By Roy Segal | Bricksave
October 30, 2024
News > Blog Article > Rental yield vs. capital appreciation: best …
As a real estate investor (or someone considering investing), there are key concepts that you will undoubtedly encounter. Two of the most important ones are rental yield and capital appreciation. But which one is better for you? In this article, we’ll explain the differences between rental yield and capital appreciation, explore the best strategies for each, and help you decide which approach aligns with your investment goals.
Experience real estate made easy.
Rental yield is the first number you’ll be presented with when you invest through Bricksave. It refers to how much you can expect to earn from the rental income of the property. Rental yield is typically expressed as an annual percentage and calculated based on the annual rental income in proportion to the property’s purchase price. With Bricksave your rental yield is paid on a monthly basis.
For example, if you invest USD 1,000 in a USD 100,000 property earning an 8% rental yield, you’d be earning USD 800 per year which equates to USD 67 per month. Rental yield is ideal for smaller investors or those looking to benefit from direct access to their profits.
Key benefits of rental yield:
Capital appreciation is considered the holy grail of real estate investing. It refers to the increase in a property’s value over time. While rental yield offers steady returns, capital appreciation allows you to profit from the increasing market value of the property.
However, predicting capital appreciation can be difficult. It is influenced by a wide range of external factors, such as macroeconomic conditions, legal changes, and taxation policies. Though less predictable, the potential for large gains is significant. Values of even lower priced properties can sometimes rise by tens of thousands of dollars, or even more.
For instance, the Millecento project in Miami delivered a nearly 45% return on initial investments. This means that if you had invested USD 20,000, you would have made around USD 9,000 on top of your initial capital – and that’s even without including your rental yields.
Key benefits of capital appreciation:
When deciding between rental yield and capital appreciation, your specific investment goals will largely guide the decision. Both strategies offer distinct benefits, but how you approach them can significantly influence the returns you achieve. Here’s an expanded look at the best strategies for each approach, along with practical insights on choosing the right path based on your personal goals.
If you’re looking for fast returns: focus on rental yield
For investors who need quicker returns—whether to reinvest, pay bills, or simply enjoy more immediate financial benefits—focusing on rental yield can be the best choice. Properties that offer higher rental yields are often found in more affordable, yet stable, markets. These properties may be in Class C/D neighbourhoods, where rental demand remains solid, but property prices are lower, allowing investors to achieve a higher return on investment in terms of cash flow.
Best locations for high rental yield:
In these cities, the rental market tends to offer consistent returns, meaning you can start earning quickly. In many cases, these properties can help you generate very attractive sums of money in a relatively short period, often within a year or two. Additionally, if you reinvest the rental income, you can rapidly scale your investment portfolio.
For example, a Class C property in Chicago might offer an annual rental yield of 8-10%. If you invest USD 50,000 in a property with an 8% rental yield, you could expect to earn USD 4,000 annually, or roughly USD 330per month. This consistent cash flow can provide the means to reinvest in more properties, speeding up your path to wealth accumulation.
Benefits of focusing on rental yield:
If you’re looking for higher gains in the long term: focus on capital appreciation
While rental yield offers fast returns, many investors are in real estate for the long haul. If your goal is to grow your wealth over time, focusing on capital appreciation might be the right strategy. Capital appreciation refers to the increase in the value of a property over time, driven by factors such as market demand, development in the area, and general economic conditions. The returns from appreciation are less predictable but can be significantly higher if you invest in the right areas.
Best locations for capital appreciation:
For example, let’s say you invest USD 100,000 in a property in Miami. Over five years, that property could appreciate by 40%, meaning your investment could be worth USD 140,000 plus rental yields. While this doesn’t provide immediate returns, the long-term profit could be substantial, especially in high-demand markets.
Benefits of focusing on capital appreciation:
Balancing both strategies: a hybrid approach
If you're unsure whether to prioritise rental yield or capital appreciation, you don’t necessarily have to choose one over the other. A balanced, hybrid strategy can offer the best of both worlds, allowing you to generate consistent income while also benefiting from long-term growth in property value.
One effective hybrid strategy is to focus on markets that offer a balance of both rental yield and the potential for appreciation. For example, investing in Class B properties in cities like Philadelphia or San Antonio can offer you a good rental yield, while also providing a solid chance for property value appreciation over time. These cities have experienced significant population growth and urban development, which drives demand for both rental properties and homeownership.
Another hybrid strategy is to invest in both types of properties within your portfolio. You can allocate part of your investments to high-yield rental properties in cities with strong rental markets, while also dedicating funds to properties in high-growth areas with good potential for appreciation. If possible, you can increase your chances of investment success even further by geo-diversifying or, in other words, by spreading said investments across multiple territories. This could mean investing in both a class B property in San Antonio (TX) and a Class C/D property in Chicago (IL).
Benefits of a hybrid approach:
Competitive rental yields and capital appreciation are in the palm of your hand. Start today, from USD 1,000.
The best strategy for you ultimately depends on your investment goals, time horizon, and risk tolerance. If you're looking for quick returns and prefer a more predictable income stream, focusing on rental yield might be your best option. On the other hand, if you're planning for long-term wealth creation and can afford to wait for your property to appreciate in value, capital appreciation offers a potentially more rewarding, though riskier, path.
Many savvy investors combine both strategies to build a well-rounded portfolio that provides both immediate cash flow and significant future profits. Understanding your priorities—whether it’s fast returns or long-term gains—will help you make more informed, confident decisions and ultimately lead to more successful and fulfilling investments.
Investing carries risks, including loss of capital and illiquidity. Please read our Risk Warning before investing.
