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Capital Growth V Rental Yield: Which is Best?

Updated: Nov 24, 2021

Being a landlord can be time-consuming and expensive, and legislative changes have added to the challenges when it comes to managing property investments. As with all investments, there are risks – rising interest rates, difficult tenants, being able to sell if the housing market changes to name a few – but there is still money to be made for property investors.

The first step in property investment is often to decide whether you want capital growth or a good rental return. You need to ask yourself what is financially viable, and which has the greater advantage. For example, a cheaper property to rent out means you will be focusing more on the rental yield, but if initial costs are high, you will be depending on property prices rising.

So the question you need to ask yourself before anything else is “Why should I buy?” Basically, you need to clear goals set for why you are investing in property and then devise the strategy to help achieve them.

What is property capital growth?

Depending on how long you plan on keeping your investment, capital growth is the amount of money you make when you sell your investment property. If you have a long-term strategy in mind, you will need to purchase a property that will sell when the time comes. As the saying goes, “a property is only worth as much as someone is willing to pay for it”.

Generally, these properties will be nicer, in more central locations and areas expecting regeneration so investors can have confidence that house prices will continue to rise. Investors tend to prefer newer properties in commuter towns and target young professionals as tenants.

This is all about the long-term with a strong focus on funding retirement or hedging poor returns on savings.

What is rental property yield?

In its purest form, rental property yield is the annual rate of return from your investment property (calculated as rent as a percentage of the property price). For some, focusing on the rental yield they receive each month is the most important factor. Investing in property is seen by many as a ”top-up” on existing income or to create extra income during retirement.

Properties with the very highest yields will be more associated with the bottom end of the market, with strong tenant demand such as students. Investors here will likely invest based on shorter-term calculations, especially as these properties are often in areas where capital growth is traditionally much lower than the average.

Can I have both?

Ultimately, yes, but it is important to understand the tradeoffs.

Every investor should be aiming to buy a property that offers both, not just one or the other. As with all investments, there are no guarantees, so looking for a property that will provide you with not only a good monthly income, but also good capital growth over the next five to 20 years, is the smart decision.

It might not be easy to find, but the right property in the right location can provide you with what you need – both in the short and long term. Thorough research and crunching the numbers early in the process can make all the difference. Many investors have continued to target London, despite its lower rental yields, as the fundamentals suggest that capital growth will be relatively strong over the long term.

Remember, capital growth will be key to leveraging the equity and expanding your property portfolio, but having a strong rental return enables you to earn a return on the property while you wait for the capital growth.

Understanding the numbers and what you can achieve will help you plan. Get started today and register for BellPepper Investor for free. Enjoy access to our exclusive Location Spy and a targeted snapshot of the property you are considering or upgrade to BellPepper Portfolio Manager for your personalised BellPepper Investor Score.

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