When you invest in property, the aim is to make a profit.
But how do you do that, exactly? We take a look at the different ways an investment property can generate income for its owner, and how investment properties in Sydney stack up.
What is capital growth?
Capital growth is simply another name for property price growth.
It is often assessed across an entire suburb or area, but individual properties can be affected in different ways. It is usually measured as an annual percentage and it’s common to hear it referred to as a compound annual growth rate, which factors in the number of years growth is being measured. There is no one ‘good’ rate of capital growth – each investor will have their own benchmark of a worthwhile investment.
Making money from capital growth
When you own an investment property that increases in value over time due to capital growth, it can generate income for you. You can sell it and make a profit, or you can use the equity to buy another investment property.
Capital growth is driven by demand and supply. When there is demand from people wanting to live in an area, and the supply of properties is finite, property prices rise over time. Capital growth is influenced by many other factors too, from the macro (the state of the economy) to the micro (local infrastructure and development).
Capital growth is a long-term investment strategy, usually requiring the investor to hold on to the property for at least five or ten years to see an increase in capital growth. Historically, the property market in Australia has grown steadily over time, but Australian properties have also experienced declines in value, and there’s no guarantee that an investment property will increase in value over any given period.
What is rental yield?
The annual return your investment property generates – in other words, the total rent you collect each year – is known as its yield. Gross yield is calculated by dividing the annual rent a property receives by its value.
For example, if your investment property is worth $1,000,000 and you receive $700 a week rent, your gross yield would be:
$700 x 52 (total annual rent) = $36,400
Property value = $1,000,000
Yield = $36,400 divided by $1,000,000 = 3.6%
A property’s net yield is its gross yield minus expenses, such as strata levies, property management fees and maintenance.
Making money from rental yield
Unlike capital growth, which is a long-term investment strategy, rental yield can supply you with a regular income. You can use it to supplement your regular earnings, or you can put it towards the mortgage over your investment property. Property investors often turn their focus to yields when capital growth is steady or falling.
If your investment property is vacant for a period, it will affect your yield. Extended vacancies can be property-specific (for example, if the rent you’re asking for is higher than market rate) or part of a larger trend, such as high vacancy rates.
Capital growth vs rental yield – which should you focus on?
Deciding whether to pursue a yield or capital growth investment strategy comes down to your investment goals.
If you’re aiming to accumulate long-term wealth, you might want to focus on capital growth. But if you’re investing to generate an income, for example to fund your retirement, you might pay more attention to rental yields.
Many investors aim for a mix of both – a good rental yield plus steady growth in value.
Local market update
So how do investment properties in our area stack up? Here are a snapshot of the yield and capital growth figures for units in Sydney, Ultimo, Pyrmont, Haymarket and Surry Hills as of July 2021.
- Sydney – units in Sydney have an average annual rental yield of 3.0% and over the past five years they have experienced a compound growth rate of 1.6%.
- Ultimo – units in Ultimo have an average annual rental yield of 3.6% and over the past five years they have experienced a compound growth rate of -1.0%.
- Pyrmont – units in Pyrmont have an average annual rental yield of 1.6% and over the past five years they have experienced a compound growth rate of 3.1%.
- Haymarket – units in Haymarket have an average rental yield of 3.85% and an average annual capital growth rate of 4.64%.
- Surry Hills – units in Surry Hills have an average annual rental yield of 2.8% and over the past five years, they have experienced a compound growth rate of 3.1%.
Thinking of investing in property in Sydney? Contact our expert team today.