Heading into property investment without a strategy is one of the biggest mistakes that you can make. You need to know about the type of property you want to buy and which locations offer the best prospects. Moreover, you need to know where you’re getting your money and what your exit strategy is.
But before all of that, you need to ask yourself a simple question.
Should I invest for growth or yield when buying property?
Property yield vs. capital growth is one of the big debates among property investors. Choosing your side and creating a plan based on your choice is the key to property investment success.
Whenever you invest in residential property you want to generate a decent capital growth.
The question becomes the quantum of this growth.
Buying for the Future – Capital Growth Strategy
I would define strong capital growth as inflation plus 4 per cent to 5 per cent annually over the long term.
So you are probably looking at growth rates at between 6.5 per cent and 7.5 per cent.
The risk with this strategy is, as alluded to above, that you’ll likely be out of pocket while you hold the investment and will be subject to interest rate risk, whereby increases in mortgage rates can be painful, especially if there are contractual and market constraints which limit the ability to raise rents.
There are ways to mitigate these risks, like borrowing less and taking out a fixed rate loan, but generally speaking this is an ongoing problem for this type of strategy.
In addition, a strong capital growth strategy places all your eggs in the one basket whereby all the profit is made sometime in future when the property is sold.
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