Capital Growth vs Yield for Property Rental
Fri 20 Sep 2019
Which is More Important?
When investing in a buy to let property, the terms capital growth and yield are discussed, as these will demonstrate how well your investment is performing for you. But which is the most important metric to focus on?
Well, first off, it’s important to understand the difference between the two terms.
This is the amount that your original invested amount has gone up by. It is measured by the properties current market value, minus the original price paid.
This is the return on your investment. Yield is calculated by showing the rental revenue as a percentage of the original price that you paid for the property.
As a general rule, landlords who are most interested in capital growth invest in modern properties (under 30 years old) that have good commuter links which in turn attract younger professionals. These landlords typically favour good-looking houses where they could see themselves living, and which would be easy to sell in any market.
In contrast, landlords who focus on high yields tend to prefer older, smaller properties which are usually cheaper to buy, and they often have a portfolio of properties. These landlords tend to have a less personal approach when it comes to buying and wouldn’t be put off by a property that they don’t like themselves, as long as it will easily let for a reasonable amount.
How do you Work Out A Potential Yield?
We think the easiest way to work out a potential yield on your rental investment property is to do the following calculation:
Annual rental income DIVIDED BY the price paid for the property TIMESED BY 100
This calculation will yell you the gross yield for the property. However, it would be more sensible to consider the net yield that you will receive. To get this, you will need to take the annual expenses off the annual rental income.
Which is the Most Important?
We think that both of these should be considered, as every landlord has different requirement or circumstances. Even if you are an accidental landlord, it is important to consider both as it can help you make a plan about how long to let for.
You should always try and speak to a local property professional who knows the area well and is aware of any changes and local developments. E.g. a new Waitrose close to an area will most likely bump the price up where as a new local housing development could have a detrimental effect.
As with all investments you can never be 100% sure, but by talking to a property expert you will limit the risk and hopefully make sure that you make a good business decision.