As a property investor you can expect to earn two quite distinct types of returns. The first is ‘capital growth’. This is where the value of the property rises over time allowing you to make a profit on the sale of the place. The second type of return is ongoing rental income, which you’ll be entitled to during the rental period.

There are a few important points to note about capital growth and rent. Firstly, in order to make capital gains on the property, it will need to rise in value by more than the costs of buying and selling the place. These costs include stamp duty, legal fee and agent’s selling commission.

If you select a well-located property in an area experiencing population growth, there is a good chance you will make a capital gain if you are prepared to hold onto the property for the long term. But there are no guarantees when it comes to capital growth especially if you only intend to own the property for a short period.

Rental income on the other hand is far more certain. Once a tenant signs a lease they are committed to paying rent – at least for the duration of the lease term.

The other aspect to consider is that it is unusual for a property to deliver both high rental yields (that’s the annual rent as a proportion of the property’s market value) and strong capital growth over the same period.

The trade-off between rental yield and capital growth makes it important for you to consider an investment strategy before you even start searching for a property.

There are two types of strategies to consider:


Capital Growth

Rental Income


  • The potential for healthy gains in the long term. As a guide, in the 10 years to February 2014, dwelling values nationally rose by an average of 4.4% across Australia’s combined state and territory capitals
  • The tax relief that comes with ‘negative gearing
  • Low repayments with more rental return
  • Unlike negative gearing, you are less likely to lose money after each repayment
  • Depending on the area, it can also have potential for capital growth


  • Other investors have over-extended themselves and been forced to sell at a loss
  • High loan repayments may see little return or even a loss for a few years
  • Profit when you sell might not be as great as it could be for a different type of property or a different location
  • Higher cash flow and high yielding properties means that you’ll pay higher tax on the income


  • A 2 bedroom inner city unit might cost $650,000 to buy, but attract a rent of around $550 per week - a return, or ‘yield', of about 4% a year. However after five years the property may have risen in value to $800,000 – giving you 23% capital growth
  • A 2 bedroom unit in the suburbs might cost only $300,000 but will get tenants paying $400 per week - a yearly return of around 6.5%. However after five years the property may only be worth $330,000 – giving you 10% capital growth

Additional costs to consider...

When selecting your investment strategy and what you can afford to spend, you should also consider the potential costs of ownership:

  • Interest repayments - If you get a variable loan, factor in higher repayments if rates go up
  • Council rates and strata fees - The agent will tell you what these are per quarter but if you’re buying a unit get a strata search so you’ll know if there are any big special levies in the pipeline
  • Repairs - If it’s a house you’ll be up for all the building repairs, but even in a strata block you’ll be responsible for repairs to fixtures and fittings and any whitegoods and appliances you include with the flat
  • Management fees - If you have the time and the inclination you can manage the property yourself, but if you get a managing agent count on paying around 7% of the rent
  • Vacancy periods - When doing the sums, factor in vacancy periods when you won’t receive rental income. Allow at least four weeks of vacancy each year

And the risks...

As with any investment there is no guarantee that you will get a healthy return on your property. Property prices can drop and good tenants can be hard to find. Do as much research as you can before buying your investment property.

Continue to information about choosing an investment property.

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