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Martin Callaghan
May 23, 2019

Annual Yield vs Capital Growth - Why Choose One or the Other?

Yield or GrowthMany investors believe that when it comes to property they have to choose between targeting a long-term approach such as strong capital growth, and a short-term option such as high annual yield. However, this isn’t necessarily the case, and with the right investment you can absolutely achieve both of these objectives in property.

There are of course numerous other decisions to be made when becoming a property investor for the first time but choosing between immediate yield and overall growth doesn’t have to be one of them.

💡 As a very general rule in many key UK cities growth will decrease as yield increases, and vice versa, however there’s a sweet spot to be found somewhere in the middle that allows for the best of both worlds.

Read more in Our Ultimate Guide to property Investment

Some investors will solely target annual yields in order to “beat the bank” (currently offering particularly unattractive interest rates of 1% - 2%) and some will invest with the longer term in mind and the capital growth that can be achieved through property investment.

Both of these approaches have their merits depending on what you’re looking to achieve, but why not target both?

Firstly let’s define what Annual Yield and Capital Growth actually are before looking at how you can target both with your next investment.

Annual Yield and How to Calculate It

Annual yield is the return on a property investment from an annual rental perspective, divided by the purchase price of the property.

When investors assess buy to let properties, they calculate the rental yields to see which properties are the most attractive and which will see them achieve the highest return on a monthly and annual basis.

For example, if the monthly rent at your property is £800, and your property is occupied for a full year you will receive annual rent of £9,600.

This figure is then divided by the value of the property and multiplied by 100 to determine annual rental yield as a percentage. So if the property was purchased for £135,000 for example this would represent a gross yield of 7.11%.

To calculate your net yield simply deduct any costs such as mortgage repayments, property management and maintenance fees from the rent and again divide this by the purchase price before multiplying by 100.

Calculate yields easily with our FREE Yield Calculator

💡 Most property investors agree that a good gross rental yield is around 6% and above. At Park Gate Investments our annual yield for investors is 7.4%.

Capital Growth – Long-Term Gains

Capital growth is the appreciative value of a property asset over time.
To establish the capital growth of an investment, simply deduct the price you originally paid for the property from current market value. To calculate this as a percentage, divide the difference by the price you paid and multiply by 100.

Following on from the example above we've used our Compound Interest Calculator to calculate that a property bought at £135,000, experiencing 5% growth for 7 years will have a new value of £189,958. This represents impressive 40.71% growth of £54,958

In property investment sizeable returns can be seen by holding a property for the medium to long term and is where many investors see substantial growth in the value of their investment.

💡 Despite some market corrections over the years such as the dot com bubble in the early 2000’s and most recently the downturn of 2008, average property prices in the UK have always increased in value over the long term.

Achieving high yields and strong growth?

Whilst finding yield and growth in the same property can be hard to come by, it doesn’t have to be one or the other.

There are ways to ensure short-term and long-term returns from your investment so long as you know the key locations to invest in, the specific property types which will be most profitable, and the tenant market you’re looking to attract. Equally important in your approach is having knowledge of the locations which are best avoided and which could have a negative impact on your portfolio.

💡 The key is to invest in thriving metropolitan areas with growing populations which are seeing investors gain from a lack of supply coupled with a strong demand for good quality rental properties. This is the case in a number of major UK cities such as Glasgow, Edinburgh, Manchester, Leeds and Liverpool which have seen a rise in popularity with investors seeking a viable alternative to the exhausted London market.

Regardless of what city you invest in, intimate local knowledge is absolutely vital to help investors achieve both objectives which is exactly what we provide with our variety of property investment services.

We’ve sourced numerous properties in Glasgow’s thriving market which have allowed our clients to enjoy the more immediate benefits of high yields, safe in the knowledge that their property asset is also performing well in terms of long-term growth.

Click the link below to discuss with us in more detail and to arrange your FREE property investment consultancy.

Schedule Your FREE Property Investment Consultation 

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