Capital growth vs rental yield: which strategy is best?
With the arrival of the New Year, it’s time to start making those resolutions for 2018. If investing in your first property has made it onto your list, it’s time to start thinking about which property investment strategy works best for you. Are you in it for the ongoing income or for the long-term profit? The strategy you choose will depend on your long-term goals and personal preference as an investor. Here a few things you should know before making your decision.
The different property investment strategies
Despite ups and downs in Perth’s rental market, property remains one of the most popular (and stable) investment assets in Australia. Many Australians view property investment as an effective way to generate additional income and secure a stronger financial position for their future. If you’re thinking about making an investment, you will first need to decide how you plan to make a profit from your property. There are generally two options you can take:
- Capital growth – The idea behind this strategy is that you purchase a property with high growth potential which you then sell further down the line for a profit. There are different ways in which investors can maximise profit: by purchasing a property to renovate and sell for a better price, and/or by purchasing a property in a suburb with high potential for property value growth.
- Rental yield – Many property owners opt to make a passive income from their investment through rental returns. This will provide investors with ongoing income from their properties.
Capitals gains – the pros and cons
Whilst this investment strategy could see you making a big profit in the long-term, it’s also a strategy that requires you to know your stuff as an investor. It can be incredibly difficult to predict trends in the property market, so investors will need to do their research to identify which areas and types of property hold higher growth potential. Capital cities and areas under development are generally a good place to start, but we would recommend speaking to a property expert with an in-depth knowledge of the local market before making an investment.
Capital growth properties will typically have a higher purchase price and a negative cash flow, meaning you may need to cover property-related expenses such as home loan repayments from your own pocket in the short-term. However, this also means you can take advantage of the negative gearing tax benefit. In the long-term, this strategy could see you making a greater profit than rental yield, with the additional option to draw out equity to expand your property portfolio as the property value increases.
Rental returns – the pros and cons
As opposed to a capital growth strategy, investing in a property with high rental demand will see you generating an ongoing income off your property investment. These properties will generally be positively geared, meaning your rental returns will cover your property-related expenses and you won’t be left out of pocket in the short-term. In the long-term, however, these properties tend to have lower potential for capital growth. Since the property is positively geared, you also won’t be able to benefit from negative gearing and you will need to pay tax on your rental profits. If you’re considering rental yield as your property investment strategy of choice, make sure you ask your property manager for advice on how to maximise your rental returns.
Property advice from Rentwest
Whether you’re making your first investment or looking for ways to increase profit on your current rental properties, the Perth property management team at Rentwest can help you maximise the value and appeal of your Perth investment property. From advertising the property to potential tenants to overseeing day-to-day maintenance of your Perth rentals, our experienced property management team can help take the stress out of your property investment venture.
For more information about our property management solutions, contact the Rentwest team today on firstname.lastname@example.org or call 08 9314 9888.