Understanding capital growth
In simple terms, capital growth is the increase in the value of your property over time. So, if you bought a property for $500,000 two years ago and it is now worth $750,000, you've had capital growth of $250,000.
In other words, you've achieved a $250,000 increase in the value of your property. You put in the research, you invested your money, and now you've got a lot of fruits for your labour. This is why owning and investing in property is so attractive in Australia. You can accumulate wealth over time, depending on the market conditions and where you choose to invest.
Strategies for achieving capital growth
There are a few options available to you to achieve capital growth. They range from passive to active and strategic. With the right help and some clever decisions, you can make your money and your investments work for you to gain wealth and security.
Market increases
The easiest way to increase your capital growth is to let the real estate market heat up around you. As property prices rise, so too will your capital gains.
Before purchasing an investment property, it's important to do some research. Find growth corridors where development is happening. See where land is scarce but popularity demand for home ownership is high.
Home renovations
You can invest money into your current property and increase its value. While this will cost you money upfront, the end result should give you a decent return. By adding another bathroom or a study, for example, you might expect your home to become more attractive to potential buyers, hence you could see an increase in its value over time.
A good paint job can increase 'curb appeal' and hence the sale price of the property. A kitchen and bathroom renovation, and a recarpet inside can also give you some good returns.
Don't over-invest in renovating your home if you intend to sell. You want to ensure you make capital gains through this process, not a loss.
Also, be conscious of what kind of renovating you're doing. Not all improvements are welcomed by the market. Speak to a real estate agent to find out what is selling in your neighbourhood.
Check out more tips for finding a loan to help with renovating.
Buying under the market value
This strategy involves buying a property for less than it’s worth on the market. It can potentially score you a capital growth boost right away.
However, it isn’t always easy to find and buy property under market value, especially in a market that is heating up.
Local development
If a council is upgrading the neighbourhood, this can bring capital growth to your investments as well.
Are there improvements being made to the schools? Is the local shopping centre being redeveloped? Are new parks and playgrounds being built?
In short, is the neighbourhood being ‘renovated’, which would in turn increase the value of your property? Is it becoming more desirable to live in your suburb?
How to choose a property with high capital growth potential
Doing some research before you buy can significantly increase the chances of capital growth and the amount you will receive.
- Location
As the old saying goes, location, location, location! If you can purchase a property in a suburb that is growing in popularity, and predicted to continue to grow, your chances of capital growth can be good. - Scarcity
Scarcity is what drives up the value of an asset. A lack of supply builds scarcity. If you have property in a high demand area, this benefits you. - Potential
Can you find a property that has potential? Is it a fixer-upper? If you invest some time and money to renovate, could you gain good capital? - Development potential
Changing school zones or increased residential density limits can significantly improve your chances of returns on your investment.
How can I access the capital growth in my investment?
There are two ways you can access the capital in your investment. These are:
- Selling your property
You can sell your property for more than you paid for it and get a return on your investment. However, you may be liable for capital gains tax. Borrowing against the equity
Home equity is how much your property is worth minus how much you owe on your mortgage. If your current property is worth $750 000, and you still owe $500,000, you have $250,000 in equity.To find out your useable equity, take 80% of the value of your home ($600,000), and take away your current mortgage ($500,000) leaving you with $100,000 in useable equity.
You now have $100,000 of useable equity to put into renovations, a new car, or a holiday. Or you might want to use it to buy your next home with a variable home loan from Great Southern Bank.
Capital growth versus rental income investment strategies
A capital growth strategy is a long game, while a rental income strategy can be both a short game – positively geared, and a long game- build a portfolio of properties for your nest egg.
Capital growth relies on the value of your property increasing over time due to any or all of the reasons discussed above. You will only get results if you borrow against the equity or sell your property when you feel the value has risen enough.
A rental income strategy has the benefit of you seeing income immediately, as long as you are positively gearing your rental property.
Alternatively, by building an extensive portfolio of rental properties, you can have a long view for retirement, a long-term income goal through property.
If you’re the sort of person who doesn’t mind a bit of risk, then capital growth might be for you. If you prefer low-risk investments and quicker results, rental income would be more up your alley.
Considerations for capital growth
While the idea of letting your investment grow in capital value sounds like a great idea, remember, it can be too good to be true. It may sound easy in theory but there are many things you need to consider.
It’s important to remember that investment always comes with an element of risk. Property values could fall or a suburb you thought would grow in popularity might not. Capital growth is a long game, and you may end up with very little return.
There is also capital gains tax (CGT) to consider. CGT is a tax you pay on the profit you make from the sale of your property. The higher your capital gains, the larger your tax bill will be. The ATO has a lot of good information about capital gains tax if you’d like to learn more.