Investment property: Aim for capital growth
Category Newsletter: Lead Article
Potential property investors, particularly those new to the industry, are easily swayed by the rental income a property could potentially generate. And while that is certainly an important consideration, it's worth taking a closer look.
Skoko Sebola, Principal at Leapfrog Midrand, shares that seasoned property investors look beyond the rental yield and rather base their decisions about the value of the investment on the capital growth potential of the property.
He explains: "Capital growth refers to the value of the property over time, while rental yield is simply the monthly cash flow. Both are important but anybody wants to see an investment grow and that growth is measured in capital terms."
The numbers tell the full story
The significance of capital growth is best illustrated through a simple example.
A property of R1.5 million could fetch a monthly rental income of R10 000, amounting to R120 000 a year. Despite the expenses that will need to be deducted from the R10 000, such as municipal rates and taxes, levies and maintenance, it's still a notable monthly income.
Capital growth on a property valued at R1.5 million is likely to be around 6% per annum, or R90 000 per year. And while R90 000 is R30 000 less than the R120 000 the rental yield generated, the overall appreciation of the property has not yet been accounted for.
Sebola explains that the R90 000 in capital growth was added to the overall value of the property, while the R120 000 in rental yield was just cash flow and didn't contribute to the value of the property. Even when the monthly rental increased by 5% - which is R500 on a R10 000 rental - it is still only R6000 a year, which is not even 10% of the R90 000 capital growth.
Long-term growth and performance is the priority for most property investors, which is why it pays to be aware of the difference. Capital growth represents the growing value of the property over time while rental yield is simply the monthly cash flow, though that is not to say that rental yield doesn't matter - it is ultimately what looks after the asset.
Expansion possibilities
The capital balance on an investment property can also be used to grow a property portfolio."Many financiers, like the banks, allow you to leverage the capital in high-growth properties as a deposit for the next purchase," Sebola says.
Any property investor should manage their expectations in line with their overall financial and investment goals. To this end, it is advisable to connect with a trusted property advisor for guidance on how to make the most of your property investment. And do so from the get-go, as they have the insight and expertise to guide you on every aspect of the property investment journey, from finding great deals in coveted areas to ensuring the eventual rental process runs smoothly.
Author: Leapfrog Property Group
