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Yield vs Capital growth

The balance between buying properties that offer good monthly returns (high yields) but quite often offer poor capital growth (i.e. they don't increase in value that much over the years compared with the average)

I have recently been speaking with a number of landlords about the importance of a balanced portfolio, when buying and renting out property. The balance between buying properties that offer good monthly returns (high yields) but quite often offer poor capital growth (i.e. they don't increase in value that much over the years compared with the average) verses properties that do go up in value quicker but often offer a lower yield. Another consideration has to be the mix of town properties verses the villages.

Choosing the right village though is very important. Living in villages often has higher costs, especially transport and petrol costs. Some tenants don't buy because they can't afford the mortgage, so if you buy in the wrong village, you could limit yourself to the type of tenant who can afford those extra transport costs.

However, one town that has a high demand with tenants is Ramsgate. Particularly popular with people that commute to London, with a high speed rail link, easy access to the A2 matched to an active and varied social scene, Ramsgate is pulling in good quality tenants.

Rental prices range at the lower end from around £450 per month for a small apartment to around £1100 for a large 4 bed detached house. For the mid £700's, a larger 3 bed semi can be rented. As an up and coming town with further improvements sited to the train links to London, properties are in high demand.

So, does that mean you should buy a property in Ramsgate as a buy to let investment? Before I can answer that, you must really consider the capital growth vs yield question. Some buy to let investors often make the mistake of chasing yield over capital growth. Some investors believe that by chasing high yielding properties, in say the poorer parts of Thanet, they will make a faster profit than waiting for capital growth. The problem with this is that to achieve high yield you usually have to compromise on capital growth.

Therefore it would seem the most logical solution is to find a high yielding property in a strong capital growth area but, these simply don't exist and in actual fact, most of the time, lower yielding properties have a better capital growth. This is because there is generally a contrary relationship between yield and capital growth so the higher the yield, the lower the capital growth and the higher the capital growth, the lower the yield. Property investment in Thanet is about balancing the two.

Not many landlords, especially those who use buy to let mortgages, can afford to service high levels of debt without a reasonable yield, which forces them to look at ways of making an investment affordable by finding the right balance between capital gain and yield.

Yield is critical to the survival of a buy to let investment but it’s not the key to building wealth. Don’t chase yield for yield’s sake, but rather chase capital growth with enough yield to make it serviceable because in the long term it is the capital growth, not the yield that will generate you the wealth and the financial independence you are seeking.

Next week, I will show that Thanet could just offer that right balance of yield and capital growth.

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