Prioritizing Capital Growth: The Key to Property Investment
Updated: Aug 6
Property investment can help you make money in different ways. Knowing these ways is important to create a plan that works best for you. There are four main ways to profit from property investment: Capital Growth, Rental Yield, Depreciation, and Manufacturing Value. Among these, capital growth is the most important for smart investors.
What is Capital Growth?
Capital growth is when the value of your property goes up over time. This increase is the foundation of a successful property investment. While rental income, improvements to the property, and depreciation are also important, focusing on capital growth is key to building long-term wealth. Not only does a superior growth rate compound over time, the benefits of this increase in equity can be further leveraged in the future and these gains aren’t taxed unless you sell the property in the future.
Rental Yield
Rental yield is the money you make from renting out your property. This steady income helps cover costs like mortgage payments, maintenance, and property management. But if you only focus on rental yield, you might miss out on properties that could grow significantly in value over time. Keep in mind the rental income is also taxed on an annual basis.
Adding Value to the Property
You can also make a property worth more by fixing it up or making improvements. This could be in the form of a cosmetic uplift or a more significant structural addition or reconfiguration. These improvements can boost a property’s market value and potential capital growth. However, it’s important to think about the costs of these improvements, market trends, and how much value they will add to make sure it’s worth it.
Depreciation
Depreciation is when a property loses value over time due to wear and tear. Investors use depreciation to get tax benefits and lower their holding costs, but it can sometimes mean buying overpriced properties or those with a low land to asset value ratio. It’s better to focus on adding value through renovations or development to get these benefits instead of buying a ready-made property just for depreciation.
Why Capital Growth Matters
Understanding each way to make money from property is important, but capital growth is the best for long-term wealth. Asset selection and manufacturing value have the greatest impact on your capital growth success, whilst rental income and depreciation has a greater impact to your ability to hold. Ensuring you have your priorities in the right order will have a significant difference to your investment returns and likely your opinion on property as an asset class.
Finding the Right Balance
Balancing these income streams is important. Prioritizing capital growth may mean waiting longer to see returns, getting less cash flow right away, and doing more market research. Market conditions, the economy, and property cycles all affect how successful a capital growth strategy will be. Being flexible and adapting to changes while keeping capital growth as a priority is crucial for success.
While rental income, adding value, and depreciation are important, focusing on capital growth is the best way to build long-term wealth. Investors should aim for a balanced approach that includes all these ways of making money but keeps capital growth as the main goal. Finding the right balance based on your risk tolerance, financial goals, and market conditions is key to a successful property investment journey.
Want to know more? We recently covered this topic in an episode of The Property Files Podcast.
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