There are a few examples where pure growth over income still exists and that’s primarily with land and off-plan purchasing. With both of these there is rarely any income until you either resell, or the property is completed. In the meantime you can anticipate a capital growth. In my view, if you are buying for growth it is critical that you buy below market value, as that is the only capital profit which is reasonably certain. So buy land cheap enough and you can probably resell at a profit. The off-plan situation can be very interesting. Take student accommodation (Select Realty Online speciality) for example. This is classified as a commercial investment, as opposed to residential and therefore yields and capital growth valuations are assessed differently.
Investors in this type of property are generally buying before construction or conversion on the basis of an assured 10% net rental yield. Let’s say the unit is priced at £50,000 and so offers a £5,000 net income. Rental yields from already built and occupied student accommodation are generally around 6.5% net. This is because an already-tenanted investment is considered a lower risk than buying off-plan, so the off-plan investor receives the extra developer incentive of a higher assured yield. On this basis, you work out your resale (capital growth) value on the yield, i.e. whilst you bought a £50,000 off-plan property with an assured 10% yield, the secondary investor will only expect a 6.5% yield from the now-performing property. The rental income of £5,000 is still the same, so the lower expected yield pushes up the value of the property. We work this out by dividing the £5,000 by 6.5% = £76,923. So, the value of your property is now (almost) £77,000 and you make a 54% (£27,000) profit on a £50,000 investment in just a year or two!
The answer lies in the total return…
We have already looked at the three factors which make up your total return: net rental income over the investment period; equity locked in at purchase through buying below market value; and potential capital growth over the period. Investors should factor in all three elements when selecting a property purchase. Bearing this in mind, we are now going to review three different locations which offer varied investment models. This will give you are real insight into what is achievable. I’m using three USA locations because of the wonderful variation of investment opportunities available there. Investors for income may well choose different locations and investment profiles to investors for growth.