Yield vs Capital Growth
Updated: Mar 31
Property investment is all about yield and capital growth. Would you prefer Yield? or Growth? or Both?
While we all want the best of both worlds, high yield AND capital growth are usually mutually exclusive. You get one or the other, not both. Although, under rare circumstances, you might be lucky enough to get both.
So, which one is better? High Yield or Capital Growth?
There are no right or wrong answers to this. It all depends on the investor's personal and financial circumstances. Throw in a mix of preferred investment strategies, and you would end up with 101 different right answers for 101 different people.
What is Capital Growth?
Capital Growth might be suitable for most people, because of the possibility of generating long-term capital growth, when you sell. The bad news is, while you are holding on to these properties, at least during the initial 5 to 10 years, they tend to be negatively geared (rental income is less than interest and other expenses). IE, while this allows the investor to pay lower taxes, using the "loss" from the investment expenses to offset their income, they will be out of pocket each month, until there is sufficient growth or when the property is sold. In the current lending climate, this is the fastest way to stall your investment plan as it is almost certain to reduce your borrowing capacity. You will also be hit with more Capital Gains Tax (CGT), when you sell.
What is Yield?
High Rental Yield, also known as a positively-geared or cash-flow positive property, is when the rental income is sufficient to pay for its interest, and expenses. The investment property is essentially paying for itself, and it may even produce excess cash. Such properties are providing constant income, and has less impact on your borrowing capacity. The downside is, such properties tend to have low capital growth potential. There is less capital gains (and thus less capital gains tax).
Can we have both Capital Growth and Good Yield?
Why can't we have the best of both worlds? The answer is simple. Everyone wants a property with high yield and high capital growth. And such properties are ultimately going to be in high demand, thus they tend to be more expensive to acquire, which is going to reduce the yield. It is a supply vs demand thing.
So, whilst it is possible to have both strong capital growth and a high rental yield, it is very rare. It is often a choice between one or the other. And what you choose, or what is best for you, comes down to what best fits your property buying objectives, risk profile and what you can affordable.