Metrocity Realty

Investing? The Difference Between Rental Value and Capital Value 

Did you know that the best investment properties grow in CAPITAL value faster than they grow in RENTAL value?

This is because rental income rises at a different rate to capital value. Low rental returns can indicate high capital value and high capital return potential. Don't believe it? Take a few minutes to go through these two examples:

 

Investment 1 Investment 2
Normal Growth High Capital Growth
High Rental Return Low Rental Return
Purchase Cost $250,000 $250,000
Gross Rental Income $17,500 $13,750
At Time of Purchase (7% of capital value) (5.5% of capital value)
Average Capital Growth 5% pa 10% pa
Average Rental Income Growth 5% pa 5% pa

 

Gross Rental Income pa
After 5 Years $22,334 $17,548
After 10 Years $28,505 $22,397
After 20 Years $46,432 $36,482



Capital Value
After 5 Years $319,070 $402,627
After 10 Years $407,223 $648,435
After 20 Years $663,324 $1,681,874


The Winner?

Investment 1, it would seem, appears better because its rental income, both as a dollar amount and a percentage of capital value, is higher.

But in terms of capital growth (i.e. the leverage you need to purchase further assets and to increase your net worth), Investment 2 is ahead. 

Investment 2, after 20 years, will be worth $1,681,000 and will produce gross rental income of $36,482 (about $701 a week).