How to estimate and maximise capital growth and rental yield of an investment property
Investing in property can be a profitable way to build long-term wealth, but it’s important to understand the key metrics that indicate the success of your investment. Two of the most important indicators are capital growth and rental yield. Estimating both can help you make informed decisions about which properties to invest in and how to manage them for the best return. In this article, we’ll guide you through how to estimate capital growth and rental yield, along with strategies for maximising both.
What is capital growth?
Capital growth refers to the increase in a property’s value over time. It’s an important factor for investors focused on long-term wealth creation, as it reflects the equity growth in a property. Estimating capital growth allows investors to project the potential future value of their investment.
How to estimate capital growth
Estimating capital growth requires analysing various factors related to the property and its location. Here are some key methods to estimate capital growth:
- Historical data: One of the best ways to estimate future capital growth is to look at past performance. Reviewing historical property prices in the suburb or region can give you insight into long-term trends. If a suburb has had an annual average growth of 5% over the last decade, it might continue to grow at a similar rate.
- Supply and demand: Locations with strong demand and limited housing supply tend to have higher capital growth potential. Areas with growing populations, employment opportunities, or infrastructure development are more likely to see property values rise over time.
- Planned infrastructure projects: Infrastructure projects such as new transportation links, schools, or shopping centres can significantly impact property values. Properties located near such developments tend to appreciate more quickly.
- Location: Properties in prime locations, such as those near city centres, beaches, or highly desirable suburbs, often experience faster capital growth. Look for areas that have high livability, good amenities, and access to transport.
- Expert forecasts: Many property data companies, economists, and real estate professionals offer market reports and growth forecasts based on current economic and housing trends. These can provide helpful insights when estimating capital growth potential.
By analysing these factors, you can form an estimate of a property’s potential for capital growth over time. You can also utilise our Save vs Buy calculator to estimate the equity in your property over 30 years.
How to Maximise Capital Growth
To maximise capital growth, focus on the following strategies:
- Buy in growth areas: Invest in suburbs with a history of strong growth or those on the verge of gentrification or development. Look for areas with upcoming infrastructure projects or growing populations.
- Renovate or develop: Strategic renovations, such as updating kitchens and bathrooms or improving outdoor spaces, can boost property value and drive capital growth. If the property has land, consider subdividing or adding new dwellings to increase value.
- Hold long-term: Property values tend to increase over time, especially over a 7-10 year period. Holding a property for the long term allows you to ride out market fluctuations and benefit from compounding capital growth.
What is rental yield?
Rental yield is a measure of the annual rental income from a property compared to its purchase price or market value. It helps investors understand the cash flow they can expect from the property, making it a key factor in assessing short-term profitability.
How to estimate gross rental yield
Gross rental yield is the annual rental income expressed as a percentage of the property’s purchase price or market value, without taking expenses into account. It provides a basic measure of a property’s income-generating potential. To estimate gross rental yield, you need to know the current market rent in the area. For example:
Gross rental yield (%) = (annual rental income / purchase price) × 100
- Purchase price: $500,000
- Estimated weekly rent: $500
- Annual rental income = $500 × 52 = $26,000
- Gross rental yield = ($26,000 / $500,000) × 100 = 5.2%
How to estimate net rental yield
Net rental yield provides a more accurate picture of your returns because it accounts for expenses like maintenance, property management fees, insurance, and loan interest. For example:
Net rental yield (%) = [(annual rental income – annual expenses) / purchase price] × 100
- Purchase price: $500,000
- Annual rental income: $26,000
- Estimated annual expenses: $8,000
- Net rental yield = [($26,000 - $8,000) / $500,000] × 100 = 3.6%
How to maximise rental yield
To maximise rental yield, you should focus on improving both rental income and reducing costs:
- Choose high-demand rental areas: Properties located near business districts, universities, or public transport hubs are more likely to attract tenants and command higher rents.
- Adjust rent to market rates: Ensure that you regularly review rental prices and adjust them to match market conditions. Undercharging rent can reduce your yield, so stay updated on local rental trends.
- Minimise vacancy periods: Keeping your property tenanted is essential for maximising rental yield. Ensure that your property is well-maintained and attractive to tenants, and respond quickly to tenant requests to reduce turnover and vacancy periods.
- Add value with renovations: Small upgrades, such as modernising appliances, adding air conditioning, or renovating kitchens and bathrooms, can increase the rental value. Properties with appealing features often attract higher rent, boosting your yield.
- Consider short-term rentals: In some locations, offering short-term rental options (such as on Airbnb) can significantly increase rental income. However, it’s important to weigh the higher management costs and potential vacancy rates against the higher rental returns.
Balancing capital growth and rental yield
Investors often face a trade-off between properties with high capital growth and those with high rental yield. Properties in desirable locations with strong capital growth potential may have lower rental yields, while properties in more affordable areas can offer higher yields but slower growth.
- High capital growth, low yield: Properties in inner-city suburbs or prime locations typically offer better capital growth but may generate lower rental yields due to higher purchase prices.
- High yield, low growth: Properties in regional areas or outer suburbs may provide higher rental yields but experience slower capital appreciation.
A balanced property portfolio with a mix of high-growth and high-yield properties can help mitigate risks and enhance overall returns.
Estimating capital growth and rental yield is essential for making informed property investment decisions. While capital growth focuses on long-term wealth creation, rental yield ensures steady cash flow. By researching market trends, choosing properties in high-demand areas, and optimising property management strategies, you can maximise both capital growth and rental yield, ensuring the long-term profitability of your investment property.
