Growth vs Yield
Think of yield as what you get paid regularly, and Growth as how much our property increases in value.
Both are important if you want to succeed in the New Zealand property market. You need yield to repay the bank for your mortgage but yield won’t be a significant contributor to your retirement savings. For that, you need growth.
It’s important to know this because when your choosing an appropriate property to buy, you’ll generally be trading of one for the other. If it’s got a great yield, it probably has less growth potential.
Apartments are a typical example of this – high yield, low growth. This might be appropriate if you need to increase your regular cash income.
Houses in high-end neighbourhoods are the opposite – Low Yield, High Growth. This will net you a better return in the long run, if you can sustain the drain on your monthly cash flow.
Most investors prefer something in the middle – A good house, in a good area. Enough rent to pay most of the mortgage each month, alongside reasonable long-term growth, to build your wealth.
|High Yield||High Growth|
|$50 per week positive cash flow||Cash flow per week||$50 per week cost|
|3.00%||Capital Growth rate||6.00%|
|$362,750||Growth after 20 years||$993,211|
|$52,000||Property cash flow||($52,000)|
Let’s look at the numbers:
We’ve compared both types of investment; high yield / low growth vs low yield / high growth. The first property has a positive cash flow of $50 a week, and increases in value by 3% pa. The second property had a lower yield, so costs $50 per week to maintain, but increases in value by 6% pa.
After 20 Years
Property one has achieved a net profit (growth plus income) of $414,750. Property two however has achieved a net profit of $993,221. This makes property two 139% more profitable, despite costing slightly more from the cashflow perspective.
If you can afford it choose growth but don’t leave yourself unable to pay the mortgage by skimping on the yield.
Remember from a finance point of view cash flow is important. This is where is becomes helpful to work with a broker who can help you with looking at your future borrowing from a strategic point of view. Don’t hit your brick wall of borrowing by not having enough cash flow. We offer strategy consults to help you plan ahead so you can be strategic with your investment purchases.