“Which is the objective of investment, capital growth or yield?”
When I asked 50 people this question, the reply was unanimous. “Capital Growth!” they all cried. Some claimed to be investment gurus. I shook my head in disbelief. Had these people never played Monopoly? Where are the capital growth objectives in Monopoly? There are none! Why? Because capital growth is not the main reason for property investment. Sure it’s a nice bonus. There is an old investor’s cliche that goes: “never ever sell property”. If that is true, why worry about capital gains? You have to sell to realise the gain, which defeats the purpose of investing in the first place. The goal for any investor should be financial independence. This means investments that return regular payments to cover living expenses. Sure you could sell, but then you would have to invest the money somewhere else, as inflation will erode a lump sum. Then you are stepping backwards because the taxman has taken his slice.
When you buy for yield, your investment is cashflow positive from day one. Any capital gains are a bonus. When yields are high, capital growth follows naturally. Investors will pay higher prices when returns are better. When you buy for capital growth, yield does not follow naturally. In order for yield to improve, prices would have to drop! In fact, depending where you buy in the cycle, you could buy when yields are low (meaning you have a cashflow negative return) and you receive no capital growth for several years. Some ‘investment’ that is!
Amateur investors chase capital growth. It’s just like people who buy a lottery ticket. They spend small money on a near-certain loss, in an attempt to chase a large win. If you buy property in the CBD, capital growth is not guaranteed, but a cashflow loss is guaranteed. This is taking a certain, regular loss now, in the hope of a large, possible gain later. Sounds like gambling to me! Investing is about certainties, not gambles. Monopoly teaches us to invest our money before it runs out. When interest rates rise, yield investors are insulated, but capital growth investors are not. They sink deeper and deeper as rates rise, their cashflow leaking like a sieve. Yield investors ride out the storm, able to pay each and every payment on time, with no stress. Ask any investment mogul, investing is all about yield not capital growth. Let the amateurs chase the capital growth with the rest of the crowd. Smart investors demand a positive return from day one.
