20 February 2018 Should you chase rental yield or capital growth?

The argument is an old one: which is better - capital growth or rental yield? One gives you increasing value over a long period, while the other gives you dollars in your pocket right now.

Obviously, both have their advantages, but deciding which is right for you will come down to your personal circumstances.

Buying for the future – capital growth

Properties with good capital growth are found in areas where demand exceeds supply; prices are driven up as buyers compete for the limited properties available. This usually happens in areas that are close to work opportunities, with good amenities, public transport and infrastructure (or these things are on the way). In other words, in good locations that people want to live in.

Over time, as demand continues to outstrip supply, the properties continue to increase in value, hence the growth on your initial capital investment.

However, because properties in these areas cost more to purchase, rental yields may not cover the expenses of owning and keeping the property, in which case the owner will have to cough up additional funds to meet costs. Interest rate increases, for example, may increase mortgage costs and the property can become even more expensive to hold.

This isn’t always the case, but generally properties in good capital growth areas may initially offer less by way of rental yield, simply because the properties cost more to purchase, and hence to hold.

Cash in hand – investing for rental yield

A rental yield strategy, however, is almost opposite. A property with good rental yield is one which is positively geared, meaning the rental income is greater than the costs of owning and keeping the property, and therefore the owner ends up with cash in the hand.

Properties with good rental yield also tend to be less expensive to buy than those in areas that promise good long-term capital growth. This means that the costs associated with purchasing (such as taxes and mortgage payments) are less overall.

Good rental yield areas can be found anywhere, but are typically in regional areas where there is a high demand for rentals but only limited properties available. This can happen suddenly in areas where new amenities and services are announced, such as a new shopping centre or upgraded transport, or in areas that have transient populations such as mining or manufacturing.

So how do you know what’s best?

As with any investment decision, it comes down to personal circumstances. First-time buyers may be more interested in a rental yield strategy to get them into the market: there may be lower up-front costs, and a positively geared property will help deal with expenses. For investors looking for a property that will weather market changes with more stability and offer a better long-term investment, purchasing somewhere with good capital growth may be more beneficial.

Of course, there are other costs to consider, including property maintenance and repairs. These costs can come as a surprise to some investors, so it’s worth considering how these could affect your rental yield. Either way, it’s up to each investor to decide whether they are looking for something that provides cash flow now, or an investment for the future.

Defence housing for yield and growth strategies

One of the main benefits of investing with Defence Housing Australia is that it offers investors both options. In terms of capital growth, people investing with DHA do so on a long-term basis. Investors purchase a property, then lease it back to DHA, with guaranteed rent for a period of up to 12 years1. This allows investors to take advantage of gains in the market that can occur over the long term, while also enjoying a regular, reliable rental income.

What’s more, with DHA the rental income is guaranteed to never drop below the commencing rent2. Annual market rent reviews also ensure that investors are maximising their income. This means investors can budget easily knowing what their minimum monthly rent will be, providing more stability and capacity to plan for both the short and long term.

Is DHA right for you?

Yield and growth strategies aren’t all there is to making a decision about where and how to invest in property. You need to consider the type of investor you are: hands-on or hands-off. And you’ll also need to plan for how you’ll manage the tenants and the ongoing upkeep of the property.

There are additional benefits to investing with DHA that can help with these considerations, such as DHA’s exclusive Property Care service, and its selection of properties available across Australia.

Find a DHA investment property to suit your strategy.

The advice contained in this article is for general information only and should not be taken as financial advice. Investment is subject to DHA’s lease terms and conditions of sale. Investors retain some responsibilities and risks including property market fluctuations. Prospective investors should seek independent advice.1Rent may be subject to abatement in limited circumstances.2Rental floor applies to DHA properties leased under DHA’s Lease Edition 6C, which will not cover all DHA properties.