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Rental yield vs capital growth: Here’s what they mean

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When it comes to investment property, what matters more: rental yield or capital growth? As with all answers to questions around good property investments, there is no “right” answer, or a simple one-size-fits-all piece of advice.

According to Michelle Cohen, principal at Leapfrog Johannesburg North East and Sandton, investors get distracted by the rental amount they see coming in each month, but in the long run it’s capital growth that sets a good investment apart from a great investment.

The glitter of yieldglitter

“Let’s take a property of R1m as an example,” she says. “It is very possible to get R7,500 rental income each month. That’s a significant R90,000 a year, before costs like levies, rates and other expenses associated with the property.

But all that glitters is not gold – just because the monthly rental income from the property is good, doesn’t mean the capital growth is necessarily what you would like it to be.

“It’s easy to get side-tracked by the glitter that is the high rental yield,” she says. “But gold – your capital growth – is worth much more than glitter in the long run. Both may sparkle now but with a property investment, long-term performance is usually what matters most.”

The gold of capitalmining-for-gold-resize

And this is simply because capital growth is the value of a property over time, whereas rental yield is just the cash flow of the property. Consider the same property as above. It’s likely that the property could enjoy capital growth of 6% per annum. 6% of R1m is not an insignificant R60,000 per year, though it’s less than the annual rental yield. What matters here is the overall appreciation of the asset. This property added R60,000 to its value, while the R90,000 was just cash flow – it didn’t add to the value of the property.

But let’s compare apples to apples. Imagine the monthly rental increased by 5%, given current market conditions. That would mean R375 extra each month, or R4,500 per year, which is a long way from the R60,000 capital growth, even after expenses.

How investors do itask-a-property-investor-resize

“What’s more, capital allows an investor to leverage an asset to expand their property portfolio,” Cohen says. “Successful real estate investors know that it is very difficult to save for a deposit for the next property investment using only rental income. Instead, they leverage the capital in their high-growth properties to use as deposit for the next purchase, and so on.


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“Another factor that is often overlooked is that the profit on rental income is taxable while capital growth is not.”

Depending on the type of investment it is, together with your financial and investment goals, there are times when rental yield is as important as capital growth but mostly it’s the latter that sets the comfortable investor apart from the wealthy investor.

“Another way of understanding this is to see rental yield as the cash flow that looks after the asset, but it doesn’t grow the asset,” Cohen explains. “At the end of the day, the decision rests on the investor’s financial needs and investment goals. Our best advice is to consult a trusted property professional for advice and guidance related to a sound property investment in the right area.”

david.steynberg@gmail.com

David A Steynberg, managing editor and director of HomeTimes, has more than 10 years of experience as both a journalist and editor, having headed up Business Day’s HomeFront supplement, SAPOA’s range of four printed titles, digimags Asset in Africa and the South African Planning Institute’s official title, Planning Africa, as well as B2B titles, Building Africa and Water, Sewage & Effluent magazines. He began his career at Farmer’s Weekly magazine before moving on to People Magazine where he was awarded two Excellence Awards for Best Real Life feature as well as Writer of the Year runner-up. He is also a past fellow of the International Women’s Media Foundation.

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1 COMMENT
  • Eddie C. Margoczi 22nd January 2019

    Dear HomeTimes,

    Thank you for the article – (Rental Yield vs Capital Growth)

    While I agree that it is the ‘overall appreciation of the asset’ that is paramount, it needs to be borne in mind what it is that drives the ROI to warrant such appreciation, and what funds the leverage?
    The Rental Income / Cash Flow substantiates the value, and the reason, why the potential Investor contemplated the property in the first instance.
    If there is sufficient Profits from Rental Income, and little Capital Growth, it could still be deemed a sound investment. Vise versa may also be true.
    An astute Investor will use a well balanced approach, including numerous well established methods of valuation to determine investment potential. Therefore, a strategy that includes both strong current Cash-flow and achievable future Capital Growth makes sense.
    Personally, all analysis included, I would marginally risk on Rental Income, and Potential Rental Income Development, with a view to increasing a well positioned Asset’s long-term future Capital growth.

    Sincerely,

    Eddie C. Margoczi
    CCPB
    PROPERTY.COZA
    BENONI

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