What Is Capital Appreciation?Property Investment Basics
Capital appreciation refers to how properties rise in value over time. This is an important aspect of buy-to-let property investment, as by benefiting from capital appreciation, investors can make a massive return when they sell their investment property.
Also known as capital growth, capital appreciation is one of the unique benefits of property investment. Alongside rental income, it is one of the two ways investors will see returns on their investment, but this is far more of a long-term strategy.
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As a physical asset, property rises gradually in value over time, meaning it will be worth more years after you buy it. If you choose to sell your property, this will give you a net profit on the investment that can be quite substantial if you’ve held onto the property for a long time.
Unlike more liquid investment assets like stocks, you won’t see property rise or fall in value quickly. Instead, growth will be more slow and steady, but far more consistent and easy to predict.
This helps you to plan ahead and get a rough estimate on how much profit you could potentially make from selling a buy-to-let property.
Unlike rental income, which is a consistent cash flow direct to your wallet, capital appreciation won’t see you earn returns until you choose to sell, at which point your returns will be a lump sum profit on the initial purchase of your buy-to-let property.
Past performance of the property market, combined with up-to-date projections, indicate that there is a high possibility of capital appreciation giving investors a strong profit.
The most recent data from the Land Registry shows that on average, UK house prices rose by 67% in the last 10 years. In real terms, this was a rise of over £100,000.
Property experts Savills have projected that over the next five years through to 2027, some areas of the UK will see house prices rise by up to 11.7%.
The longer you own a buy-to-let property, the higher the amount of growth you will see from capital appreciation.
This is one of the reasons why property investment is considered a long-term investment, as you will need to own your buy-to-let property for several years at least in order to see a strong enough return on your investment.
Benefiting from capital appreciation is a waiting game, as you will need to be patient to give yourself the best returns possible.
The level of capital appreciation you earn will also depend on where you invest. Cities will see their property markets rise in value at different speeds depending on local factors, so doing your research into seeing how different areas are projected to grow is important.
For example, Savills’ projections indicate the North-West will see prices rise by 11.7% by 2027, whereas London’s are predicted to fall by 1.7% in the same time period.
This shows knowing where to invest is important, as it will affect the level of capital appreciation you can earn.