Relative yields, capital appreciation and keeping it simple

Despite the doom and gloom surrounding some worldwide property markets there are still sound long-term investment opportunities for those willing to do the research. When you read about prominent real estate investors taking profits on some assets and then reinvesting, sometimes it seems as though they are too eager. They seem to want to jump from one investment to the other when maybe a more sensible approach would be to sit on the sidelines and keep their powder dry?

Taking a long-term approach

While there are many short term investments opportunities for those willing to act fast, buying low and flipping for a significant gain, the best real estate investors have made their money in the longer term. The opportunity to acquire property at an attractive price and then leverage both the capital gain and rental income should not be underestimated. Yes, there is nothing wrong in taking a short-term profit (there will never be a time when it is wrong to take a profit) but sometimes investors fail to see the woods for the trees.

Even just a gradual increase in capital values and a mid-range rental income can have a significant impact on your overall finances. Rental income creates cash flow which allows you to pay down the mortgage, increasing your equity content and hopefully benefiting from long-term capital appreciation. This is why many investors will take a profit on their leading assets when they start to look expensive in relative terms and then reinvest in other areas which have the potential for long-term capital appreciation as well as competitive rental yields.

Switching yields

Rental yields are much easier to forecast than capital appreciation in the short, medium and longer term. If you can switch a property with a rental yield of say 4% into one with the rental yield of say 8% it does have significant attractions and can have a massive impact upon your cash flow. There may be less potential for capital appreciation in a property with a higher relative rental yield but at the end of the day investing with just capital appreciation in mind can be dangerous.

Homeowners who acquired property just prior to the 2008 crash may still, a decade later, be struggling to match their purchase price. When you also take into account inflation they could be well behind the relative price curve. Hindsight is a very useful tool for investors, but a property with a relatively high rental yield even back in 2008 would have been supported to a certain extent even during the most troubled of times. The ability to create an annual income of 8% looks very attractive against current UK base rates of just 0.25% and negligible savings rates.

Think of real estate as you would stocks and shares

Many people assume that real estate and stocks and shares are very different when in reality this is not the case. There are opportunities to acquire shares for capital appreciation, dividend yields as well as a mixture of the two – sound familiar? Many people are attracted by bombed out shares with potential for recovery which offer an above-average dividend yield as short-term “compensation” for a lack of potential capital growth – get the picture?

Buying stocks with a relatively high yield and selling when the yield falls would indicate a strong appreciation in capital. Even though the real estate market is not as fluid as the stock market the fundamentals are the same and strategies which have been successful on the stock market may attract a similar level of success in the real estate sector.

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