Which is better? Some suggest you should invest in property for cash flow while others feel you should invest for capital growth (the increase in value of the property.) Every investor would like to buy properties that have both great capital growth and a high rental yield, but if you have been in the game long enough, and you look to buy quality property in good areas, you know that's just not the way it works.
Regional centers and many secondary locations can achieve a higher rental return but do not do so well when it comes to long term capital growth. However in the major capital cities, strong capital growth usually comes with a lower rental yield.
As the value of a property increases, the rental return (as a percentage of the value) decreases. This is of course unless the rent increases by the same proportion, which does not normally happen. Rents eventually go up but these increases usually lag capital increases by a number of years.
So the situation during any extended period of high capital growth as happens during property booms is that rental returns fall. This is just the way the property market works.
When the market is in the slower phase of the cycle, rental yields begin to increase and investors are drawn back into the market once again.Strong capital growth “is” the key to a successful property investment. Even though the first year or two of holding an investment property can be challenging, remember that capital growth builds your equity much faster than loan re-payments and rental income will.
