Investing in property can be difficult when it comes to making decisions and one of the toughest decisions for new investors is whether to invest in a property with a high rental yield or a property with a healthy capital growth. While it is ideal to have both qualities in one property, finding a property like this can be difficult. Most of the time, it will be an either-or situation, so it helps to weigh out your options on which factor will help you achieve your future financial goals.
When a High Rental Yield May (or May not) Make Sense
A property with a high rental yield will help towards a steady income stream. This steady income will enable you to service your mortgage on your property, and probably have enough money left for the occasional repairs and renovations. The benefit of this type of property is that you won’t have to pay out of pocket expenses just to keep your investment, plus you’ll ideally have extra money to complement your other income streams.
On the flip side, however, it may be better to choose to negatively gear your property (where your expenses on your property outweigh your profit from it). This is very helpful if you want to reduce your taxable income due to other income streams, such as a salary or other investments. Negative gearing can assist in helping you save money due to the tax deductions available.
When it is (or not) Ideal to Opt for Capital Growth
Many investors opt for capital growth, particularly those who are looking for a long-term investment. If you are preparing for your retirement, for your children’s future, or for a goal 10 years or more from now, then capital growth is your best option.
However, when you focus on capital growth, keep in mind that you may lose out on having a healthy rental income, which might mean that you’ll have to shoulder all the expenses of owning the property. It is best to do your sums first to see whether or not you will be able to afford running your investment out of your own pocket while waiting for its value to grow.
The Importance of Balance
Most importantly, you should choose a property that balances a healthy rental yield and a good history of capital growth. You will need the former to be able to service at least a portion of your mortgage. Meanwhile, capital growth is also important because you want to be able to make a profit from the property when you finally sell it.
More importantly, you should take into consideration your investment goals, as these will help you decide which aspect will be more important in your situation. If you are looking to lower your overall taxable income, for example, then a high rental yield may not be as important. However, if you are looking to invest in property to add to your other income streams, then opt for a property with a high rental yield. For those in it for the long term, it is only a sensible move to go for a property with healthy capital growth. It is important to always remember to try and keep both aspects balanced as much as you can for maximal profit short term and long term.