Understanding Capital Growth

Understanding Capital Growth

As more people see the possibilities involved with investing in property, they first must understand what their goals are. Will they renovate and flip? Or look for a property that provides either high rental yield of greater capital growth possibilities?

Long-term investment plans tend to involve a ‘buy and hold’ approach with a single focus in mind, increasing capital growth. Also known as capital appreciation, capital growth is the increase in value a property gains between the purchase date all the way up to the present day. High capital growth properties tend to have a lower rental yield, although they may not make a huge profit (or even a small loss) in rental income, the expected value of the property over 10, 15 or 20 years can double or even triple.

Understanding Capital Growth

Utilising capital growth

One of the biggest upsides to capital growth is compound growth. This is the steady incline of the property’s value each year which slowly leads to a big pot of gold at the end of the line. New investors fail to understand numbers so well and the difference between a 8% increase per annum compared to 11% in their opinion is nothing, but they would be wrong. 3% in the grand scheme of things seems like very little, but added over time it can end up being a significant amount.

For example, let’s say you recently bought an investment property for $400,000 with the plan to hold it for 20 years. With a 8% growth per annum (according to the research done) and ignoring any profits or expenditures during that time, the property’s value would increase to a staggering $1.84 million. Now, if you planned the investment more wisely and maximised the capital growth to hit 11% per annum (by selecting a more favourable area, renovating etc), the property’s value would be closer to $3.2 million after just 20 years.

Do the numbers yourself if you don’t believe us, but that’s a $1.3 million increase. Investors aren’t required to pay any sort of capital gains tax on their investment properties until they decide to sell. Alongside that, investors are able to defer certain capital gains profits as tax deductibles. Now can you see why so many people are turning to property investing as a way to early retirement?

It’s not as easy as that

Although the scenario we pictured above is quite common in Australia, don’t think by just buying a property and sitting on it for a number of years will reap such rewards. Careful planning needs to go into researching properties that are located in high capital growth areas that offer the biggest return on investment. You may have heard people say:

“properties double in value every 7-10 years on average”

While this is true, it’s not the case for all properties as some only increase as little as 1-2% per annum. Suburbs that are capable of providing such high returns are an investor’s dream, but finding them can become an investor’s nightmare. Without extensive knowledge, experience or a professional Realtor by your side, you may find it near impossible to find investment properties that will yield a decent amount of capital growth each year.

Capital growth works best with a long-term strategy of buying and holding a property. If you’re looking to start or expand your portfolio by purchasing a property that has awesome capital growth potential in Queensland, don’t just sit idly waiting for something to happen. Do the sensible thing and give us a call today for more advice about your investing goals.