Capital Growth vs. Rental Return
Updated: May 25, 2022
Here at Real Estate Investment Finance, we often get asked whether capital growth or rental return is better
If you're thinking about buying an investment property, the answer to this question depends on your long-term finance goals. At the end of the day, the benefits of investing in property will differ depending on individual circumstances. In this article, we're going to explain the difference between capital growth and rental return.
Capital growth refers to the increase in value of an asset over time. It's commonly applicable to residential and commercial property. When determining the benefits of buying an investment property from a capital growth perspective, you can measure it by comparing the current market value of the property with the value that you purchased it for.
If you're buying an investment property, there's no guarantee of how much its value will increase over time. Though, there are various factors that contribute to capital growth depending on the type of rental property and its location.
Factors that contribute to capital growth:
The economy - dependant on interest and employment rates which influence the economy as a whole
Population - property prices are a result of supply and demand
Supply and demand - depends on who's living in the region and whether there are sufficient vacancies to support the price growth of a rental property
Local infrastructure - the developments you need to consider when buying property that will support the liveability of a region and making it more appealing
When you're buying an investment property, another factor that you may want to consider is the rental return. Also referred to as rental yield, this factor is a percentage representation of the amount of rent that you can receive compared to the value of that property. The higher that your rental yield is, the better return you will get on investment. This is because it will help you with covering the interest payable on your mortgage rate whilst potentially leaving you with extra cash to pocket.
If you're considering buying a rental by using the following formula:
Multiply your weekly rental income by 52 (weeks in a year). Then divide your gross income by the current market value of the property. Multiply this value by 100 to get your rental yield.
$520 x 52 = $27,040
$27,040 / $465,000 = 0.05815...
0.05815 x 100 = 5.8%
How to know which is best?
As mentioned, when determining the benefits of investing in property you need to know what your end goal is. This will help to determine whether a capital growth strategy or rental return strategy will be best for you. The factors that may alter your strategy could depend on your age, where you want to be in the next 10 to 30 years or the current value of your property portfolio.
Investors concerned with capital growth are interested in the equity existing in their property(ies) to leverage off from to purchase another rental property. Furthermore, expanding their property portfolio and helping them to achieve their long term goals quicker.
Investors who are more concerned with receiving a high rental return from their investment property are generally interested in receiving a rental income that's greater than the costs of owning and keeping the property, therefore leaving them with cash in hand.
For more information on how to determine which is best for your investment strategy, check out this video:
How REIF can help you with your property investment goals
Here at REIF, we're interested in supporting our investor clients with being able to purchase rental properties that are cash flow positive whilst also providing them with capital growth potential. Our acquisitions team researches the hottest markets that will generate property investors with capital growth and high rental yields so that our clients can continue to expand their property portfolios and generate a healthy income stream.
If you want to learn more, reach out for a FREE consultation with our property investment specialists. They will be able to show you the current properties we have access to across the country.
Ph: 1300 130 932