When investing in property, there are two key aspects to consider; capital growth and rental yield. These two components are used to calculate the performance of a property investment and measure its financial growth. The higher the capital growth and rental yield, the better the return on investment will be. If you’re looking for some insights on measuring the financial growth of a property investment, then it is important to understand the key differences between capital growth and rental yield.
What is capital growth?
Capital growth is the amount a property increases over time. For example, if you were to purchase a property for £200,000 and then sell it for £250,000, your capital growth is £50,000. The UK’s robust housing market has returned high capital growth for property investors over the years and shows no sign of abating. According to the Office for National Statistics, the average price of property in the UK increased by 7.5 percent over the year to January 2021, increasing on average by £17,000. The North West, and Yorkshire and The Humber, saw the highest growth, with the smallest growth seen in London and the West Midlands.
What is rental yield?
Rental yield is essentially the amount of money made through letting a property. There are two types of rental yield; gross rental yield and net rental yield.
Gross rental yield is the total amount the property generates in income divided by the home’s value and multiplied by 100 to give a percentage. Net rental yield takes into consideration any losses, such as mortgage payments, service fees, landlord insurance and on-going maintenance and repair costs. Essentially, the rental yield must be high enough to cover the running costs of a property.
As the rental market continues to soar in the UK – average rents outside of the UK’s capital rose by 5% in the year July 2020 to July 2021, according to Zoopla – rental yields are a key consideration for property investors as they are a good indicator as to whether or not a property is a good investment.
Which one is more important?
The importance of rental yield versus capital growth will often depend on a property investor’s long-term aim. For example, a property investor seeking a long-term investment may place greater emphasis on capital growth, while an investor seeking a short-term investment will likely be more focused on a property’s rental yield. Either way, it’s important to thoroughly research both.
How can I maximise capital growth and rental yield?
Several key factors can help maximise capital growth and rental yield.
Buying in a desirable location with good transport links, schools, and lifestyle amenities will likely make a property more attractive, boosting both rental yield and capital growth. Additionally buying in a location where tenant demand is high and where properties rarely stay on the market for long will also help ensure a good rental yield.
While more high-risk, investing in up-and-coming areas, especially areas that are benefiting from ongoing regeneration initiatives and investment, can also secure excellent return on investment.
Other aspects that can help maximise capital growth and rental yield include making sure a property has plenty of curb appeal. For example, modern kitchens and bathrooms, a well-maintained garden, adding a loft conversion or extension can add value to a property and increase rental yield and capital growth.
Finally, investing in a new-build property, especially off-plan, can help increase capital growth and rental yield. Off-plan properties can often be purchased at a lower than market value purchase price, while new-build properties often command higher rental thanks to the property’s modern fixtures and fittings. Finally, maintenance and running costs are often significantly lower with a new build property. Indeed, a new build property can be income generating from day one.
When it comes to making a sound property investment, it’s important to consider a variety of factors. Both rental yields and capital growth can help give a firm indication of a property’s return on investment and income generation in both the short and long term.
Citylife is creating new high-quality residential buildings in Leeds, across premium city centre locations, perfect for investors seeking new investment opportunities in a fast-growing city.
Find out more about our live developments of off-plan investment properties in Leeds here. If you’re interested in investing in the off-plan property Citylife is developing, get in touch with us today.