Capital Growth vs Rental Yield: Choosing Property Investment Strategy

When it comes to investing in property, most investors have an interest in either a capital growth strategy or a strategy geared towards higher rental yield.

While it’s entirely possible to achieve both, focusing on one or the other allows investors to maximise their returns in their chosen avenue.

But choosing the appropriate strategy comes down to the investors goals, and individual situations.

Let's take a look at the difference between a capital growth and a rental yield strategy, and the benefits and drawbacks they both carry.

Capital Growth

A capital growth strategy is a long game - and requires an investor to hold their property for at least a decade, preferably multiple decades, to maximise profitability.

Capital growth occurs when, over time, a property’s value appreciates. 

Consider an investor purchased a Sydney home for the median price of $221,770 back in 1992. By the time they sold the home in 2022 for $1,346,190, it had appreciated by over $1.1 million. 

The investor has made an average return of $36,000 every year over 30 years, simply by owning the property. That's before any rental returns and without considering expenses like interest and maintenance (which can be claimable as deductions at tax time).

The investment strategy of capital growth relies on data and research - and lots of it.

To guarantee a solid return on a capital growth strategy, an investment property should be in an area of high growth potential. It’s difficult to identify areas with high growth potential, so investors should be highly experienced or seek professional advice prior to purchasing.

Up and coming areas are hard to spot, but can be profitable investments, with investors able to capitalise on impending property booms.

But to identify potential boom locations, investors need to analyse multiple variables like demographics, future infrastructure plans, existing infrastructure, available land and future demand.

To the untrained eye, it can be a cloudy picture, and a risky gamble. That's why it’s important to engage a property expert.

Another reason to utilise a capital growth strategy is to maintain the value of your savings. 

Leaving savings in a bank account might gather interest, but it also erodes the value of your money. This is because of inflation. Inflation increases, goods and services become more expensive (including property), and your money is able to buy you less.

But investing in property can help to mitigate these effects, with historical averages of home value growth largely outstripping the growth of inflation.

Since the 1990’s, house price growth has well outpaced annual inflation growth, which has sat at an average of around 2-3 percent. And according to CoreLogic, national dwelling prices have increased on average by 5.4 percent annually, since 1992.

The other advantage of utilising a capital growth strategy is that, if rental yield is slightly lower and there are out of pocket expenses that weekly rent won’t cover, investors can use negative gearing.

It means mitigating the yearly tax bill, but also fronting some of the costs each week.

That brings us to the next strategy - one of higher rental yields.

Rental yield

An investment strategy that focuses on rental yield aims to secure a property where the weekly costs of owning are less than the weekly rent coming in, otherwise known as a positively geared property.

It means positive cash flow can be achieved, and weekly overheads are kept to a minimum.

Positively geared properties tend to be cheaper to purchase, attracting a market rent that exceeds their regular mortgage payments.

Due to the relatively low entry cost, capital growth potential might be less than a more expensive property in a sought after location.

But there are undoubtedly benefits of utilising this investment strategy.

The lower entry cost means that positively geared properties might be more accessible to first home buyers, and young people starting out on their investment journey.

It also means that investors are less likely to be overwhelmed by unwelcome financial surprises, with a higher rental yield providing a buffer to cover unexpected maintenance costs.

It can be a good strategy for portfolio expansion too, with the positive cash flow not eating into your mortgage serviceability capacity, as some negatively geared properties can do.

A positively geared property is still likely to enjoy capital growth, if held for long enough. But perhaps less than a property purchased solely for its growth potential.

As always, the best investment strategy depends on the individual’s situation and financial goals, but expert advice can help to devise the best course of action.

To speak to a property specialist and get started on your investment journey, head to https://www.freedompropertyinvestors.com.au/contact/