Capital Growth which is also called Asset Appreciation, is the main aim for most property investors. Capital growth is when the value of your property increases over time.
But, how to achieve it?
Well, it’s not that difficult as property is a popular investment class which has shown to move up over the long term. However, it is not enough to just go out and buy any old property.
Poorly chosen property can decline or remain flat for long periods of time.
Take the city of Sydney for example. In the early 2000’s, Sydney started to experience a big property boom unlike anything seen in recent history. Some properties doubled in value in only 2 or 3 years.
Some people who bought at the peak of the boom, paid top dollar for their property and probably assumed that it would keep going up in the short to medium term. However, the property market cooled off and Sydney then remained flat to declining for the next 6 or 7 years.
A former colleague of mine had purchased an investment house in the area of Bankstown (south western Sydney) around 2005. 3 years later the property had dropped by about 10% and there did not look to be an immediate turnaround in the near future.
This is a good example of buying what should be a good investment (a house within 25 kilometers of the CBD in Australia’s biggest capital city) but having to hold it for a long time before it starts to actually achieve capital growth.
In 2010, Sydney’s market started to heat up again and I’m sure that my colleague’s property has now increased in value compared to the original purchase price.
But he had to hold it for 5 years before seeing it move and not only that, it was negatively geared meaning that he had to keep pouring in cash from his own pocket to hold it.
So while most property should increase in value over the long term, this example demonstrates that you do need to research areas which are likely to receive capital growth in the short to medium term, in order to minimize risk and also build equity sooner rather than later.
The quicker that you build equity, the more property you can buy to build your empire.
So why is capital growth so good?
Let’s say you purchase a property worth $500,000 and you pay a 10% deposit of $50,000. You then borrow $450,000 for the rest of the purchase price.
If the property increases by 10% over the next year, it is now worth $550,000.
Therefore, from your original cash of $50,000, you have made a gain of $50,000 and now have $100,000 equity in the property.
You just doubled your money in 1 year. Not bad hey?
So capital growth is great and the returns can be magnified when combined with leverage (using debt wisely).
Always keep capital growth in mind when buying your next property.