Every investor has different goals, and this is particularly true in property which has two distinct streams of returns. Some investors are mostly interested in long-term appreciation through both rent and the much less liquid medium of capital growth. Others, however, invest in property for the regular cash income that rent can bring. All investors are likely to want a balance between the two, at least to some extent.
This can make choosing a type of property asset to invest in difficult. With each investor having slightly different goals, it can be hard to identify the properties that will perform in quite the way you hope in terms of both rental income and capital appreciation.
Unless you have enough money to buy a property outright, your mortgage will be your biggest outlay and this will eat into your rent. If in doubt, it may be worth looking into lower-cost properties such as student accommodation. This may enable you to pay cash, eliminating this cost and making it easier to calculate a property’s potential for income.
If you do buy with a mortgage, or use some alternative finance deal for a lower-cost property, you must deduct the monthly cost from your rental yields to work out your net monthly income. To work out your net rental yield, divide by the cost of the property (including fees for purchase or renting out) and multiply by 100. This will give you your rental yield as a percentage of the property’s cost, helping you decide whether, for example, a property that is more expensive and commands a higher rent will truly prove better value overall.
If you are purchasing a property primarily as a source of income, maximizing rent will probably be your biggest concern. However, it is important to be realistic in your expectations. It is also important to realise that an initial shortfall does not necessarily represent a bad investment, as a well-chosen property will rise in both value and rental yields over time.
Capital growth is the other major source of income from property. Over time, the property’s value will hopefully grow and this will raise the total value of your investment. These gains are not particularly liquid, but if and when you want to exit and resell your property they will be translated into cash.
This, of course, is subject to economic influences both positive and negative, so property values can fall as well as rise. They do, however, tend to be less sensitive than investments such as foreign exchange or stocks and shares.
To try and predict whether a property is likely to experience strong capital growth, it is worth looking for the following things:
Upcoming Improvements to the local area, such as infrastructure projects.
A Strong Demand Profile in general and in the local area specifically.
Proximity to High-Demand Locations which means the area may start being “discovered” by tenants who want to be close to those locations but get cheaper rents.