Capital growth versus high rental yield…. and how you can enjoy both

Capital growth versus high rental yield

It’s one of those classic investor questions – which one is better: capital growth or high investor 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 really not that hard to purchase investment properties that give you both.

Firstly though, let’s investigate some of the positive points of capital growth and high rental yield. Long term, you’ll make a significant profit when you sell a capital growth property. On the other hand, a high rental yield property can earn you a passive income from day one. Imagine what you could do with the extra capital: to pay off 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?

Check out the majority of articles online and most posit theories such as while it’s possible to have both capital growth and high rental yield “it is rare” or as one opinion writer claimed: “there is an inverse relationship between capital growth and high rental yield”. Another opinion writer claims that positive cash flow properties tend to be out in the country and outer suburbs, and as such, don’t have strong capital growth as they have small populations, less infrastructure and simply aren’t as attractive to live in.

However, the fact is that it’s really not that difficult for investors to have both strong growth from a property as well as enjoying high rental incomes.

Let’s debunk the arguments against it. 

The classic argument as to why you can’t have both is based on a series of generalisations. 

The first generalisation is based on properties with high rental yield being out in the regions or the country. Typically these are in areas where housing is in short supply (for instance few apartment blocks or townhouses). Property is cheap to buy and maintain so the high rental return sounds very attractive. Capital growth is slower in these areas because incomes don’t increase very much and there isn’t much of a growth in population. Or so the argument goes.

Certainly in mining towns, rental yields can be disproportionally high, as we witnessed in Western Australia, This was because of the highly attractive income to be made from the mines. At the absolute peak of 2011, the average Western Australian family was earning $98 000 – about $40 000 more than the rest of Australia. 

At one point it was more expensive to rent a 3 bedroom house in South Hedland than a 5 bedroom mansion in Sydney’s wealthy Vaucluse. And because the majority of workers were “fly-in, fly-out”, they had no interest in purchasing property, so rents went stratospherically high but capital growth didn’t accelerate. As we’ve seen, once the mining boom died down, suddenly the property market collapsed and investors who’d been generating high incomes from rent, were suddenly left with empty houses and little capital growth.

This is certainly a very unique example. It does, however, illustrate the dangers of relying on high rental yield alone, especially in a finite economic situation like a mining boom or tourism.

The next generalisation says that capital growth comes from properties in cities where there’s constant demand for housing but rental yields simply can’t keep pace. This argument claims that expensive suburbs have strong housing price drivers but weaker rental increases.  This is partly based on the idea that negative gearing investors will keep rents low, and that capital growth will keep outstripping rental incomes.

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. 

Dividing capital growth areas into only city and country is simplistic at best. It 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 Sydney, Melbourne, Brisbane and Adelaide, where an investor can purchase relatively cheap properties that have surging capital growth and excellent rental returns. City markets are fluid and ever changing, as Australia’s demographics, infrastructure and local economies continue to evolve.

So as Australia’s population booms and increases, 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 the Central Coast or south west or similar. 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. So these so-called “undesirable” areas are now finally booming thanks to rapid population growth.

There are many ways to harness capital growth with good rental yield. One appealing solution is a dual income property, such as DPN’s CASA Seconda. 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 $500,000 and built a dual income residence on it. You’d be in a strong position as Wollongong is averaging around 5% capital growth with rental yields around $500 a week. 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. Through thorough, fact based research and careful targeting of the areas set to explode.