Capital Growth vs Yield- which is more important?
Firstly, let me describe the difference between the two. Capital Growth is the amount your original invested amount has gone up by which is measured by its current market value minus the original price paid.
Yield is the return on your investment and is worked out by showing the rental revenue as a percentage of the original price paid for the property.
As a general rule you tend to find landlords who are most interested in capital growth invest in modern properties (under 30 years old) that have good commuter links that attract younger professionals. They like good-looking houses where they could see themselves living 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 cheaper to buy and often have a portfolio of properties. They tend to have a less personal approach when it comes to buying and wouldn’t be put off by a house they don’t like themselves as long as it will easily let for a reasonable amount. If you are unsure how to work out yields then I think the easiest way is to do:
The annual rental income ÷ by the price paid for the property x 100
This is the gross yield. It would be more sensible to consider the net yield so you just need to take the annual expenses off the annual rental income.
As to which is more important- I personally think both should be considered any every landlord is different. 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.
Landlords 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.