Rental income vs capital growth: Which is more profitable?

Rental income vs capital growth

Everyone starts in the same place when it comes to investing in property. Most people don’t wake up one morning with a portfolio of properties that are raking in a tidy sum in rents each week.

Everyone has to learn the ins and out of how to make money in property and once they have a plan, they can start building their portfolios. There really are only two ways investing in property can be profitable.

Rental Income vs Capital Growth

Rental Income:
This puts money in your pocket if you have a positively geared property. In general, a cash-flow positive property has a gross rental yield of 9% or above.

Capital Growth:
This is the value of the property. Historically property increases its value over time, this is easy to see when you come to sell a property for more than you bought it for. The key here is to either add value to the property and/or hold on to the property long enough to achieve those gains. Again, if you property’s value increases at 9% or more annually then you’ve got a good one.

So which is better?

Actually, if you find the right property you can have both! Finding a positively geared property that you can rent out, add value and sit on for a few years would allow you to reap the benefits of both. But these are very difficult to find and all investors are looking for these properties so competition is fierce. Usually, these get snapped up by the experienced investors because they have developed an extensive network of people who can give them a heads up before other people are aware.

Rental Income:
If you like the idea of income then finding positively geared property is the key. But, it’s easier said than done. It is not easy to find a positively geared property, you will have to put in a lot of time and energy to hunt down those properties. Often times the property will only become positively geared once the debt owing on the property has been paid off.

The other downside to a positively geared property, is that if you are making money on the property then you need to pay taxes on that income which makes it harder to build wealth.

Capital Growth:
The upside to capital growth is that you can make a lot of money and this is often where investors make the bulk of their money. On the downside, you usually need to hold on to the property long-term to make a profit.

So which works better for you? Which system do you gravitate towards?

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