capital growth vs rental yield
  • For a long-term strategy, the capital growth potential is a priority.
  • For consistent cash flow, a high demand rental should be top-of-mind.
  • Ultimately, your strategy will be driven by what your personal goals are.

It is essential to have a clear strategy when you’re starting your investment journey or growing your property portfolio to avoid getting caught out further down the track.

When you are buying your first investment property or building your portfolio, there are so many considerations. Where to buy? Is the area getting good capital growth? What is the potential rental yield? How can I maximise my returns for the long term?

But when it comes down to the nitty-gritty, which is really more important? Capital growth or rental yields?

Capital growth

If you want to make money over the long term, then the predicted capital growth rate of an area will be your top priority.

You will want to look at the gentrification of the area, the planned developments, population growth, Government projects, proximity to amenities and the access to transport/ transport links.

All these factors contribute to an area appearing more desirable in the long run.

Capital growth is driven by the supply/demand matrix, so if there is more demand in an area then the capital growth will be higher.

The Capital growth potential of a property is very important because if you were to put a figure on it, then investment properties have the potential to double in their value every seven to ten years.

One of the biggest mistakes investors commonly make is to buy into an area that has been suggested as ‘booming’, but they are far too late to buy into the area and end up purchasing at the top of the market.

It is best to do your own research to determine which areas are likely to boom so you can get in early!

Rental income

The rental income of the property will help you to keep your property running. This is key if you want a cash flow-positive property.

To receive consistent rental income from your property, you will want to purchase a property that is located in an area with high rental demand.

Having cash flow-positive properties will assist your property portfolio as a whole and will help you to cover the expenses in your portfolio.

If you’re looking for good rental income (rental yield) it’s important to buy a property in the right area, and the right type of property for the demographic to ensure you will receive consistent and reliable cash flow.

Positive cash flow in your portfolio will also help your serviceability, meaning your ability to pay back your debts to the bank. Having good serviceability is vital so you are able to borrow from lenders to grow your property portfolio.

Properties with excellent cash flow and rental yields typically come with a sacrifice. This may mean you hold an excellent positive cash flow property, but the long-term capital growth prospects are lacking.

So, which is better? Capital growth or rental yield?

This comes down to your strategy

Your investment strategy should always be at the forefront of your mind for any property purchase.

Your strategy will outline a clear idea of what you are trying to achieve in the long term (this could be anything such as retiring from your job, reducing your debts, or paying off your home mortgage).

Your strategy will be broken down into realistic short-term milestones and will also determine what type of property you need in your portfolio to help you achieve these goals.

Having a clear investment strategy in mind when purchasing your next property will help to guide you in finding the right investment for you, and skip past any property that doesn’t fulfil your strategy.

For some investors, a cash flow-positive property will be ideal to boost their savings and help to pay down the mortgages on their other properties. For other investors with a long-term focus, capital growth properties will be more ideal at the sacrifice of short-term rental yield.

It is very important to have a clear strategy when you start your investment journey so that you don’t get caught up further down the track.

If you need assistance to purchase an investment property, or grow your investment portfolio, employing the expert help of a buyer’s agent can assist you in purchasing the right property for your strategy as well as help you to avoid making a costly mistake.

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