Capital Growth or Rental Yield: Which is More Important in Property Investment?

Is it better to sell or rent out a property? This is one of the biggest conundrums faced by novice real estate investors in Malaysia. If you are itching to know the answer, read on and find out what is the best avenue for your investment property.

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The right real estate product could provide you with a healthy return on investment or ROI, either in terms of capital gain or rental revenue/yield. In this article, we will discuss these 2 fundamental property investment strategies and look at the good capital growth rate for residential properties in Malaysia, in addition to the strong rental yields you should be aiming for.

Obviously, both matrixes have their advantages, but deciding which is right for you as a property investor will come down to your personal circumstances. Let’s dive into it:

What is capital growth?

Capital growth or capital appreciation is defined as the increase in the value of a property over a period of time. The gain is measured by deducting the present market value of the asset from its purchase price and taking into account the holding period. How do you calculate capital gain, otherwise known as capital growth? A simple calculation would be:

Capital growth =  Current market value of a property – Original price paid / property purchase price

Assuming you purchased an investment property in Kota Damansara for RM500,000 in January 2017 and as of January 2022, it is valued at RM650,000. Your capital gain over the 5 years would be RM150,000 or 30%. Do take note that capital appreciation for an investment property can be pretty volatile year-on-year (YoY), hence assuming that this property provided you with a 6% capital gain each year (30%/5 years) is not entirely accurate. It could have appreciated in value by 10% in the first year, stagnated in the second year and appreciated again by 15% in the fourth year.

Hence, it is recommended that long-term investors utilise a more comprehensive calculation called the Compound Annual Growth Rate (CAGR), which displays the annualised figure of your investment property’s capital growth value. To calculate your property’s CAGR, you can use this free capital gain calculator. Also, do check out our in-depth article on what is capital growth & how to compute it.

What is the average capital growth in property investment?

According to real estate experts, a high capital growth rate for residential properties is at least 4 or 5% per annum above the inflation rate. For example, Malaysia’s Consumer Price Index (CPI) edged up by 2.9% in October 2021. Taking the inflation rate into account, your’s capital growth should be at least 6.9% or 7.9% for it to be considered a robust rate.

In normal economic situations, a capital growth rate ranging from 2% to 3% above the inflation rate is already decent, although it cannot be categorized as high. On the other hand, anything below that is deemed as a low capital growth rate.

Notably, the capital growth rate of residential properties is usually impacted by the state of the country’s economy. Based on data from the National Property Information Centre (NAPIC), the average capital price appreciation of residential properties in Malaysia reached a whopping 13.9% in 2012, when the country’s economy was flourishing.

During typical market situations, a capital growth of 5%-7% would be ideal.  But when Malaysia’s economy was significantly affected by the COVID-19 pandemic, the average capital growth for residential properties fell to 0.6% in 2020. It even plummeted into negative territory during Q1 2021.

What is rental yield? 

Rental yield is the amount of rental income a property generates each year when compared to the overall investment price. This formula is useful during a property investor’s decision-making process as it can be used to evaluate an investment property’s potential income.

How to calculate rental yield? Unlike capital growth, the formula for rental yield is simpler and it can be computed without a calculator.

Rental yield = (Total rental income – total maintenance cost)/Property purchase price X 100

Assuming your property cost was RM500,000, the maintenance costs per annum amounts to RM5,000 and the rental income attainable is RM3000/month:

Rental yield = (RM3,000 X 12 months – RM5,000)/RM500,000 X 100 = 6.2%

Reading our article on how to calculate the rental rate in Malaysia would be very helpful for you to gain a deeper understanding.

What is a good rental yield in property investment?

Just like capital growth, rental yield is also impacted by economic conditions. For example, when the labour market is strong, there is healthy demand for rental properties in areas surrounding business districts. Conversely, when many people lost their jobs due to the virus outbreak, demand for properties in these locations waned.

In Malaysia, the average rental yield for residential properties during normal market conditions is about 3.72%. According to See Wei Jie, a Malaysian financial analyst turned landlord, a good rental rate should be at least 7% of the property’s purchase price, as 6% would be breakeven. This is because a landlord should take into account additional costs – property furnishings, maintenance and upkeep, property repairs etc. In addition, taxes such as quit rent and assessment charges may further reduce your rental income. If you want to learn more renting insights from him, check out this article: From poker to property – See Wei Jie’s story

Do take note that rental yields are dependent on the property type and asset’s location. For instance, condominiums with a limited number of units and located close to transportation nodes such as the LRT and MRT, shopping centres and office buildings usually command a higher rental yield.

It is also crucial for investors to attain positive cash flow when they are renting out their investment property for profits. You should have a positive net profit after deducting all rental-related expenses such as monthly maintenance fees, assessment tax and quit rent AND the rental earnings must cover your monthly housing loan instalments. A popular mantra for buy-to-let property investors is: Let your tenants pay your housing loan for you.

