Capital Appreciation vs Rental Yield: Which Investment Strategy Is Right For You?
A common question that many first-time investors or even seasoned property investors face when it comes to their investment strategy is whether to focus on capital appreciation or rental yield. In other words, should they invest in a property based on the potential of future growth or is rental income the most important factor?
As the majority of investors are at different stages of building their property portfolios and indeed life in general, there is no right or wrong answer when deciding which route to take. However, it is important to compare both investment strategies to identify which one offers the desired returns that meet with your financial goals.
By definition, capital appreciation, also known as capital growth, refers to the increase in the value of a property investment over a period of time. Many investors who aim to achieve capital appreciation invest in off-plan residential developments that offer the potential of continuous growth. These investors will often have a long-term property investment strategy and aim to achieve a significant increase in value during the period of construction, with incremental growth following on from completion. Although it may seem easy to identify properties with capital appreciation potential, some research must be performed before selecting a property for long-term gain. A tip would be to identify properties in areas with the following attributes:
Local Investment – Purchasing a property in areas undergoing investment from the local council or government is an excellent signpost of the potential for capital appreciation. An example of UK property markets undergoing substantial local investment would be regional cities such as Birmingham with its £8billion regeneration scheme “Big City Plan” or areas along London’s commuter belt such as Slough experiencing millions of pounds worth of regeneration. Local investment into infrastructure, city-centre renovations, employment sectors, education and commercial space can provide endless value to properties. Properties located in these areas are the “diamonds in the rough” that will appeal to investors seeking capital appreciation.
Transport Infrastructure – The UK government is investing heavily in transport infrastructure with billions of pounds set aside for improvements to networks and future connectivity. For investors seeking properties with capital appreciation potential, the quality of local infrastructure should be a major consideration. A tip would be to identify properties in areas undergoing substantial infrastructure investment such as the high-speed railway (HS2) that will connect London to Birmingham in just 49min or areas along the new Crossrail route such as Slough, which is experiencing significant property value increases. Infrastructure investment is not only transforming UK cities but also the local real estate market as well.
By taking advantage of a secondary income stream, this strategy is common among investors with multiple properties. These properties can provide a steady stream of income from tenants rather than speculating on a property’s future growth potential. Rental yields are calculated by deducting all expenses of the property e.g tax, service charges and lettings fees from the annual rental income and dividing this number by the total cost of the property. Multiply the result by 100 for the net rental percentage.
As a calculation it looks like this:
A (Annual Rental Income) / B (Property Value) x 100 = Rental Yield
Although this may seem a straight forward method of investing, certain aspects must be considered before choosing this strategy:
Property Management – An important factor to consider (especially for overseas investors) when focusing on rental yield strategy is the management of the property. Many landlords can attest to the fact that finding tenants is not an easy task nor is dealing with maintenance issues or lettings agents. A tip for investors is to identify a property that offers a fully managed service. This allows investors to enjoy their passive income without any hassles involved. A small percentage of the annual rent will be charged towards property management; however, it does offer freedom from dealing with the numerous tasks associated with being a landlord.
Supply vs Demand – Before determining the return on investment for a rental property, you must analyse the supply and demand levels for your market. For example, many UK property investors assume that London is a haven for a rental yield strategy as there is high demand for accommodation, but this is not true. The UK is experiencing tremendous population shifts from London towards commuter belt locations and regional cities. Figures released by ONS highlight that since June 2017 the number of people leaving London for a new life elsewhere in the UK reached 106,607 — more than 14 per cent higher than in 2016 and 55 per cent higher than five years earlier. For those moving within England, Birmingham was the most popular destination followed by Brighton and Bristol. People are searching for larger living spaces and increased employment opportunities. A tip for investors is to identify cities experiencing population growth next to solid employment sectors. This will ensure supply does not outweigh demand for accommodation and will provide a continuous stream of rental income per annum.
Can I achieve both?
Yes, of course. Fortunately, the UK property market is unique in the fact that it offers investment opportunities with potential for capital appreciation and rental returns and can each be a set goal in your investment strategy. As mentioned previously, many people are at different stages on their investment journey and both strategies can pay dividends. The UK property market has historically proven its viability as an investment destination and provides many opportunities for investors to capitalize on, however, the right advice is required to ensure the long-term viability of an investment portfolio.
SevenCapital is a leading UK developer that specialises in identifying property hotspots across the UK with proven capital appreciation and rental yields to align with your investment strategy.
For further information on UK investment properties, follow this link for details: https://sevencapital.com/developments/