The two main ways that people make money out of property investment are through Yield and Capital Growth. There is often a need to sacrifice one in favour of the other, with lower yielding properties typically achieving greater capital growth and vice-versa. What do we mean when we say ‘Yield’ and ‘Capital Growth’?
Yield is just a measure of how much rent a property generates in relation to its purchase price. Check out my video running the numbers.
Capital Growth just refers to how much a property increases in value over time.
Let’s look at two examples:
These are just two examples and of course you can find everything in between. Sometimes I ask my clients to place themselves on a scale from 1-10, with one being a complete yield focus and 10 being a complete capital growth focus. Most people tend to come out somewhere in the middle.
Yield investments often require a lot more input and management, but the year one returns can be really exciting. Capital Growth investments tend not to make you much money in year one, but they are typically much more hands off and will reward over the longer term.
There is a tendency for newbie investors to be more yield focused. This is because they are typically more motivated by increasing their cashflow which may allow them to leave their job sooner.
More experienced and wealthier investors tend to be more capital growth focused. This is because they are less concerned with the need for cashflow and are more interested in maximum return overall in the long run. Having said theat, there are still plenty of wealthy investors who follow a heavily yield focused stragy.
Neither of these strategies is right or wrong. The important thing is to understand what you are trying to achieve from the outset and then you can focus your search appropriately and make Smarter Property decisions.