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What is capital growth strategy and for whom is it suited?

Basically, the capital growth strategy is buying a residential property when prices are still low and selling it higher than the original acquisition price. This is usually achieved by purchasing homes in up and coming areas and disposing of the asset when the area becomes mature, popular or more developed over the years.

For instance, you can buy a home in a growing residential suburb or property hotspots that are currently being planned to be turned into a booming township. If you want to know which residential developments saw the highest capital growths in 2020, check out this article.

Notably, the capital growth strategy is ideal for homebuyers who will eventually upgrade to a larger/better home or those who plan to change jobs or move to another location in the future. This strategy is also suited for short-term property investors like flippers, who quickly resell a home for a profit. But keep in mind that Malaysia’s real property gains tax (RPGT) may significantly reduce your profit.

CHECK OUT: How to flip a house for profit in Malaysia

What is rental yield strategy and for whom is it suited?

Essentially, the rental yield strategy is buying an affordable property that can potentially be rented out. This can be achieved by acquiring a home close to areas popular with tenants, such as employment hubs, prestigious universities and even hospitals and healthcare facilities.

Do remember that the surrounding amenities and conveniences should already be operating, otherwise, you may see months or years with zero rental income if you buy a property while malls, proper road networks, etc are still being constructed.

The rental yield strategy is suitable for investors with smaller budgets, who can afford small or compact residential properties such as studios or 1- or 2-bedroom high-rise units. It is also ideal for long-term real estate investors who want to secure a stable income stream for over 10 to 20 years.

If you plan to repay your housing loan via the proceeds of your rental property, take note that there could be months when your property would be left vacant. Therefore, set aside sufficient money to repay your housing loan instalments during such cases.

Capital growth versus rental yield

To recap, the table below summarises what was first mentioned above, namely the ideal capital growth rate and rental yield you should be aiming for.

Now, let’s go back to the main topic at hand – which is more important in property investment: capital growth or rental yield? The answer is simple mathematics, whichever is higher is the best, taking into account all of the related expenses.

To illustrate, let’s use Mont Kiara’s Residensi 22 as an example. In 2020, this residential development recorded one of the highest capital growth % in the country at 7.28%. To compute how much the property sellers earned, let us use the indicated median price of RM859.70 per sq ft in 2019 and RM914.03 per sq ft in 2020 as well as its unit sizes ranging from 1,900 sq ft – 3,043 sq ft.

To get the selling price, multiply the corresponding median price with the unit size.

Hence, the 2020 selling prices ranged from RM1,736,657 to RM2,781,393. Similarly, the 2019 acquisition prices ranged from RM1,633,430 to RM2,616,067. By subtracting the two figures, we get capital growth profits ranging from RM103,227 to RM165,326 for 1 year (assuming no RPGT was paid).

This translates to an annual capital growth of 7.28%.

But if we look at NAPIC’s data, Residensi 22’s rental yield was lower at just 4.47% in Q4 2020. Using the 2019 median price, we multiply it with the rental yield to get an annual rental income of between RM73,014 and RM116,938. By dividing it by 12 months, the monthly rent translates to between RM6,085 and RM9,745 (assuming no other expenses).

As you can see, the profit gleaned from selling the investment property would have been better as the capital growth figure was higher. Other residential projects with steady capital growths are Seringin Residences in Old Klang Road (5.7%) and Mutiara Condominium in Bukit Mertajam (5.49%).

If you prefer to rent out a property, you will be glad to know that some residential developments have offered solid rental yields, such as Le Renaissance in Bukit Kepayang, Negeri Sembilan (11.1% in 2019); Amber Court in Bentong, Pahang (8.8% in 2019); and Larkin Utama in Johor Bahru (8.5% in 2019).  Check out the Top 7 High-Rise Properties with the Highest Rental Yield in 2019.

Do look out for our latest roundup of properties with the highest rental yield in Malaysia, which will be published later this year.

As you can see above, some property types in certain neighbourhoods will command an impressive rental yield, which can be higher than the corresponding capital growth %. Hence, it is important to conduct your due diligence on a deeper level rather than just looking at the area’s average capital gain/yield figures.

While deciding which property investment strategy is the best is mainly dependent on the numbers, bear in mind that each strategy is only suited for certain circumstances. For instance, to reduce the RPGT you need to pay by using the capital growth strategy, you will need to hold your investment property for more than 5 years. As for the rental yield strategy, landlords were gravely impacted when many employees who were laid off/had pay cuts decided to move back home or to a cheaper unit as they had the option to work from home during various COVID-19 lockdowns. Moreover, being a landlord requires significant time and energy, you might want to read up on Landlord rights and obligations in Malaysia.

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