When investing in property, growth vs yield is one of the biggest decisions you need to make. Do you want to focus on generating short-term income that could potentially help cover your living costs? Or would you rather take a longer-term approach, targeting substantial wealth accumulation through increased equity and value appreciation?
Both of these approaches have their strengths and can provide significant returns. Both also have their challenges and present unique considerations when acquiring new properties. So, the big question is, growth vs yield property – which should you buy?
The pros and cons of growth properties
The goal of a growth approach to property investing is to acquire assets that will appreciate in value over time. A good growth property can deliver substantial long-term returns, while building equity and providing tax benefits in the short term. However, when comparing growth vs yield property, growth properties can also be higher cost and higher risk.
The strengths of growth properties
The biggest appeal of growth properties is their ability to support long-term wealth accumulation. Traditional market wisdom states that, in Australia, properties double in value every 7 – 10 years. While the actual timeline for prices doubling varies greatly depending on location, this still represents substantial long-term capital growth potential.
Depending on your financial situation, a growth property may also allow you to offset some of your other costs. For example, many of the expenses associated with maintaining a negatively geared investment property are tax deductible. As such, they can be used to help reduce the tax payable on your other sources of income.
Considerations when buying a growth property
The main point to remember when buying a growth property is that it’s a long-term investment. As such, it’s critical you do your research and carefully assess each property’s growth potential. You should also consider how you could add value to the property itself (e.g. through extension, renovation, etc.).
You also need to be aware that future growth potential often comes at the cost of immediate rental returns. As such, you need to strike a balance between maximising capital growth and minimising your holding costs. This should help you maintain a manageable cashflow and ensure that your investment remains profitable over the longer term.
On a more strategic level, a growth-based investment approach can – somewhat ironically – actually slow the expansion of your portfolio. This is because your ongoing out-of-pocket expenses can reduce your borrowing capacity and limit your ability to acquire additional properties. However, it is possible to overcome this limitation through careful financial planning and a structured investment approach.
It’s also worth noting here that growth property returns are heavily impacted by market fluctuations. This means that a growth approach is inherently riskier, as the property market is incredibly dynamic. That said, as the market is also cyclical, savvy investors can usually reduce this risk by carefully timing their movements.
The pros and cons of yield properties
When you adopt a yield approach, your focus is finding properties that deliver positive cashflow. These provide steady, ongoing returns, which can be used to continue growing your portfolio or cover living costs. When comparing growth vs yield property, yield properties are usually lower risk, but can also be lower reward.
The strengths of yield properties
The main selling point of yield properties is the immediate and ongoing income that they produce. This makes them more self-sustaining and less stressful to own, particularly when maintenance costs are rising. It also means they tend to be a more stable, and less risky, investment.
In addition, yield properties can make it easier to continue expanding your portfolio. The income they produce should help improve your cash flow, creating greater financial stability and increasing your borrowing power. This should allow you to acquire additional properties sooner and make progress on your investment journey faster.
Considerations when buying a yield property
Much as higher growth potential often comes at the cost of immediate returns, the reverse is also true. High yield properties may offer good immediate returns, but they often also experience lower capital growth. This means that their value may not increase significantly over the longer term, often resulting in lower overall returns.
It’s also important to remember that, just like the sales market, the rental market is highly dynamic. Growth in rents varies greatly across locations and market segments, and this is driven by a range of factors. As such, careful research is required to identify opportunities that will deliver high yields, both now and into the future.
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Growth vs yield property – which is better?
In short, it depends. There truly is no one-size-fits-all approach to property investing and the best option for you will depend on many factors. These include your financial goals, investment strategy, current financial situation, and risk tolerance.
When choosing between growth vs yield property, where you are on your investment journey can also be a major consideration. Newer investors often lean toward growth properties, drawn in by the ability to build significant equity over time. By contrast, more experienced investors often target yield properties to balance their portfolio and strengthen their cashflow.
As an alternative, many investing experts advocate for a hybrid approach that balances short and long-term returns. This is somewhat of a middle-ground, where you target properties that provide both reasonable yields and good capital growth potential. However, these opportunities can be difficult to find, and such a moderate approach will often deliver relatively moderate returns.
Ultimately, your optimal investment strategy will be the one that works best for you. It will also evolve and change over time, as your circumstances and priorities evolve and change.
Want more information?
If you would like to discuss growth vs yield property further, give Local Agency Co. a call. Our team are experts in working with investors to identify the opportunities that best suit their strategy. We also have significant experience helping new and experienced investors select the most suitable approach for their situation and goals.
CLICK HERE TO SPEAK WITH AN EXPERIENCED LOCAL PROPERTY MANAGER