Understanding the Difference Between Capital Growth and Rental Return Strategies

  • Posted 27 Oct
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Understanding the Difference Between Capital Growth and Rental Return Strategies

If you want to get started in the business of investment properties but aren’t sure which strategy to adopt yet, getting a solid understanding of them and what they mean is a good place to start with.

People generally buy investment properties for two reasons – capital growth and rental return.

Property investment for the purpose of capital growth is where you invest in a property that can be realistically expected to increase in value as time goes on. Meaning, in a few years from when you buy the property, you’ll be able to resell it for a much higher price, which you can then use to refinance your other properties.

Rental returns or cash flow, on the other hand, is where you purchase a property that will give you access to a steady flow of cash through ongoing rent payments.

For Capital Growth

Investment properties for capital growth are usually found in major cities, regional centres or places that are under development.

Pros

  1. Because the value or price of the property increases over the years, it generates a lot of money when the property is finally resold. The long-term capital gains are a lot higher. This is the main advantage of investing for capital growth because there’s a lot of money to be earned this way. Even though you don’t get a steady in-flow of cash, you get access to a large amount of cash at once and this can be extremely useful.
  2. Owners of investment properties for capital growth can claim tax deductions and benefits each year.
  3. You might be able to borrow against the value or equity of the property if you wish to purchase more property.
  4. These types of investment properties have a great demand in the market, and as a consequence, are typically more expensive.
  5. The rental returns are not always high; in fact, they may be so low that you might have to pay from your own savings to cover all expenses. And because it takes time for the value of the property to rise, the net profit might be less than you anticipate.

Cons

  1. These types of investment properties have a great demand in the market, and as a consequence, are typically more expensive.
  2. The rental returns are not always high; in fact, they may be so low that you might have to pay from your own savings to cover all expenses. And because it takes time for the value of the property to rise, the net profit might be less than you anticipate.

For Rental Returns

Because investment in these properties is geared to earn high rental income, these are found in places where the demand for rental properties are high such as suburban areas that are far from the busy cities.

Pros

  1. The rent received on these properties can be greater than the expenses, thus they’re likely to generate a steady income for you. This can be used to repay loans you might take out and clear them off quickly.
  2. Because the rent will take care of all the expenses of the property, you will not need to pay from your own pocket.
  3. If you prove to be a reliable landlord, you might get a lot of interested tenants and a steady stream of those can help maintain your income from all your rental properties.
  4. Interest rates on home loans might increase over time, and as they increase the rental returns on the property will decrease (if rent increases are not maintained) and they’ll stop generating benefits.
  5. If the income generated from the rents paid to you crosses a certain limit, you will have to pay taxes on it, which will ultimately lessen your net rental return.

Cons

  1. Interest rates on home loans might increase over time, and as they increase the rental returns on the property will decrease (if rent increases are not maintained) and they’ll stop generating benefits.
  2. If the income generated from the rents paid to you crosses a certain limit, you will have to pay taxes on it, which will ultimately lessen your net rental return.

Still can’t make your mind up about an investment property? Get in touch with us today to get our team of home finance experts to help you out.

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