: This information is of a general nature only and does not constitute professional advice. We strongly recommend that you seek your own professional advice in relation to your particular circumstances. Investor Assist Pty Ltd Builders Registration No. 13818. Source: RPdata.com.au