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Should BTL Investors Prioritise Capital Growth or Rental Yield?

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    Capital Growth or Rental Yield: Which Is More Important for Property Investors?

    Property investors must consider many things when deciding whether buy-to-let properties are worth purchasing. Location, number of rooms, EPC ratings and many other things are worth inspecting before making an investment decision.

    However, when thinking about profits, you’ll probably have two metrics at the top of your checklist: capital growth and rental yield.

    Both are strong indicators of whether a property is a worthwhile investment. Understanding what capital growth and rental yield mean for your property is essential to making wiser decisions for your property investment strategy.

    Today, we’ll examine the differences between capital growth and rental yield and whether you should prioritise one over the other when buying a rental property.

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      What Do You Need to Know About Capital Growth?

      Capital growth is one of the most fundamental aspects of UK real estate investment. The term relates to a property’s increasing value over time. Capital appreciation is the price difference from when you purchase a property to when you eventually decide to sell it.

      Numerous factors can influence capital growth. For instance, market trends will affect property prices. 2023 was a subdued year for property investment due to high inflation and elevated mortgage costs. As such, capital growth was very shallow. However, once activity picks up, property prices should rise faster.

      Also, if you purchase a property in a regeneration hotspot, you may see capital growth accelerate over time. This is because the area has become a more desirable place to live while you own the home due to investment in local businesses and infrastructure. Therefore, many investors like to purchase properties in areas on the cusp of a regenerative boom.

      One is the Baltic Triangle in Liverpool – a former hinterland that has become one of the trendiest places to live in the UK.

      However, investors need to remember that capital growth is a long-term venture. It may take many years to see a substantial asset value appreciation. As such, landlords with short-term investment strategies may become impatient waiting for their property to realise its capital growth potential.

      In addition, property investors may want to keep abreast of capital growth forecasts from industry experts – this will help you narrow your property search to areas with better-value properties with serious capital growth potential.

      For instance, the Savills Residential Property Market Forecasts are one of the most authoritative predictors of capital growth for every region in the UK, providing five-year outlooks for the country’s property market. The most recent Mainstream Capital Value Forecast suggested that the UK would see capital growth of 17.9% by 2028, while regions like the North West and North East would see more significant growth than the national average.

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      What Do You Need to Know About Rental Yields?

      Rental yield is the name given to the rent on your investment that comes from rental income. Typically, yield is represented as a percentage of property price.

      Investors will want a higher percentage to indicate a property’s worth. Rental yield allows for immediate returns on a property investment and benefits investors who need a regular income from their investment.

      Much like capital growth, several factors can affect rental yield, chiefly location, property type and current tenant demand.

      It’s no secret that certain areas in the UK offer better yields than others. Keeping an eye on which areas have a high average yield is an excellent way to find properties that provide a solid monthly income.

      For instance, Zoopla regularly updates its list of the highest-yielding cities so investors can see which areas will provide the most significant monthly returns. It is also worth noting the average rental yield for the UK – which currently stands at 5.49% – as this can indicate whether your yield represents a good investment. The likes of Liverpool have an average yield of 7.43%, which is almost 2% higher than the UK average. In contrast, somewhere like London, it has an average yield of 4.92%. As such, investors would choose Liverpool over London if they were looking for high yields.

      As aforementioned, property type can also impact rental yield – apartments are more likely to earn a higher yield as they are cheaper than larger properties but in advantageous locations. As such, they command significant rents due to their proximity to job opportunities. For that reason, many landlords view city centre apartments as a lucrative investment opportunity.

      Learn More: If you want to know more about buy-to-let profits and costs, use our UK Stamp Duty Calculator to find out how much stamp duty you’ll pay on your investment property.

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        Capital Growth or Rental Yield: Which Should You Prioritise?

        So, should you focus on purchasing properties for capital growth or rental yield as a buy-to-let investor?

        Prioritise capital growth if you aim to accumulate wealth over time. This suits investors who can be patient as they don’t need immediate returns and are willing to wait for the property value to increase.

        Opt for rental yield if you need a consistent income to support your earnings or retirement income. This strategy ensures a steady cash flow.

        To maximise your property investment strategy’s potential, consider a balanced approach by having a diverse portfolio that includes high-yield properties and those with potential for capital growth. This way, you can enjoy immediate income and long-term capital appreciation, meet various financial needs and adapt to market conditions. Looking at property investment London has on offer as well as property investment in Birmingham have become more popular choices in the UK.

        For more property insights into the UK rental market, check out some of our buy-to-let area guides, including:

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        Dale Barham

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        Dale is a property content writer at RWinvest. Keeping a close eye on the UK property market, Dale helps our readers stay informed and up to date on the latest market news and statistics.