What floats your boat – rental income or capital growth?

What floats your boat – rental income or capital growth?

Investing in buy-to-let has been the stand-out investment class for the last couple of decades. Rental yields are consistently outperforming traditional investments such as ISAs, bonds and equities and the rental demand in the UK is at an all-time high. This is why buy-to-let is such an attractive proposition for investors.

Check out this article to see how buy-to-let has been beating other investments http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11161497/Buy-to-let-my-top-ten-tips.html)

Everybody knows that supply is not meeting demand in the housing market and problems of affordability with first time buyers is making the buy-to-let market even stronger. If you add to this the fact that there has been a fundamental change in attitudes towards home ownership in the UK, especially across the young professional audience, it’s easy to see why the buy-to-let market is booming.

Take a look at this article to see how buy-to-let has grown in the UK:

http://www.telegraph.co.uk/finance/personalfinance/investing/buy-to-let/11176988/1996-the-birth-of-buy-to-let-Britain-in-numbers.html)

Rental yield or capital growth?

Generally, there are two main motivations for the investor when it comes to buy-to-let – funding their pension and achieving a degree of financial freedom. In the property investment world this can be achieved by generating regular rental income, through capital growth or, if you’re really lucky, then both!

When an investor starts building a property portfolio they need to decide whether they are investing to achieve good capital growth or whether rental yield is more their style. Both are viable methods and they depend on your personal financial circumstances and what your investment goals are.

Capital growth is when a property increases in value over time. When the housing market is a bit unstable then this is less predictable so capital growth strategies can be a bit speculative.

Check out these capital growth projections for 2016:

https://propertymoose.co.uk/blog/how-property-moose-compile-capital-growth-projections/)

Rental yield is the annual rental income a tenant pays as a percentage of the property price. Ideally you need to generate enough rental income to cover the mortgage, pay for any other costs, and repay the property over the quickest time possible.

The best of both worlds

Of course, the best of both worlds is to build a balance portfolio of properties that deliver a good rental yield and properties which you can sell on at a good profit. However, when you’re just starting out, it’s unlikely that you will have a portfolio so where should you start?

Well, that really depends on your capacity for risk, the capital you already have available and what financially you will be more comfortable with. If you’re happy to grow your income steadily then achieving a regular rental yield may be the way to go. If you prefer the excitement of picking up a bargain property at an auction, doing it up and selling it on at a good profit, then a capital growth strategy might be your preference. With the latter you just need to bear in mind the pitfalls involved in doing this so doing your homework is a must before parting with your hard-earned cash.

There is no correct answer to rental yields or capital growth, so the ball is in your court. Just make sure that you don’t double-fault!