Capital Growth Vs. Rental Yield: What's More Important?

For those new to real estate investments, capital growth and rental yield are used as markers for the performance of an investment property, but deliver different outcomes short and long-term.

Capital growth refers to how much a property increases in value over time, where rental yield is about how much rental income is earned from an investment property.

It’s largely accepted that capital growth is more important than rental yield - but, as always, there are exceptions that apply. Let’s compare the outcomes of focusing on capital growth vs. rental yield to understand how you should position your investment.

What is Capital Growth? 

Capital growth refers to the increase in value of a property over time. Property should naturally increase in value over time. As the area surrounding a property becomes more developed through infrastructure upgrades or additional amenities, the property becomes more attractive to potential buyers, which leads to an appreciation in value.

Capital growth is measured as the percentage increase in a property’s value over a number of years. The ideal is that by the time an investor is ready to sell the property, there is significant return on capital growth. Houses have greater potential for capital growth than units due to the land component that is attached to the property.

What is Rental Yield?

Rental yield is a measure of a property's rental returns relative to the cost of the investment. It is also an indication of how much rental income investors can expect to receive.  

Evaluating a property based on rental yield instead of the rent it can achieve provides a more accurate estimate of investment value.

It’s also worth noting that units typically offer a higher rental yield than houses.

Comparing Capital Growth vs. Rental Yield for Investment

Potential Return on Investment

Capital growth delivers a greater return on investment than rental yield over the same time period.

Consider a property bought at $700,000. Over a period of five years at a modest 10% year-on-year capital growth rate, the property’s value will have increased to $1,127,357, resulting in a total return of $427,357. 

The same property, with a gross rental yield of 6%, will deliver a rental return of $210,000 over five years.

Tenancy Requirements

High rental yield investment properties must be consistently tenanted to maximise rental return - any period of vacancy will impact the total returns. Even in markets with high rental demand, there is still a risk of being unable to lease the property consistently, notwithstanding the ongoing costs of advertising the property for rent and engaging property management. 

Capital growth occurs regardless of whether the property is tenanted or vacant - either way, the property is going to increase in value over time. This makes capital growth more reliable as an investment goal, especially in developing areas and regions. 

Cash Flow

Rental yield will provide cashflow and will see faster returns in the short term. High rental yield properties provide more rental income for investors when leased, which investors can use to offset ongoing costs such as mortgage payments or property management fees.

Finding a property with both high capital growth and rental yield potential is not impossible, but not always viable. Generally investors will choose to either focus on rental yield for short-term rental returns and better cash flow, or invest in capital growth returns over a longer period of time.

Focusing on capital growth is the best real estate investment strategy for building wealth. At Cougar Homes, we build luxury homes in rapidly-growing areas such as Cairns and Mackay, where houses are experiencing year-on-year capital growth. Our team can help you build a home with an investment house and land package in Cairns that matches your long-term investment goals.