There are two ways to profit from property investment; rental yields, and growth in the value of the property. For many new investors, the question of which kind of returns they should prioritise when choosing their investment property is one of the most difficult and confusing ones. Finding the answer to that question can be not just a relief, but a big step towards finding the right property in which to invest successfully.
Which is Most Important?
Like a lot of questions, there is no fixed answer. Both are important, and the question of which should be the biggest priority depends entirely on your investment goals. The biggest difference is that rental yields come to you in the form of liquid, immediately-accessible cash whereas capital growth remains tied up in the property until you sell it. On the simplest level, if your number one investment goal is to generate a usable income then rental yields are the way to do it. If buying a property is more a savings strategy – a place to put your money to grow for a few years and beat the disappointing interest rates that banks offer – then capital growth might be the most effective way to do it. At the end of the day, however, the question is only which kind of returns are most important to you. Both are important, and both need to be considered.
Investing for Rental Yields
Some locations and property classes tend to deliver strong rents but little growth, and for some it is the other way around, so the first step is to look for a rent-focussed area and property type. The biggest factor eating into rental returns is likely to be mortgage repayments, so it is often best to buy smaller properties in order to pay off the mortgage and eliminate that expense more quickly. Choosing a location and property class which is in high demand from tenants should also be a priority. The easier your property is to fill, both initially and whenever a tenant leaves, the less time it will spend vacant and failing to generate rent.
Investing for Capital Growth
Location is key to any property investment, but is especially vital when you are investing for capital growth. Growth in the value of a property tends to be due in large part to the area it is in, and particularly to any changes in that area. Investing in areas that are due to undergo regeneration or are set to benefit from specific projects or events. Perhaps the area is going to benefit from significant improvements to its transport links, for example, or maybe a major company is moving into the area and creating jobs. Wider economic factors are also important. Investing at times when the economy, local and national, is expected to perform well and demand for housing is forecast to keep increasing will mean investing at a time when your property is likely to grow rather than shrink in value.
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Daniel Peacock