Yield & Growth - Your best friends in Real Estate

Do you understand yield and growth? In the context of residential investment properties, yield and capital growth are two key metrics that investors often consider assessing along with the performance and potential returns of their investments. Here’s a brief explanation of each:

Yield:

Yield refers to the income generated by an investment property, expressed as a percentage of its current market value. There are two main types of yield:

1. Rental Yield:
   • Formula: (Annual Rental Income / Property Value) * 100
   • Rental yield provides an indication of the income generated from renting out the property. It is calculated by dividing the annual rental income by the property’s current market value and multiplying by 100 to get a percentage.
   • Example: If a property is valued at $500,000 and generates $20,000 in annual rent, the rental yield would be (20,000 / 500,000) * 100 = 4%.
2. Gross Yield:
   • Formula: (Annual Rental Income + Other Income / Property Value) * 100
   • Gross yield considers not only the rental income but also any other income generated by the property, such as parking fees if you rent your parking space out separately (common with inner city apartments).
   • Example: If a property generates $20,000 in annual rent and $2,000 in additional income, with a property value of $500,000, the gross yield would be (20,000 + 2,000) / 500,000) * 100 = 4.4%.

Investors often use yield as a measure of the property’s income potential. Higher yields are generally favourable, but it’s essential to consider other factors such as property expenses, rates, management fees, body corporate fees and potential capital growth.

Capital Growth:

Capital Growth refers to the increase in the value of the property over time. It is a key component of the total return on an investment property and is expressed as a percentage. Capital growth can result from various factors, including changes in market conditions, demand for properties in the area, improvements to the property and changes in zoning.

• Formula: (Current Property Value – Initial Property Value) / Initial Property Value) * 100
• Example: If you purchased a property for $500,000 and its current value is $600,000, the capital growth would be (600,000 – 500,000) / 500,000) * 100 = 20%.

Balancing Yield and Capital Growth:

• Income vs. Capital Growth:
  • Rental yield provides immediate income, while capital growth reflects long-term appreciation. Balancing the two depends on your investment goals and risk tolerance.
• Market Conditions:
  • Market conditions can influence the balance between yield and capital growth. In some markets, high-yield properties may experience slower capital growth and vice versa.
• Property Type and Location:
  • The type of property and its location play a crucial role. For example, inner-city properties may offer lower yields but have higher potential for capital growth.
• Risk Considerations:
  • High-yield properties may be associated with higher risks, such as lower-quality tenants, while properties with strong capital growth potential may involve a longer investment horizon.

Ultimately, successful property investment involves a careful consideration of both yield and capital growth, aligned with your financial goals and risk appetite. Diversifying your portfolio with a mix of properties that offer a balance between income and potential appreciation can be a prudent strategy. It’s also advisable to educate yourself and seek advice from a financial advisor with extensive property experience for advice based on your specific circumstances and investment goals.

Make sure you have all the information you need to make the right decision for you. At Pike Property we have nearly 30 years of experience, we know and understand our local property market – so make the call today to find out what your property is worth.

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