Are rental yields more important than property capital growth?

When you are investing in property the basic strategies are between capital growth and rental yield, allowing you to make revenue on different grounds depending on your preferences and objectives. However, before deciding which course of investment to take you must consider the reasons and nature of your financing in this property. As Taylors Property Management Specialists narrowed down the fundamental differences between the two strategies as long-term and ongoing. Simply put, for capital growth you are basically holding onto the property until the market is ripe for it and you sell it for the max amount of revenue in one go. Whilst rental yield is for continuous income annually, gradually snow balling the revenue you make from the property. In that case, wouldn’t rental yields be more important than capital growth? Since the former generates a secure income every month whilst the latter requires constant knowledge of the market.

Why is rental yield more important?

It all depends on your objectives to define whether rental yield is a more important and efficient method than capital growth, as Richard O'Niell, Managing Director of Lettings at Romans believes understanding both strategies ‘will help you plan how long you intend to hold onto the property before selling it.’ In the long term rental yield does seem like a better course of investment when compared to capital growth; with rental yield giving a guaranteed steady earnings and less dependence on both the market and the property area. Aside from that you don’t have to devote as much time into the market since you are mainly collecting rent and taking care of the property’s utilities. When it comes to rental yield strategies, O’Niell realized many investors would go for older and even less central properties than those that are brand new and convenient ones. That’s because the demand for tenancy will always be there compared to waiting for the right moment in the market to sell off your highly sought after asset. This makes rental yield an easier and lesser effort source of amassing fortune, which undoubtedly is more important than the opposing method. But of course, given that obtaining a certain amount of income in the long term is your aim and not a sudden boom of wealth overnight.

The best option: combining both

On the other hand, Michelle Cohen, principle of Leapfrog Property Group in South Africa, argues that capital growth is more important in terms of profit, long term plans and taxation. She realizes the total amount of profit obtained from the property’s increased value over time is way more than constant annual cash flow. And that many investors struggle to use their money from rental yields to invest on the next property, capital growth returns prove to be the better option. But then again, like a broken record, I have to stress on how much the nature and aim of your investment have a role on deciding which option is the best. Hence the best option would be to combine both investments into one property. Imagine you have a good property that is suitable for capital growth, you have everything refurbished and ready for the market, now you wait for a good value on this property. Instead of selling it off in one go, rent it out instead, snowball the profit from rental yields, then whenever the tenant returns the property, you can either put it up for lease again or sell it off once the market is perfect for it. This method combines both approaches to property investment together and makes an even larger profit for you. Because at the end of the day the importance of the two options are dependent on you, so why not combine both for the best option?

13 views0 comments