Buy Into A Property For Capital Appreciation Or Rental Yield?
As a property investor or property buyer, there are only three reasons why we buy a property – for our own stay, as an asset for capital appreciation or to rent them out to make a side income. Aside from buying it for our own stay, it depends on your risk appetite and the location of the property, although the list is unexhaustive as to whether you are looking to make full use of each matrix. Here, we delve into what may work best for you based on your current circumstances.
Capital growth or capital appreciation is defined as the increase in the value of a property over a period of time.
Capital growth = Current market value of a property – Original price paid / property purchase price.
More often than not, the capital growth rate of residential properties is usually impacted by the state of the country’s economy.
In normal times, a growth of 5% to 7% would be ideal. However, since the Covid-19 pandemic hit everyone globally, the average capital growth for residential properties fell to 0.6% in 2020 which is not surprising.
The capital growth strategy is buying a residential property when prices are still low and selling it higher than the original acquisition price. Often, it is ideal for homebuyers who will eventually upgrade to a larger or better home or those who plan to change jobs or move to another location in the future.
If you are an investor looking to shorten the hassle of dealing with tenants and the nitty-gritty, this is also a good strategy movement for you as you would be able to make a profit relatively faster.
Nonetheless, do remember that to reduce the Real Properties Gain Tax (RPGT) you need to pay by using the capital growth strategy, you will need to hold your investment property for more than five years.
Rental yield measures the income you gain from your rent annually as a percentage of the total price you paid for the property itself.
Before Covid-19, rental yields for high-rise residential properties could go up to 6% to 8%, whereas landed properties were between 3% and 5%. Currently, the average rental yields that can be achieved are 4% to 5.5% for high-rise residential properties and 2% to 4% for landed properties whereby properties with higher asking rents and lower asking prices will usually have higher rental yields. These properties are normally in mid-end residential developments with good locations and accessibility.
Residential properties with good access to public transport such as KTM, LRT and MRT stations, or transit-oriented developments, generally command higher returns.
Investment properties that enjoy a healthy rental demand have traditionally been located in areas with a large expatriate population, such as the city centre, Taman U-Thant, Mont’Kiara and Bangsar. Yields in popular expatriate locations are typically 4% to 4.5%.
Also note that areas such as Setapak, Wangsa Maju, Bandar Sunway and Shah Alam which command a healthy student population also often fetch high rental yields.
Do remember that the surrounding amenities and conveniences should already be operating, otherwise, you may see months or years with zero rental income if you buy a property while malls, proper road networks, etc are still being constructed.
[image source: House money photo created by freepik]
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