Should I be looking for capital growth properties or high yielding investments?

Lucy EldredDecember 17, 2020

Every property investor is faced with decisions, but one of the debates that many enter into early on is whether to consider buying a property for strong future capital gains prospects or for current rental yield realisation.

What is high yielding for a particular area? Yield is very specific to the individual property, and it can be further altered by the outgoings.

Balance between both – yet they’re not a "trade-off" necessarily. You do not want to be completely drained by an investment each week, and you don’t want to get cash flow coming in with little growth on the other end.

However, some investors are strictly yield chasers, looking to maximise their regular income.

With an inverse relationship seen between capital growth and rental income – a rule of thumb with many exceptions – it makes sense to boost rental yield where possible.

There are several ways to do this, including furnishing the property, offering it to multiple tenants, adding a granny flat or turning it into a holiday rental. A renovation, or adding something desirable like air conditioning, can also do wonders for justifying a small rent increase.

Strong rent is not useful when the area’s rental market is in freefall. Similarly, strong capital growth is going to be hard to hold out for when you’re paying out a substantial sum each week. Your capital growth is going to need to cover what you’ve paid out while waiting for it to occur if the investment is viable.

It’s all about your short and long-term goals, as well as your current financial situation. For every investor, this will differ.

Total yield

Total yield is a concept that brings the annualised capital growth and rental yield together to create a new figure that determines the success of the property.

For instance, a 4% yield with a 6% annualised growth creates a 10% total yield.

If you never intend to sell the properties you hold, a plan many subscribe to, then it may make sense to seek out high yielding assets for the final portfolio to sustain you in retirement.

For help getting started in property investment, speak with a RAMS home loan specialist and pick up your free RAMS Investor Pack.

Follow RAMS on Facebook, Twitter and LinkedIn

Disclaimer: Information in this material in general and does not take into account your objectives, financial situation or needs and you should consider whether it is appropriate for you. You should also obtain independent professional advice relevant to your financial circumstances.

The taxation positions described are general statements and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation.

RAMS Financial Group Pty Limited does not endorse or assume any responsibility for the advice, content or services provided by Property Observer or any other third party referred to in this material.

RAMS Financial Group Pty Limited ABN 30 105 207 538 AR 405465 Australian credit licence 388065. Credit provider and issuer of RAMS deposit products: Westpac Banking Corporation ABN 33 007 457 141 AFSL and Australian credit licence 233714.

Editor's Picks