Rental yield and capital growth are the two key ways property investors make money. Both can be highly lucrative — providing you know how to find them.
Without strong capital growth and/or rental yield, you may find your investment shrinking instead of growing, but is there one you should be aiming for in particular?
Investors could argue until they’re blue in the face about rental yield vs. capital growth, but in an ideal world, you should be aiming to achieve high rates for both.
In this article, we’re going to discuss key aspects to help you determine whether you should be prioritising one or the other. We’ll then share some tips on finding the golden ticket of great rental yield and capital growth.
If you’re new to the world of property investment, it’s worth taking a moment to review a couple of key definitions.
Rental yield is simply the return you can expect on a property via its rent. If you’re looking to work out your gross rental yield, take your annual rental income and divide it by what you paid for your property.
Say, for example, you earn £12,000 per annum in rent from a property that cost you £160,000. To get your rental yield, you divide 12,000 by 160,000, which gives us 0.075. To turn this into a percentage, times 0.075 by 100, and your rental yield would be 7.5%, which would be a great return on your investment.
Capital growth is the amount of money you earn from the sale of a property that has gone up in value. So, if you spent £200,000 on a property and sold it for £300,000, your capital growth would be £100,000.
As you can see, there are a number of pros for both rental yield and capital growth. So, how do you decide whether to prioritise one more than the other?
Your personal goals and the areas you want to invest in will play a huge part in deciding whether rental yields or capital growth is right for you.
When it comes to investing in property, there’s always one common priority, making money. That said, money is not the only thing you should take into consideration.
Why you want to invest is heavily influenced by your own personal and professional goals. You may want to make some extra income in the short term, or you may be planning for your retirement.
The first thing you need to consider is how you want to make your money. Would you prefer the comfort of a regular monthly income or the elation of a big payday?
If the former is up your street, rental yield will likely be your priority. If it’s the latter, then capital growth is what you’re looking for.
In reality, both capital growth and rental yield are suited to long-term strategies. However, if you want to generate money quickly, then you may try to force a quick increase in capital growth by identifying a property to renovate and sell at a higher price.
Whether you view your investment as a full-time job or a part-time bonus will also have a significant impact. Researching properties with strong capital growth potential can be a time-intensive exercise, so may not be suited to investors with a nine-to-five workday. A better option could be prioritising a strong rental yield (while keeping an eye on capital growth).
Depending on if your property is close to a metropolitan area or not, you can expect to find a significant difference between the potential for high rental yield or capital growth.
For example, city centres in areas such as Liverpool and Manchester tend to do well when it comes to selling properties, so it’s a good idea to look for capital growth opportunities here.
The high demand for properties in worker hubs with a buzzing social scene means there will be a lot of interest in your property when you decide to sell it on. Ultimately, this means you can expect to sell faster than if you were trying to sell a property in the suburbs.
This is great if you need to sell your property quickly to release the capital, too. The downside, however, is you may sell at a loss or a smaller profit than you hoped for if the capital growth of your property hasn’t had time to develop.
By travelling just a few miles outside of the bustling cities, you can often find areas with the potential for high rental yields. This is because house prices are typically lower, and with more young professionals looking for better value for money, rents can be higher.
These areas are also popular with young families who need access to good schools and transport links. This could provide you with long-term security, as a family is more likely to rent for the long-term, guaranteeing you a regular income.
When deciding where to invest, consider how the demographics of an area can change over time. What might be popular with retirees today could be ideal for the young professional tomorrow and vice versa.
Believe it or not, you don’t actually have to pick a side in the epic battle of rental yield vs. capital growth. There are ways for you to achieve both.
One of the biggest benefits of buying off-plan is that you purchase the property below its eventual market value. This means you can sell the property once it is completed for a much bigger profit or you can hold on to it and see if the value continues to rise.
And like we said, this works well for anyone looking for a high rental yield, too. By buying a lower price, this will ultimately affect your yield positively, as your net percentage will come out much higher.
Off-plan properties can result in great returns either way, and Liverpool and Manchester in particular are excellent areas in the North West for these types of investments.
Serviced accommodation is a truly unique way to make an excellent rental return. Since serviced accommodation tends to work very well in the city centre you can combine great capital growth and rental yield.
SA properties are mostly sought after by business people staying for a short spell in the city and by tourists looking for a base in a prime location. Both these groups are willing to pay a little more than they normally would when renting a standard buy-to-let.
By providing them with a great location and a touch of luxury, you can achieve a rental yield between 6.5-9%, according to research carried out by JLL.
And if you decide to sell your property, there will be no shortage of people looking to buy as the city centre location has such great appeal.
The key to any good investment is to spot potential before anyone else, so keep a lookout for any areas in the UK that may undergo a huge redevelopment in the future.
Take Ancoats in Manchester as a prime example. After years of neglect, the district was given £250 million by the government for redevelopment in 2000, and everyone with a piece of land or property in Ancoats felt the benefits.
These days, a property in Ancoats could cost £750,000, according to the Manchester Evening News, so it just goes to show how a run-down area can easily become one of the most sought-after places to live.
If you want a little extra tip from us, look to see where tram stations and Waitroses are being built. Apparently, the price of a home can increase between 25-50% if the upmarket grocery is within walking distance.
Doing your own homework on rental yields and capital growth is all well and good, but an expert’s knowledge on the subject is literally worth a small fortune.
Have a word with a member of our team to discuss what’s right for you. If you’re interested in achieving high rates for both rental yields and capital growth, download our free guide to investing in serviced accommodation.