Capital growth is the golden goose of property investment, and your clients need to understand how to make their money work for them over the long haul. Informed decisions lead to sustained wealth creation, and it’s important to recognise that investing in property is not a get-rich-quick scheme. It’s more like planting a tree; you wouldn’t expect it to grow 6ft overnight, and the same principle applies to property investments. Enter capital growth—the increase in property value over time. While rental yield (the income from renting out a property) is important, it’s merely the cherry on top of the much larger, juicier cake.
Rental Yield vs. Capital Growth: A Tale of Two Strategies
Imagine being faced with two investment opportunities: one offers high rental yield but modest capital growth, while the other promises stellar capital growth with average rental yield. Which do you choose? If you’re thinking long-term (and trust us, you should be), capital growth is your best friend.
Rental yield offers a steady cash flow, which is great for covering expenses and keeping the lights on. However, it’s the capital growth that will significantly boost net worth over time. Think of it like this: rental yield is a regular pay-check, but capital growth is the retirement fund. Over decades, a property in the right area can double, triple, or even quadruple in value, far outpacing the income generated from rent.
Location, Location, Location
So, how do we find these magical properties that promise robust capital growth? The answer lies in one of the oldest real estate adages: location, location, location. Investing in the right area is crucial. Regions with strong economic fundamentals, such as job growth, infrastructure development, and population increases drive demand for housing, which in turn pushes up property values.
The same goes for areas undergoing revitalisation or those with planned infrastructure projects, like new transport links or commercial hubs, often see significant capital growth. So, do the homework and keep an eye on urban development plans. Remember, the tortoise, not the hare, wins this race.
The Power of Compounding
Here’s where things get exciting. Capital growth benefits from the power of compounding—earning returns on returns. As a property increases in value, the amount of equity held grows exponentially. This snowball effect can lead to substantial wealth accumulation over the years. To harness this power, reinvest any profits or savings into more growth-oriented properties, creating a virtuous cycle of wealth creation.
For example…
Suppose your client purchased a property in South East Queensland for AUD $500,000 ten years ago. Over the past decade, the SEQ property market has experienced an average annual appreciation rate of around 6%.
Using this 6% annual growth rate, the value of the property would compound as follows:
- After 1 year: AUD $500,000 * 1.06 = AUD $530,000
- After 2 years: AUD $530,000 * 1.06 = AUD $561,800
- After 3 years: AUD $561,800 * 1.06 = AUD $595,508
- …
- After 10 years: AUD $500,000 * (1.06)^10 ≈ AUD $895,424
In ten years, the property value has increased by nearly 80%! The significant increase in equity can then be leveraged to invest in additional properties, further enhancing a property portfolio and amplifying wealth creation.
Risk Management and Diversification
Of course, no investment is without risks. The real estate market can be unpredictable, influenced by economic cycles, interest rates, and even government policies. That’s why it’s crucial to diversify property portfolios, think of saying “Don’t put all your eggs in one basket”. Spread investments across different locations and property types to mitigate risks and ensure a more stable return on investments.
Investing in residential real estate with a focus on capital growth is a strategy that requires patience, research, and a long-term mindset. While rental income is important, the real wealth-building potential lies in the appreciation of a property’s value over time. By choosing the right locations, leveraging the power of compounding, and diversifying their investments, your clients can build a robust portfolio that stands the test of time.
ALC’s affordable new house and land packages are strategically positioned in locations with strong capital growth. Explore our options today by inquiring about our offerings.
