Capital gains v rental yield: Which is better?
Investing in property isn't just a fantastic road to take towards financial independence, it's also a great learning opportunity. If you'd never thought residential property investment was right for you, there are two factors that might just change your mind: Capital gains and rental yield. But which is best? It's an age old debate and investors always think that their strategy is the ultimate. Here's a little guide to unpack what these terms could mean for the return on your investment.
Many people buy a residential investment property to make a long-term profit. A home grows in value as prices rise over time, meaning you could pocket a tidy profit when it comes time to sell again, or have a big chunk of equity behind you if you want to expand your portfolio – this is known as capital gain. It might mean smaller profits in the short-term while you're paying off a mortgage or keeping up maintenance, but it can be a really popular strategy in high-flying areas, where prices are on the rise – take central Auckland, for example.
Basically, yield is the rental money you get from your tenants. It's split up into two categories: Gross and net yield. Gross is the amount you collect before all those other bits and pieces are taken into account, like vacant periods or expenses – since it's a bit easier to calculate, you can use it to compare different areas and properties. On the other side of the coin is net rental yield, which is the income you make with all the extras included.
Properties that show the potential for strong rental yield can be a bit cheaper, which makes them appealing to young investors who might not have the cash to splash out on the areas with high capital growth.
Both strategies have their perks, but are very different. In the end, it boils down to what you're after – your needs, your ambitions and your long-term outlook. By having a chat with an Authorised Financial Adviser at Goodlife, we can work out what residential investment property strategy sits well with your situation.
Here's to your financial independence!
Authorised Financial Adviser / Investment Property Expert
Contact us now!