Mark Hay
Rental return vs. Capital growth

This Weeks Episode of Home in WA

Contact:
Mark Hay

Email:
markh@markhay.com.au

Website:
http://www.markhay.com.au

Phone:
(08) 9225 7000

Fax:
(08) 9225 7777

Mobile:
0418 953 742

Address:
28/118 Royal Street
East Perth WA 6004

It’s fair to say that one will trade off against the other, for instance if the property has a much higher capital growth, usually it is reflective in a lower rental yield. Conversely, the higher the rental yield, generally the lower the capital growth rate. As far as I’m concerned, I have a far stronger preference towards capital growth because the capital growth can then be repackaged via equity borrowing to acquire further properties along the trail of further real estate acquisitions. The fact that capital gains tax only applies to 50% of your net profit also ensures that the tax implications are minimised. However, if you take the property investors long term view of never selling property, then indeed zero capital gains tax may be paid.

Whereas if you are seeking higher rental yields, then the sooner the property becomes cash flow positive, the sooner you will be liable to pay income tax each and every year on that extra cash flow. Obviously, when you are first starting out investing, repayments are the greatest drawback, so chasing a higher rental return is usually more favoured by initial investors. However, as their income improves over the years, via their personal exertion and their property, they tend to gravitate towards higher capital growth assets and less rental return. Then just prior to retirement or in retirement they ideally trade off the higher capital growth real estate for higher rental return, to enhance their retirement cash flow.

The interesting thing in relation to capital growth is that in standard market conditions the cumulative effect of owning property should see the properties value double in 7 years, triple in 10 and then potentially go ballistic beyond there.

Pursue capital growth where possible.