Rental Yields vs Capital Growth

Rental Yields

Investors calculate the rental yield of a property to understand what returns they can expect to achieve. When deciding on a location, investors often take the average yields in the area as a benchmark against their forecasted rental growth. Working out the rental yield is useful to compare buy-to-let properties and grasp which property will generate the highest returns.

Property yields show the potential return on investment (ROI) that a property can generate based on initial costs. It is calculated as a percentage based on the predicted rental income compared to the property value when bought. To calculate a rental yield, divide the annual rental income of the property by the property’s purchase price, then multiply the result by 100. This will calculate the gross rental yield. However, to get a more accurate percentage of the returns, the net rental yield should be found, which considers expenses such as maintenance, management fees, and taxes.

The average UK yield changes drastically depending on locations or property types. For example, cities like Manchester and Leeds usually offer higher yields than London, due to property prices being more affordable and other cities developing and offering the same opportunities. Therefore, rental demand is increasing and pushing yields up.

Capital Growth

Capital growth, or capital appreciation, is the amount a property’s value changes over time. Many factors affect property values such as regeneration in an area. If there are plans in place for regeneration, like new infrastructure, transport links or investment, this normally has a positive effect on future property prices. Another factor that affects property prices is the supply and demand of houses. If the demand outweighs the supply it creates a competitive market, therefore, increasing prices. Whereas, if the supply outweighs the demand many properties would be left vacant and the market would drop, decreasing prices.

To calculate capital growth, investors should find the difference between the current market value of an investment and the price it was purchased for. Then divide the difference by the purchase price and multiply by 100 to get the increase in value in a percentage.

This calculation is vital for investors looking to benefit from long-term growth, leading to a growth in wealth. A wide range of factors affect price growth, such as location, market trends, and property conditions. Capital appreciation gives investors access to an increase in equity when the property is sold, which for some is a main goal over a higher monthly rental income.

Which to Prioritise?

The debate between rental yields or capital growth and which to look for depends on each investor’s unique goals. Rental yield gives investors an immediate, regular income. However, capital growth provides long-term wealth accumulation. Finding a property that offers both at a balance often is the best solution for investors. Using both aspects to create a diversified property portfolio.

Areas with strong rental demand and potential for appreciation should be targeted. Upcoming towns, regeneration areas, and cities with rising populations usually offer a fair percentage of both. A rental yield of 5% to 9% is a great yield in the UK, but this range can change depending on the city. In more stable locations, a lower yield, around 4% to 5%, might be desired due to the lower risk. Areas boasting these yields often offer consistent income from rents and a steady growth in property values.