Many Australians look to property investment in their wealth creation journey. Whether you are looking at purchasing your first investment property or adding to an established property portfolio, the debate over cashflow or rental yield and capital growth will be at the heart of your decision.
The point of property investment is principally to make money. This is achieved via the rental income you receive from the property and by the increase in the value of your property over time, or, by creating equity through renovating or developing the property.
To maximize the amount of return it is clear that this would be best accomplished by maximizing both cashflow and capital growth. In recent times many investors have been able to achieve both, for instance some investment properties in mining areas of Queensland have been returning excellent rental incomes coupled with significant capital growth. However this may not always be possible as there is an inverse relationship between these two variables.
Property investment for capital growth
For example, lets say a property in a beachside suburb of Sydney was to increase in value by 8-10% per annum. As it grows in value, the rental yield of this property will decrease simply because the rental yield is expressed as a percentage of the property’s value. Unless of course the rental income was to increase at the same pace as the property’s value, this holds true.
Some investors opt for taking a balanced view of their portfolio and purchase multiple properties, some providing yield and some providing growth. A high income earner may choose a property for capital growth as the poor rental yield may provide other benefits to that investor in the form of tax deductions.
Whatever your situation using property investment as a wealth creation vehicle is a safe and trusted strategy. Your mortgage broker is best placed to discuss your plans and develop strategies the suit your particular investment needs.