What makes more sense: Capital Gains or Rental Yield? Which should you pursue? What is Capital Gains? Read this to find out!
Property Investing is about more than just buying property, and if you've been following our blog and podcasts you'll have picked up on that.
So today we're going to introduce two more things to think about when investing in property.
Put simply: Capital Gains is the money you make on the sale of a property.
So taking a capital gains approach to property investment means that you will be buying properties that you expect to sell later, and expect to make more than you've invested in the property - taking into account inflation etc.
Effectively you're investing money while betting that you'll get a large payoff in the future.
Of course, before you get to that stage you'll be eating the costs of the property. This includes the costs associated with the loan, as well as property maintenance and council fees.
You'll also have to take into the account Capital Gains Tax.
There are ways to offset this, through negative gearing and rental yields, and strategies to minimize the CGT payable.
Negative Gearing has been a hot-button issue over the last few years, and it has been said to contribute to everything from locking people out of the housing market, to keeping rents low for tenants.
Whether any of that is true isn't the point of this blog, but it is worth keeping in mind that calls to change negative gearing are getting louder and more frequent.
Rental Yield is the amount of money you make out of rents payable by your tenants.
Compared to Capital Gains this is a much less risky strategy, and in turn generally results in a lower or slower return on your investment.
However, there are benefits to this.
Chief among the benefits is that there is less risk, which is perfect for those who can't absorb large losses.
But there is also the advantage of having an ongoing positive cash flow as well which, depending on your circumstances, might be an attractive benefit.
As with capital gains, you will have to eat those ongoing costs, and there may be taxes payable on the cash coming from your rents.
In an ideal world you'd just have a portfolio of high gains and high yields, and while these properties exist they are rare.
However which strategy you should pursue depends on your circumstances, your appetite for risk and what your overall goal in property investing is.
Keep in mind that:
Capital Gains is a high risk, high reward strategy with a (hopefully) large payoff happening in the future.
Rental Yield is a low risk, low reward strategy that generates positive cash flow for you.
With those two facts in mind, you might be able to figure out which way you want to go.
If you're still unsure about this though, get in contact with us and we will walk you through property investing using our four-step property confidence plan: PPIA.