If you’re an investor looking for capital growth and high rental yield, this is for you.
It’s one of those classic investor questions – which one is better: capital appreciation or high rental yield? Is it possible to have both? It’s a conundrum that keeps many awake at night.
Investors will be told that it’s near impossible to achieve both solid capital growth and strong rental income. In fact, as we’ll demonstrate, it’s possible to purchase investment properties that give you both.
Firstly though, let’s investigate some of the benefits of capital appreciation and high rental yield.
Long term, you’ll make a significant profit when you sell a growth property and you can also leverage this equity to borrow for other investments.
On the other hand, a high rental yield property can earn you a passive income. Imagine an extra source of income at your disposal. You could make extra payments your home mortgage, offset your living expenses, or keep it as a buffer against a future interest rate rise.
Both scenarios have valid, attractive propositions. If you’re forced to select one, it will come down to your individual needs and financial situation. However there’s a bigger question: why can’t you have both?
The classic argument as to why you can’t have both is based on a series generalisations.
The first generalisation is that properties with high rental yields are only in the regions or the country. It’s true, we often find high yielding properties in regional towns where income-to-property-price ratios are lower. Capital growth can be slower in these areas because incomes don’t increase as much and population growth is slower compared with cities.
Cessnock, in the Hunter region of New South Wales is an example of an area offering both high rental returns and strong capital growth. This example illustrates the potential opportunity loss from believing outdated narratives which can limit one's investing perspective.
The reasons for Cessnock’s high yield are lower house prices and incomes still relatively high, allowing favourable yields. Housing supply is also tight which keeps rents up.
Yet, despite this, it is a market exhibiting strong capital growth over recent years and continues to be fuelled into the future with a projected city population growth of 48% by 2041 and when we multiply this with a strong economy and regionally significant infrastructure projects it certainly bucks conventional wisdom.
Cessnock investment results:
The next generalisation says that capital appreciation comes from properties in cities where there’s constant demand for housing but rental yields can’t keep pace. This argument claims that expensive suburbs have strong housing price drivers but weaker rental increases. High property demand in metropolitan housing markets can typically create a disconnect between asset price and rental income that, even with a high rent, typically results in a low yield for that market.
However, this is based on a snapshot of statistics that doesn’t take into account the highly diverse property markets that exist across Australia. As we’ve pointed out before, there is no such thing as one amorphous market.
This myth also ignores how attractive regional areas have become and how many regional cities with strong economies and infrastructure are substantially bringing in outside populations.
In fact, there are areas such as Newcastle, Geelong, Gippsland and Wollongong that enjoy high rental incomes and are equally performing very well with capital growth. In the cities there are markets in the suburbs of Greater Sydney, Melbourne, Brisbane and Adelaide, where an investor can purchase reasonably priced properties that have solid growth and excellent rental returns. City markets are fluid and ever changing, as Australia’s demographics, infrastructure and local economies continue to evolve.
Dividing capital growth areas into only city and country is simplistic at best.
So as Australia’s population booms, we’re seeing people move further outwards. Sydney has become unaffordable for many young families and first time buyers, so this has led to a migration out to places like the Central Coast or southwestern Sydney. This has meant infrastructure and city hubs have slowly expanded outwards. Parramatta and Newcastle, for example, have seen significant upgrades in the last few years, becoming thriving centres in their own right. These once “undesirable” areas are now booming thanks to rapid population growth.
One sure way to achieve strong rental yield is with a multi-rental property such as DPN's Dual Income home design which is two separate dwellings built on the one block of land. If you’re investing in a high capital growth area you can immediately get strong a rental yield, as you’ll be enjoying two rental incomes from the same plot of land.
For instance, say you purchased land in Wollongong for $600,000 and built a dual income residence on it. You’d be in a strong position as Wollongong is averaging around 7% capital growth with rental yields $1,200 a week (current at June 2023). In this scenario your portfolio value is rapidly growing while you’re also pulling in two rents. With that extra income you could pay off your mortgage faster or just enjoy the extra capital.
So, is it possible to have both capital growth and rental yield on a property? Yes, absolutely. With multi-rental property designs, thorough research and careful targeting of the areas set to explode.
RP Data, Cessnock
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