What is Good Capital Growth?
For property investors there’s usually two clear objectives – generating rental yields and building capital growth. Depending on your strategy, rental yields will usually be the goal, especially if you’re investing for long-term returns. However, capital growth is the profit made on an investment, and it is a clear opportunity for investors to maximise their profit on their Buy-to-Let property, especially with the growth in prices we have seen over the past 10 years.
What is Capital Growth?
Capital growth, also known as capital appreciation, is the profit on your property purchase that accumulates based on natural market growth – provided prices trend positively. While the value of a property can obviously depreciate, the stability of the UK property market is usually a primary reason for investing in the sector.
The UK property market has been on an upward trajectory for the best part of ten years, and aside from momentary dips, those who purchased back in 2011 may have seen considerable capital growth on their property investment.
There are several ways you could maximise your capital growth, which should be considered early on in the investment process. The location of your Buy-to-Let property will inevitably form a large part of your initial research and you should consider high growth areas as well as the average prices within the local market. Here, you’ll be able to get an idea of the potential of the area, as well as what adds value to these properties.
In addition to the local property market, you should also consider the wider area. Price growth is driven by demand, and if the area offers transport links, amenities and access to schools, it’s more likely that your property will see positive capital growth. The benefits of these considerations will be twofold – you’ll increase your chances of capital growth in the long-term and cater to the priorities of current tenants in the meantime.
Capital Appreciation vs. Rental Yields
Capital growth is often the headline statistic for investors as it revolves around the ‘big numbers’, but what about rental yields? Rental yields represent the potential for long-term success and are a key metric for investors to consider when searching for a Buy-to-Let property. They’re calculated by comparing your monthly rent (per annum) against the value of your property. By working out the gross yield, you’ll be able to get an idea of how your investment will perform over time.
Much like capital growth, considering the demand in the local area and its amenities is key. However, your investment goals will likely determine what you value more. If you’re looking to invest in a property purely for capital appreciation, then you might consider the past performance of an area and future forecasts more than the current tenant demand.
If you’re prioritising a consistent passive income and consider any capital appreciation as an added bonus, you’ll want to spend a lot of your time researching what tenants are currently looking for in a property, and more importantly, which locations deliver these.
That said, the factors that influence capital growth largely overlap with those of rental yields, so by taking these into account, you’ll likely be able to benefit in both the short- and long-term.
What is Good Capital Growth?
Generally speaking, there isn’t an industry standard for what is considered ‘good’ capital growth. As this metric can be influenced by a variety of factors, such as location, expectations for capital appreciation should be based on the local area.
That said, the past performance of UK property prices can give you an idea of the average growth you could potentially see over the years. If you were to consider price growth over the past 10 years, the average annual price increase works out at around 4.14%. So, if you go by the national average, anything that surpasses this number can be considered exceptional growth.
To work out capital growth, you’ll need to compare the price you paid for the property with its current value. Once you know how much your property has increased in value, you’ll need to divide this by the purchase price, then multiply it by 100.
For example, if you paid £250,000 for your property and it has now been valued at £275,000, it has increased by £25,000. If you divide £25,000 by £250,000, you’ll be left with 0.1, which when multiplied by 100, equates to 10% capital growth.
Along with rental yields, this metric is a key consideration for investors to consider. With similar factors often maximising both rental yields and capital appreciation, investors should be mindful of local areas and amenities in order to safeguard their short- and long-term profits.