Striking the Ideal Balance in Real Estate: Capital Gains vs. Yield – Which Prevails?

Posted on 17 September 2024

When buying an investment property, two key financial aspects you need to consider are long-term capital growth and rental yield. Striking the right balance between these factors can significantly impact your investment's success.

Understanding Capital Growth and Rental Yield

Capital Growth

Capital growth refers to the increase in the value of a property over time. When you buy for growth, you anticipate that the property's value will rise, allowing you to reap a significant return when you sell. While growth properties often have higher holding costs due to lower yields, the long-term reward can be substantial.

Example: Investing in Auckland (and most main centres), known for its robust property market, can be ideal for capital growth. Despite higher costs, the potential for significant appreciation makes it a wise choice for long-term investors.

Rental Yield

Rental yield measures the income generated from renting out the property relative to its purchase price. When you buy for yield, you aim to earn a steady and passive income. Yield-focused properties often generate rental income that exceeds holding costs, making them positively geared either immediately or within a short period.

Example: Tokoroa offers high rental yields relative to property prices, making it an excellent choice for investors seeking regular income. However, these properties might experience limited capital growth compared to high-growth areas.

Achieving Balance

The right balance in real estate investment is where you can purchase a property that promises long-term growth without significant holding costs. This balance ensures the property remains either cashflow neutral or requires only a modest shortfall in the short term.

Building a Balanced Portfolio

1. First Property: Focus on growth. Your initial investment should aim for significant capital appreciation, even if holding costs are higher.

2. Second Property: Shift towards yield. Your next purchase can be more yield-focused, providing a steady income stream to balance your overall portfolio.

3. Mixing Both: Diversifying with both growth and yield properties ensures you meet both long-term and short-term financial goals.

Practical Advice for Investors

1. Evaluate Your Goals: Determine whether your priority is immediate income or long-term capital gains. Note – Younger investors show focus on growth rather than cashflow. Your financial goals will guide your investment strategy.

2. Research the Market: Analyse different regions and their potential for growth and yield. Consider factors like economic development, infrastructure projects, and rental demand.

3. Consult Experts: Engage with financial advisers and mortgage brokers to get tailored advice and explore financing options that align with your investment strategy.

Finding the balance between capital gains and rental yield is essential for a successful real estate investment.

By evaluating your financial goals, researching the market, and diversifying your portfolio, you can achieve a balanced investment strategy that meets both immediate and long-term needs.

If you are an Equiti Affiliate Adviser, share this article with your clients to help them move quickly on their purchases. If you are a buyer looking to invest, reach out to your mortgage adviser to sort out your financing or contact Equiti directly for guidance on properties that meet your needs.