How to find properties with high capital growth as well as rental yield?

Every so-called property expert has an opinion on the subject of whether property with better potential for capital gains or one offering higher cash flow is the one to buy.

This argument assumes property investors can have either get high rental returns or substantial increase in value over time, but not both.

For high cash flow properties, it’s said they’ll be located in areas of high tenant demand and will offer the ability to achieve more return per dollar outlaid in purchase.

They will be in locations where population is socioeconomically disadvantaged, particularly with low level admin or labourer type workers with average paying jobs and stable employment.

For capital growth properties, it’s believed, these are typically detached houses on a decent sized block of land and located in suburbs which has high homeownership ratio with good schools, convenient shopping and ready access to a major city.

Benefits and drawbacks of focusing on one over the other

Both approaches to investing have their pros and con, lets look at high rental yielding property first.

Pro, high cash flow is great if your available funds for investing are limited. The high yield will help you service the loan and stay ahead of repayments.

Con, as a gross generalisation, high yield does not create the sort of long-term returns that help investors achieve real wealth. It may put you into a comfortable position, but the property itself experiences limited value increase.

For example, suburbs like Bourke in NSW, South Hedland in WA, Menzies in Qld and Jamestown in SA have two things in common. All have rental yields over 9% and zero or negative capital growth over the last 12 months.

Now let’s look at property with high growth potential.  Pros, it’s a passive way to build extraordinary wealth.

Even though high growth during booming property market has been all too common in Australia. Capital gain also works like compounding interest which sees exponential value rises over a long time. The longer you hold it, the wealthier you’ll be on paper.

Con, high growth, blue-chip usually costs more to acquire and the relatively low rental yield will not assist all that much in servicing the loan. Also, rising interest rates or unexpected job loss can be financially devastating.

What should buyers consider?

First and foremost, find what your buying power is so that you can then target suburbs that are within your price point and have the potential to experience capital growth over time.

Next, narrow down to property types within your selected suburbs that will offer a good rental yield.

An example would be, buying in surrounding suburbs of major Universities. This is one way you can achieve the best possible rental yield in a growth location, it buys you time in the market, time to benefit from potential capital gains.

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This article does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.