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Capital Growth

Capital Growth Is Usually What Really Counts

But, unless you specifically have a strategy to buy low growth / high yield properties, perhaps by renting to students or setting up other HMOs (Homes of Multiple Occupation), it is important when concentrating on property management and maximising yields, not to get over-focused to the exclusion of what really matters.

And what really matters to almost all property investors is, of course, capital growth.

Even if a property is cashflow negative, after the period of investment it can have been cashflow positive in retrospect. This is especially the case if you invest in overseas markets where no interest only mortgages are available.

So, while the amount you are paying off the loan capital every month might take you into cashflow negative territory each month, when you sell and pay off your mortgage, you will have commensurately less to pay. So, spread over the time of the investment, this can make the investment cashflow positive.

Ultimately, this is just another way of saying that the growth was worth the fact that you had to subsidise the investment every month.

So, maximising yield is indeed a way of increasing profits – but not necessarily rental profits, but profits overall.

This is because the aim of maximising the net yield should not necessarily be to make a property profitable from a month to month rental point of view, but rather to make it affordable.

This is important to remember, even in a slow-growing market, because one of the key attributes of the successful long-term property investors is doggedness.

The phrases ‘don’t give up,’ ‘hold on in there’ and ‘keep the faith’, tend to be heard when times are a little tougher – slower growth, higher interest rates, etc. And they are actually well worth bearing in mind.

Certainly you can make quick short-term gains in property, but the real spoils from a substantial portfolio come from long-term capital growth, which means seeing through all points of the growth cycle.


Even at modest levels of growth, over the long term, geared property investment is about capital growth.

On a long-term basis, a growth rate of five per cent is very modest indeed. But, even at that rate, the returns are impressive over the long term, let’s say 15 years.

Let’s use the example of a 20 per cent deposit on a £150,000 property, so you put down £30,000 and borrow £120,000.

The property’s value will go from £150,000 x 5% compounded over 15 years = £312,000. That figure represents profit of £162,000 - the property has more than doubled in price.

More interestingly is your return on investment, or how many times your £40,000 stake has increased against itself. This is the measure serious property investors use to assess investments.

In this case, the ROI is £312,000 minus the original loan of £120,000 = £192,000.

(£192,000 / £30,000) x 100 = 640%

So, this kind of ROI puts a cashflow shortfall into perspective. The important thing is that by adjusting cashflow you want to be able to allow yourself to afford to take advantage of this kind of return.

Copyright © Property Secrets 2007

“Property Management Secrets”
Reproduced with the permission of Property Secrets.

Further information on this topic can be found in "Property Management Secrets"

For extensive, regularly updated information about UK and Overseas property investment and to purchase this book, go to http://www.propertysecrets.net

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