This article was originally published on ibuildnew.com.au, and has been reproduced here with permission.
Article by Kaylah Chesson
It’s the age-old question when it comes to property investing: should I opt for capital growth or rental yield? While the former provides you increasing value over an extended period of time, the latter gives you cash in hand straightaway. Both have their advantages, but deciding which option is best for you ultimately comes down to your individual circumstances. To help you with your property investment journey, we’ve broken down some of the key differences between the two and weighed up the advantages and disadvantages they offer…
Long-term Gains: Capital Growth
If you are financially secure and prepared to wait to reap your reward, then purchasing a property in an area where the demand surpasses the supply could be the option for you. Given that properties with good capital growth are situated in areas close to work opportunities, with good amenities, infrastructure and access to public transport, they can often be quite costly to purchase. While your expenses may initially be higher, as time progresses, and demand continues to exceed supply, the value of your property will only increase – as will the growth on your capital investment! It’s important to remember however, that rental yields may not, in the beginning, offset the expenses of owning and maintaining the property. In such circumstances, you may be required to invest additional funds to cover, for example, interest rate increases, which can inflate mortgage costs.
Cash in Hand: Investing for Rental Yield
On the other hand, if you’re seeking to count your dollars straight away, then investing for rental yield could be the more suitable option for you. A property with a good rental yield is positively geared, which means the rental income exceeds the expenses of owning and maintaining the property. Due to their ‘less in-demand’ location, such properties are usually not as expensive to purchase, and the associated costs, such as taxes and mortgage payments, are consequently lower. Properties with good rental yield are normally in regional areas where new developments are underway. Fresh services or amenities, such as upgraded transport or new shopping centres, often generate a high demand for rentals with only limited existing properties available. Areas known for mining and manufacturing are similar, given the populations of such locations are typically more transient.
What should I choose?
As with any decision concerning property investing, your individual circumstances are the deciding factor. First-time buyers are more likely to consider a rental yield strategy as a quick way to get a foothold on the property ladder, given the up-front costs are often lower, and a positively geared property makes it easier to deal with expenses. For those seeking a property with greater long-term stability however, purchasing in an area with good capital growth may be more profitable. There are other expenses to factor into your decision, of course, including property maintenance and repairs. It’s imperative to account for such costs when determining your possible rental yield. Your property investing decision ultimately comes down to whether you are chasing instant cash flow or an investment for the future.
Here are 7 other key points to look out for when it comes to identifying a good investment property.
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