Capital growth vs rental income- Long-Term Income Opportunities in U.S. #Real Estate

Capital growth vs rental income- Long-Term Income Opportunities in U.S. Real Estate It is one of the most debated questions in real estate: Which is better, capital growth or rental yield? Successful long-term investors in both camps argue that their preferred strategy works best, but many believe a blend of both approaches is the safe and sure way to build wealth. Others say they can find individual properties which offer both strong capital growth and high rental yield. Those who favor capital growth say it is the mose direct way to build a nest egg because their net worth grows hand in hand with the increasing property values But investors who prefer rental yield (return) say their properties pay them more than the properties cost to own, ensuring positive cash flow from day one. "Cashflow is King," is the catch cry of the rental yield investors who love the security of having money in their pocket while they continue to build their portfolio. Deciding which strategy is best is a real personal choice based on individual circumstances and goals. So there is no right or wrong answer and the debate proves one thing: there are many ways to make money from property investment. Capital growth Properties targeted for capital growth aim for an annual increase in value of 7 to 10 percent, or more for short periods, with a rental yield of 2 to 5 percent. Investors buy them banking on maximum increases in market value so they can be sold for a significant profit or used as equity to buy more properties. While rental return is secondary for capital growth buyers, many find that rents are hauled up by increasing value of the property. The big worry with capital growth properties is that because investors generally have to contribute to the ongoing cost of the property, if interest rates go up too much too quickly they might not be able to afford to keep the property. This is where financial planning is critical and it is wise for investors to include buffer in their calculations to allow for increased costs. Rental yield Investors who buy cash flow positive properties rest easy knowing they can't go broke making a profit. Their risks are minimized when the property pays them more than its costs to own it. These properties therefore appeal to new and young investors, those with a low risk profile or those with less money to spend as comparable properties offering strong rental yield are generally cheaper than those expected to have big capital growth. Properties bought for their rental yield are expected to achieve a rental return of 6 to 10 percent a year and capital growth of 4 to 6 percent. Sometimes rental return investors can have their cake and eat it too when the property also enjoys above average capital growth. For example, small towns in remote areas traditionally offer low capital growth and strong rental yield, but if the town enjoys a mining or tourism boom, capital growth can be exceptional. The disadvantage with cashflow positive, high yielding properties is that their owners must pay tax on the income whereas negatively geared properties give tax benefits, especially for high income earners. A mix of both Many investors favor a blend of properties in their portfolio - some with strong capital growth to generate equity to buy more properties and some with high yield to provide the cash flow to cover the costs. This balances the advantages and disadvantages of both strategies and means investors avoid putting all their eggs in one basket. Smart investors can also achieve the best of both worlds with one property - if they know what to look for and can think outside thaw square. Properties offering strong capital growth and high rental yield do exist, but they are hard to find. You might have seen one and not realized it. The key to in covering such properties is what I call buying property with a twist. The property needs to have a feature which can be twisted to generate additional equity or cash flow. For example, a property expected to offer high capital growth might have a large garage that can be converted into a flat which can be rented separately, or a second living area might be made into a fourth bedroom, generating more rent. A high yielding property can create instant capital growth if it can be subdivided into two or more allotments. Study planning schemes and local council zoning rules. For example, a property zoned rural that is scheduled to be rezoned to residential will grow in value immediately the rezoning is approved. The numbers Take a property valued at $400,000 and chart its progress over 20 years. In the blue corner, put the statistics for the property with a rental yield of 10 percent a year and 5 percent capital growth, and in the red corner put the comparable data for the same property calculated to have a capital growth of 10 percent a year and 5 percent rental yield. After 20 years, the rental yield champion is earning an income of more than $132,000, flattening its opponent which is returning only $53,000 a year. On the flip side, it is in capital growth where the red corner property delivers the knockout punch. It's market value has soared to more than $2.6 million, smashing the opponent's highest price of more than $1 million. So which is better? A difference in rental income of $79,000 a year or a difference in market value of about $1.6 million after 20 years? In reality, the question will always be more complicated than the maths might suggest. What works for one person will be uncomfortable for another. the main point is that there are two very different but very successful ways to build a financial future through property. Talk with one of our property investment specialists to help you plan your investment strategy. Click here to request for a free consultation.