Tips for the Budding Property Investor: Rental Yield vs Capital Appreciation
If you are a property investor in Singapore, then you would probably already know a little about the two main types of returns on investments in property: rental income and capital appreciation. But which one should you be focusing on when you make investments? What factors should influence your decision? In this article, we will answer all these questions and more! Keep reading to learn more.
Rental Yield vs Capital Appreciation: What’s the difference?
When people buy residential property in Singapore as an investment, they generally plan to get the bulk of the return on their investment in one of two ways: through rental yield, or through capital appreciation. Rental yield is additional income that comes from renting out the property in question, while capital appreciation is the profit that the investor makes when he sells his property at a higher price than what he bought it for. In choosing which type of return to prioritise in making your decisions, you can try to consider the following factors:
Intended Period of Investment
When you buy the residential property, how long would it be before you absolutely want to see the returns on your investment? In many cases (except for new HDB flats that have yet to reach their minimum occupancy period), you will be able to see returns in the form of rental income almost immediately after you buy the property, assuming you are able to find a tenant who wants to rent all or part of your property. But for capital appreciation, the returns generally take a longer time to come to you. This is because after you buy the property, it can take years for your property value to go up. After all, the value of a property tends to go up the most because of renovations, nearby amenities, and the convenience of nearby transport systems – and these things take time to improve.
So if your priority is on a steady stream of smaller payments that you can see quickly after investing in your property, then you might want to place a little more emphasis on rental yield. But if you are okay with waiting several years to get a return on your investment, then perhaps capital appreciation should be your priority, especially if you have no plans to rent out your property in the meantime.
Dynamics of Local Property Market
Singapore’s property market is ever-changing, so investors need to pay close attention to the market’s changing demands. This might help you decide which type of return you should prioritise at a certain point in time. For example, when its economy is booming, Singapore might draw many foreigners into its bustling business centre, raising the demand for accommodation! This means it might be easier to find tenants to rent out your property, so rental income might go a little higher on your priority list. But in the case of an economic recession, it is likely that fewer foreigners enter Singapore because fewer companies would be hiring, and so it might be more practical to focus on the capital appreciation potential for the time being.
Your Chosen Balance Between the Two Types of Returns
Rental yield and capital appreciation are not mutually exclusive at all! It is perfectly possible to invest in a property, rent it out for a few years to generate rental income, and then sell it to take advantage of the capital appreciation. What matters is that you need to decide if you want to prioritise one type of return over the other, or get a good balance of both in your investment. It is important that you decide on this balance early, because your decision can impact the type of property you should invest in!
I have decided on how I want to balance rental income and capital appreciation. What kind of property should I invest in?
Different kinds of property can be better suited to generate either rental income, or capital appreciation. Here are some factors that can impact the income-generating potential of a residential property.
Type of Housing
Is your property public or private? Leasehold or freehold? Completed or building under construction?
Some types of public housing have restrictions on them. For one, HDB flats cannot be rented out or resold until the Minimum Occupancy Period is reached. HDB flats also cannot be rented out unless you are a Singapore citizen. Private housing, on the other hand, can be rented out almost immediately after buying it, provided your tenant rents the house for at least 3 months. Because of regulations, many types of public housing are more suited to generating capital appreciation than rental income, especially if we are talking about a new HDB flat.
The number of years your property has remaining on its lease will also determine the kind of revenue the property can give you. For example, fewer people want to buy a home with very few years remaining on its lease, but renting it out is usually not a problem. Similarly, if your property is freehold, or a building under construction, then the potential for capital appreciation is much higher. The potential for higher capital appreciation in building under construction also explains why many property investors are geared towards new launch projects as well.
Size of Property
Even though larger properties definitely fetch more on the resale market, smaller properties may actually be more suited to generating a steady flow of rental income! Why? Well, smaller properties cost less to rent, and so there are probably more tenants willing to take it up! So even though a small property may not appreciate as much as larger ones in terms of capital appreciation, they make it easier to find tenants, which can give you a more steady stream of income in the years you are renting out your investment.
Finally, we can’t talk about property without talking about the first rule of property investment: Location, location, location! You would have probably heard this before, but the location of your property matters. Properties in prime locations fetch more on both the resale and rental market, as do properties that are near amenities like MRT stations, bus interchanges, malls, a good selection of schools, and so on. So if you are aiming for a good source of rental income, look for a property that’s surrounding these amenities if possible! But if you are hoping the value of your property increases during the years you own it, then it might also be worth considering properties in up-and-coming neighbourhoods. They may not be in “prime locations” yet, but as the neighbourhood gets more and more developed and mature, the value of your property is likely to go up quite a bit!