When it comes to property investment, the immediate revenue from rental income is attractive. However, there’s another important aspect that’s sometimes overlooked: capital growth.
Often termed ‘silent income’, capital growth refers to the increase in property value over time, and is influenced by factors such as inflation, economic conditions, and supply and demand.
In this article, Michael Haywood, Momentum Wealth’s Property Advisory Specialist, emphasises the significant role that capital growth plays in creating a high-performing property portfolio.
A long-term strategy
Capital growth can lead to significant returns but it’s a slow process and requires a ‘buy and hold’ strategy. According to REIWA, home values went up by 391% within Perth over the 30 years to March quarter 2023. This equates to an average annual compound growth rate of 5.45% during this time. So buying a property in areas with strong growth projections can be a smart move.
While rental income offers an immediate and consistent cash flow, capital growth functions as a steady force working in the background. It might not offer immediate returns, but its long-term effects are an important piece of the investment strategy.
A practical example
Take a look at this example from Momentum Wealth.
In 2015, when the market was considered to be at its peak, an investor engaged a Momentum Wealth buyer’s agent to purchase a Perth property for $500,000. By 2023, that property was sold for a profit of $125,000, plus the owner made approximately $170,000 in gross rental income over those years. Compared to Perth’s median house price increase of $15,000 over the same period, this example highlights the importance of careful property selection.
Increased financial flexibility
Capital growth also provides investors with increased financial flexibility. As property values appreciate, investors have the option to capitalise on the increased value through a sale, leverage the growing equity for other investment prospects, or potentially negotiate with the banks for reduced interest rates.
A balanced approach
Rental income can provide immediate financial benefits, serving as a consistent source of revenue. On the other hand, capital growth, although slower to materialise, significantly impacts the long-term value of the investment. Maximising capital growth requires an in-depth understanding of market dynamics, access to and analysis of key research data and the ability to identify the right properties in growth suburbs.
Depending on your strategy, applying a dual focus on both rental income and capital return can help to ensure a more well-rounded, and resilient property investment strategy throughout changing markets.