Capital appreciation versus yield

Last Updated on Thursday, 25 March, 2021 at 2:46 pm by Andre Camilleri

Derrick Maguire, CEO of Luxfair Real Estate

This is a question that has been asked by many property investors over the years and even some very experienced investors.

The first question(s) these investors should be asked is – What is your Exit strategy and do you want an instant income from your investment?

If the answer is, I want to hold for a long time and then sell, an Investment with good Capital Appreciation is recommended.

If the answer is, I want an instant income, then a property with a good yield is advisable. If you can get both then you are on to a real win-win situation. Especially if the Exit Strategy is long term.

Let me explain what Capital Appreciation and Yield mean

Capital appreciation is the increase in the market value of the property against the purchase price. Here is an example: You bought a property for €1m in 2015 and in 2021 you have the property professionally valued at €1.5m. This is an increase of 50% over six years. So the capital appreciation is 50% or €500K.

Capital appreciation can be found in areas with great locations. Examples in Malta are Sliema or Santa Maria Estate. These are areas that the affluent professional wants to live in and will pay for this choice.

Capital appreciation can also happen in areas with regeneration or new services being provided. An example is the south of the island; due to the Marsa by-pass being built and thus cutting travel time down drastically. The knock-on effect should be a migration of people from the centre of Malta to the south, as they will be able to find villas at the price they would pay for an apartment in the centre; along with newfound capital appreciation.

To summarise, the longer you hold an asset, like property, the better the chance is of capital appreciation happening. It is the Long Game not the Short Game win.

What about Yield, what is it defined as? Well if you look in the dictionary it is defined as the rate of return on an investment, but what does that actually mean?

Yield is something many investors want as it can provide them with a residual income, especially if they own multiple properties, and the Tax system is kind to them.

Yield is worked out by simply subtracting the annual expenses of the property from the annual rental income and then dividing this result by the total cost of the property. Multiple the result by 100 for the net rental yield percentage.

Here is an example for you to understand how the yield is worked:

If the annual rent is €15,000 and you have had repair expenses of €1,600, net revenue is €13,400. Then divide this figure by the cost of the property, say €200,000, and multiply the result by 100 to get the yield.

[(€15,000-€1,600)/€200,000)] x 100 = 6.7% net rental yield

An important point to note is that you may be shown the Gross Yield, which is only the Rental Income divided by the cost of the property, which in this case is 7.5%. Always ask for the Net Yield when looking at investing in a property as this is the true Yield.

To summarise – For many investors a combination of strong capital appreciation and strong rental yields is important. Once you have explored all of the options, in all the areas, then you will choose a property that is expected to not only provide you with an extra monthly income but also good capital growth in five, 10 or 20 years’ time.

Remember though that, as with all investments there are no guarantees, and the rental yield and capital growth are estimates based on the current marketplace and housing policies. Many micro and macro events can change this in a heartbeat.

At Luxfair Real Estate we pride ourselves on our Buy-to-let consultancy service, always giving you the best advice on where and how to invest your money in property – both residential and commercial, as well as locally or internationally. We are a one-stop-shop for all your needs in relation to property.

Derrick Maguire, CEO is a Luxfair Real Estate has over 30 years’ experience in Real Estate, both locally and internationally. He can be contacted on +356 7702 6842;

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