What’s Best? Yield or Capital Growth

When it comes to property investment in the UK, one of the most crucial decisions investors face is whether to focus on rental yield or capital growth. Both strategies have their merits, and the best choice often depends on individual circumstances, financial goals, and market conditions. We speak to David Maidment, Director at Urpad.property to delve into the intricacies of yield and capital growth to help you make an informed decision for your property investment journey.

Rental yield is the annual return on investment you receive from renting out a property, expressed as a percentage of the property’s value. It’s a key metric for investors seeking regular income from their property investments.

1. 1. Determine the annual rental income
   2. Divide it by the property’s purchase price or current market value
   3. Multiply the result by 100 to get the percentage

For example:

 Rental Yield = Annual Rental Income/Property Value x 100

 For example: if a property generates £12,000 in annual rent and is valued at £200,000, the rental yield would be:

 (£12,000 / £200,000) x100 = 6%

1. 1. Steady Cash Flow: Rental yield provides a regular, predictable income stream, which can be particularly attractive for investors seeking monthly returns.
   2. Inflation Hedge: Rental income tends to rise with inflation, offering some protection against economic fluctuations
   3. Short-Term Returns: Ideal for investors with shorter time horizons or those needing to cover mortgage payments and other property-related expenses.
   4. Diverse Investment Opportunities: High-yield properties can be found in various locations, including up-and-coming areas or student-heavy cities.

1. Higher Risk: Properties with high rental yields may come with increased risks, such as being located in less desirable areas or requiring more maintenance.
2. Market Fluctuations: Rental demand and rates can vary, potentially affecting your yield over time.
3. Active Management: Yield-focused investments often require more hands-on management, including tenant screening, property maintenance, and rent collection.

Capital growth, also known as capital appreciation, refers to the increase in a property’s value over time. It’s the difference between the purchase price and the current or future selling price of the property.

1. 1. Subtract the purchase price from the current market value
   2. Divide the result by the purchase price
   3. Multiply by 100 to get the percentage

For example:

Capital Growth Rate = (Current Value – Purchase Price) / Purchase Price x 100

If a property was purchased for £200,000 and is now worth £250,000, the capital growth rate would be:

(£250,000 – £200,000) / £200,000 x 100 = 25%

1. 1. Long-Term Wealth Building: Capital growth can lead to big returns over long periods, benefiting from compound growth.
   2. Possible Tax Benefits: Capital gains can be taxed at lower rates than rental income, potentially offering tax advantages.
   3. Passive Investment: Capital growth strategies typically require less active management compared to yield-focused investments.

1. 1. Market Dependence: Capital growth is heavily influenced by market conditions and location, making it less predictable than rental yield.
   2. Longer Time Horizon: Achieving significant capital growth often requires holding on to a property for a significant period of time.
   3. Cash Flow Challenges: Properties focused on capital growth may not generate sufficient rental income to cover expenses in the short term.

While some investors may choose to focus exclusively on either yield or capital growth, many successful property investors aim for a balanced approach that combines elements of both strategies.  Here are some factors to consider when balancing yield and growth:

Investment Goals: Decide whether your key objective is to achieve a regular income, long-term wealth accumulation, or a mix of both.

Risk Tolerance: Understand how comfortable you are with market fluctuations and potential short-term losses.

Time: Consider how long you plan to hold the property and when you need to see returns on your investment.

Market Conditions: Research local property markets to identify areas with potential for both strong rental demand and capital appreciation

Diversification: If you can, perhaps build a portfolio that includes properties with varying yield and growth potential to spread risk and maximise overall returns.

The choice to go for yield or capital growth in property investment in England & Wales is not a straightforward one. Both strategies have their pros and cons, and the best approach almost always depends on individual circumstances, financial goals, and market conditions.

Rental yield offers the advantage of regular, predictable income and can be particularly attractive for investors needing to cover property-related expenses. On the other hand, capital growth presents opportunities for significant long-term wealth accumulation and can offer tax advantages (please check this with a Tax professional before investing). Many successful property investors find that a balanced approach, considering both yield and growth potential, leads to a well-rounded and resilient investment portfolio. 

Remember, the England & Wales property market is always changing. Whether you choose to focus on yield, capital growth, or a combination of both, thorough research, ongoing market analysis, and professional advice can help you make informed decisions and achieve success in your property investment journey.

If you wish to book an appointment with Property Sales and Investment Specialist, Ross Pollard, give him a call on 0117 427 0099 or email him on [email protected].