What Is Capital Growth?
Capital growth (or capital appreciation) is an increase in the value of an asset over time.
A popular long-term property investment strategy is simply to purchase a property, hold onto it until its value increases substantially, then sell it for a profit. This plan can produce a big payoff but it requires patience, as you may have to hold the property through some ups and downs.
The capital appreciation of the property can protect your wealth against inflation.
How To Calculate Capital Growth
To calculate a property’s capital growth, you subtract the property’s purchase price from the current market value of the property.
Capital Growth Formula
Capital Growth = Current Value – Purchase Price
Example: Suppose you bought a home for $420,000, and the property’s current market value is $500,000. Your capital growth would be $80,000.
$500,000 – $420,000 = $80,000
Note: As property values are affected by various factors such as location and demographic changes (in average income, median age, etc.), it’s impossible to predict with certainty how a property might perform after a given period of time. That said, property values always tend to increase over time, which is why investing for capital growth is a common long-term strategy.
What Determines Capital Growth?
Supply and demand:
In general, any time there are more potential home buyers than homes for sale, values – and therefore capital growth – will increase rapidly.
Capital Growth Vs Rental Income
Your financial situation and investment goals dictate the best strategy for you between capital growth and rental income. A capital growth strategy might be the best choice for you if you can afford management fees and mortgage repayments. However, it depends on your risk level. If your risk tolerance is low, a rental-yield strategy might be the better option for you; whereas, if it’s high, a capital growth strategy might be more suitable.
While there are differences between the two strategies, a well-chosen property can both earn rental income and appreciate in value. A portfolio balancing the two strategies would be ideal.
Why Is Capital Growth Important?
To best use a capital-growth strategy, you need an expert’s help with the initial property research and structuring your investment loan.
Call Home Loan Experts on 1300 889 743 or enquire online so that our brokers can help you acquire a suitable property for capital growth in your portfolio.