What should I aim for: Capital Growth or rental yield?
Hi readers. It has been a great week for me as I got the keys to my first property. I was hoping to undertake renovation work removing the chimneys, however I am having to engage party wall surveyors as my neighbours are refusing consent. I have been learning a lot about the Party Wall Act, and will make sure to make a blog post explaining it! You can watch the video of the property here.
So, I was chatting to one of my landlords the other day and I was explaining to him about the different ways to make money through property investment. I told him that there are two key factors to consider when making an investment in property and it’s important to understand them correctly before buying a property so you can ensure you maximise the opportunity.
The question is ‘what should I focus on; capital growth or rental yield?’ these two factors are also what often makes property such a good investment. Whilst the days of buying really low and selling so much higher are generally gone, these opportunities do exist but they are hard to find.
What is capital growth
Simply put, capital growth is the increase in value of your asset over time. This can also be called capital appreciation.
For investors who are looking to achieve much better returns for their money, achieving capital growth on a property purchase can be much more profitable than, for example, simply holding their savings in a bank account.
There are a few important factors to consider when purchasing a property as a capital growth investment and these include knowledge of the local area, upcoming developments and changes (such as high-speed rail) that will contribute to a rise in house prices.
As mentioned above, capital growth is a good way for investors to achieve more with their money rather than it sitting in a bank account. This is due to leverage and I have outlined below:
- A £50,000 investment saved at an interest rate of 1.9% over five years earns you £4,978
- A £50,000 deposit invested in a £200,000 asset that has an annual capital growth of 1.9% over five years earns you £19,915
This serves to illustrate why capital growth in property is such an attractive and important factor. Whilst you have to work a little harder for illustration two, the rewards are so much greater.
What is rental property yield?
Put simply, a rental yield is the amount of money that an asset earns each year compared to the value of the asset itself. Rental yields differ depending on a number of factors, but these are largely the property location and type of property (such as a single let, HMO e.t.c).
Calculating the rental yield of a property is simple and I have outlined below:
- Annual rent (say £12,000) divided by property value (say £200,000) multiplied by 100. In this illustration, the rental yield is 6%.
In the Medway area, a good rental yield on a single let property is around the 5-6% mark and an HMO can be 10-15% or more. Rental yield is an extremely important factor when initially looking into an investment and also deciding what the monthly rental cost should be.
What is more important? Capital growth or rental yield
As property investors, we spend a lot of time discussing these two factors but a question that I am often asked is what factor should be the prime one. The answer to this simply depends on the each individual’s personal circumstances. There is no one-fits-all approach when it comes to property investment and I cannot stress this point enough.
An HMO, for example, is a brilliant way to generate cash whilst achieving capital growth, if you pick the right location. Whereas a single let will be an investment that would generally be something that will give you the return that you need later down the line.
Very often a single let property is something that people will hold as an investment for the future (perhaps as part of a pension, to support children e.t.c) as well as hedging against savings.
If you would like to discuss your property goals and particularly those around making sure that your HMO gets the best return possible, then I will be more than happy to help. I run strategy workshops and portfolio review sessions. If you want more information about that, email me at firstname.lastname@example.org.