Capital growth or rental yield on your Inner West investment
One of the biggest decisions you’ll make as a property investor is whether you should focus on capital growth or rental yield. There are pros and cons for each investment strategy, so keep reading to discover which strategy might work for you. Note that we don’t recommend one strategy over another; it’s vital that you consult your accountant before making any property investment decisions.
Long-term strategy = capital growth
Properties with good capital growth are found in high-demand suburbs where there’s a shortage of stock. Prices rise quickly here, as buyers and investors compete for the limited available properties. This occurs particularly in sought-after suburbs in close proximity to amenities, public transportation, infrastructure and (usually) the CBD.
In Sydney terms, we’re talking about inner-city, city fringe and Inner West suburbs where properties cost more to purchase. For example, property investors in Camperdown experienced capital gains of 13.46% over the past 12 months.
Generally, properties with good capital growth are negatively geared and offer low rental yield that might not cover the expenses of owning the property. Investors may need to dip into their finances to pay for these additional costs. But over time, as demand continues to exceed supply, the property will increase in value, which equates to substantial growth on your initial capital investment. Therefore, capital growth is a long-term investment strategy.
Besides buying in a sought-after suburb, another way to generate capital growth is to tackle home renovations. Keep an eye out for properties that require small renovations on significant areas of the home, like kitchens and bathrooms. Otherwise, you can go big with an extension. Just be wary of spending more money than you’ll get back in the eventual sale value.
Cash in hand = rental yield
A property with good rental yield is ‘positively geared’. This means the rental income is greater than the costs of owning the property, so you end up with cash in hand. Generally, properties with great rental yield are less expensive to buy with lower upfront costs compared to those that promise good capital growth.
However, in the long term, these types of properties typically have a lower potential for capital growth. It’s also important to remember that you need to pay tax on rental profits of positively geared properties.
So, where do you find properties with higher rental yield? Typically, they’re located in regional areas, where there’s a high demand for rentals but limited properties available and new developments. If you’re considering this investment strategy, speak to your property manager about how to maximise rental returns. At Vogue Property, we offer Inner West property appraisals on rentals, to give you peace of mind.
Which investment strategy is better?
So, which investment strategy is better? That answer is completely up to you and your financial situation. We aren’t qualified to give financial advice, so once you establish your financial and lifestyle goals, we strongly recommend sitting down with your mortgage broker, qualified buyer’s agent or real estate agent to discuss the best solution for you.
For example, first-time property investors are typically more interested in rental yield to initially get them into the market. On the other hand, if you’re looking for a long-term investment to build wealth, capital growth could be the more effective strategy. If you already have an extensive investment portfolio in place, then it’s likely you will opt for a mixture of both, so you get the benefits of cash flow as well as future profits.
Can we help with your Inner West investment property?
Let the Inner West property management experts here at Vogue Property manage your investment property with the care it deserves. We know the market, understand what tenants are looking for and can help you buy where renters want to live.
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Are you a landlord looking for advice? Do you have questions about these uncertain times? Changes to the rental market or anything specific to Property Management? Book a one-on-one, obligation-free, consultation with Jaime Pratt, Head of Property Management at Vogue Property Managers.
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With over 20 years of property management experience, Jaime will openly provide advice on improving rental return, enhancing your property, attracting quality tenants, and finding ways to alleviate your expenses.