Understanding Capital Growth and Rental Yield

It’s important as a property investor that you make a good return from your investment. This can be from rental yield which gives you regular income, or capital growth which is the increase in value of the property over time. Your return could be from either one or both of these things.

Capital growth

This is also known as capital appreciation and refers to the increase or decrease in the value of your property or property portfolio over time. If you purchased a property four years ago for £200,000 and the current value is £250,000 then your capital growth is £50,000. There are lots of factors that can affect your capital growth such as the economy, local regeneration, new transport links, low mortgage rates boosting demand in new homes and lack of supply. It’s important to invest somewhere that property looks set to increase in value and you can usually get this information from property experts and literature surrounding what’s happening in the general property market and also within each region.

Rental yield

Rental yield is the return you make or expect to make from your property. To work out the rental yield for a particular property, you will need to know the purchase price of the property, or a current market value, and the annual rental income that you expect to receive.

Take the annual rental income amount and divide it by the property value or purchase price. To convert this figure to a percentage, you will need to multiply this by 100. This percentage is your rental yield.

For example, your new property purchase would give the following rental yield:

Annual rental income: £10,000

Purchase price: £200,000

Rental yield: 5%

A gross yield is when you take the example above and work out your rental yield. If you are trying to work out your net yield, you will need to take into account other costs such as your insurance, mortgage repayments, letting management fee and maintenance costs.

Location

Each city and region across the UK differs in terms of rental yield as average rents vary. Recent research has shown that rental yields in Glasgow in particular are higher than in other regions.

If you are looking to invest in a rental property, talk to us at Newton Lettings as we can advise you on the rental value of property across Central Scotland.

 

Are You New to Property Investment?

Property investment can be extremely rewarding – both on a personal and professional level. It can give you financial freedom, a flexible work-life balance and surprising returns especially here in Glasgow where they are higher than anywhere in the UK. However, it can be extremely daunting so it’s important to do your homework first.

Buy to Let

If you are going to let your property – either privately or via a letting agent, you need a buy to let mortgage on your property. If you have a residential mortgage, you’ll need to talk to your lender about your plans. As a landlord with a buy to let property, you have several legal obligations and responsibilities that you need to be aware of.

Finance

You will need to ensure your finances are in good order and in place before buying an investment property. Talk to a mortgage broker about your plans and find out how much you will need to invest and whether you will be eligible for a buy to let mortgage. They will also set out any additional costs and fees.

Time

Do you have time to be a landlord? If not, can you outsource the management of your property to a letting agent? It’s important to be realistic about not only the time you have to spare, but whether you have the experience and knowledge to undertake the running of your investment property.

Location

When buying a property to let out, it’s important to do your homework and find the right area. Are you going to buy a property where you live or are you going to buy it in a city centre, close to a university or in an area popular with young professionals. The type of property you buy has to marry with the location – there’s no point in purchasing a luxury flat in a student area nor a family home where there are no good schools. You’ll also need to decide on the type of property within that location – new build, off-plan or resale. You may even decide to visit the local auctions – but we strongly advise only doing this if you have had sound advice first. Talk to your local estate agent about rental values, the types of renters in the area, transport links, schooling and amenities. Get the advice from several agents.

Your return on investment

Rental yield and capital growth are the two ways that you can increase your return on investment.

Take a look at the differences here. (link to existing blog)

If you are a first-time investor, we hope you’ve found this information helpful. If you have any questions, please don’t hesitate to talk to us.