Rental yield refers to the return you receive on the investment of your property , It is a crucial method to calculate the gap between purchase price and the rental income you generate .
Meanwhile , capital growth refers to the appreciation in the value of the property over a period of time . To calculate capital growth we have to subtract the original price of the property with the market value of the property now . In simple terms , rental yield is the cash flow from a property you generate each year , whereas capital growth means an increase in the value of a property over time .
How Does Rental Yield & Capital Growth Affect One ’ s Property Strategy ? A frequent question that many firsttime property investors or even experienced investors ask when it comes to choosing the right investment strategy is whether to focus on the potential of future growth or higher rental yield .
The most important factor to consider when deciding on which route to take , is to compare both investment strategies to identify which one offers the desired returns that meet with your financial goals . Majority of investors are at different stages with regards to their property journey , therefore it is important to evaluate property investments based on your investment preferences and risk profile .
Additionally , some investors prefer to purchase properties that will give them a high rental yield and not necessarily be concerned about the long-term performance of the property . Whilst other investors will consider properties that will yield capital growth over time and not be worried about whether or not they are receiving a positive cash flow from the property .
People may urge that the rental income that you will generate over a year is insignificant compared to the capital growth of the property considering the fact that the cash flow is used to look after the property and you may not necessarily enjoy it . Whilst , the capital growth could give you a yield 7 % per annum and you could use the capital to leverage , depending on the location and market conditions . It is important to note that capital gain is never guaranteed and property prices in any area can experience low growth or even negative growth .
Be Aware of The potential yield that the property will generate . Remember , the main purpose of investing is growing capital , and this is why long-term performance should enjoy priority over rental yield . It is difficult to save for a deposit for the next property investment , but it may be possible to leverage the capital in your high-growth properties to pay the deposit on your next purchase .
SA Real Estate Investor Magazine DEC / JAN 2022 19