As property investors, our goal is to use real estate to improve our financial position and set ourselves up for the future.
Property can make you money through capital growth, cash flow, or even by manufacturing equity.
But which is the best way to do it?
Capital Growth
Capital growth is all about the increase in your property’s value over time. The main driver of this is supply and demand. When there’s more demand for properties in an area than there are available homes, prices tend to rise. This is why location is so crucial in property investment. You want to invest in areas where people want to live, work, and play.
But it’s not just about current demand. You need to think long-term. Look for areas with growing populations, improving infrastructure, strong local economies, and diverse job markets.
Remember, the people living in the area need to be able to afford increasing property prices. A growing, affluent demographic is key to sustained capital growth. Personally, this is why I prefer blue-chip locations. They have affluent residents and a steady stream of others who want to live there. Coupled with tight supply, this drives property prices higher.
Rental Yield
Rental yield is the annual rental income as a percentage of your property’s value. Like capital growth, it’s influenced by supply and demand, but it works a bit differently.
When there’s a shortage of rental properties and high demand from tenants, rents tend to increase. However, rental growth often lags behind capital growth.
Here’s a personal example: I have properties I bought 6-8 years ago that saw little to no rental growth for years. In fact, during COVID, some even decreased in rent. It’s only recently that we’ve seen significant rental increases.
This recent “rental crisis” is partly a correction after years of stagnant rents, driven by historically low interest rates that didn’t pressure landlords to increase yields.
In the same way that we can boost the value of our property, we can also increase rental income.
We can renovate and improve the property to make it more appealing to tenants. This can increase both rental income and property value.
It’s also possible to add value by adding another dwelling to the property if feasible. This can potentially double your rental income from a single property.
Or you can get the right tenants. Understand what renters in your area want and tailor your property to meet those needs.
Yield or Growth?
When looking at these two main elements, it’s important to remember that while getting higher rents is beneficial, it’s ultimately capital growth or equity that will move the needle.
Higher rents help with your serviceability and might allow you to expand your property portfolio. For that reason, we can’t ignore it. But it’s not going to be the factor that sets you up financially.
If you focus on buying high-quality assets in good locations, rents will rise over time. It might be enough to take a negatively geared property to one that is neutrally geared or even slightly positively geared.
When combined with good capital growth, that’s how you can buy another property and keep growing your portfolio.
Engaging a trusted buyers advocate through Henderson’s buyers advocacy service is your best chance at navigating the competitive real estate market.
