Income versus Growth


Jacey Coates

Buy-to-let has been the outstanding investment of the past 18 years, providing average total returns which easily outstrip those of other major asset classes based on recent research by Paragon (conducted by Wriglesworth). Rental demand in the UK has never been higher and the buy-to-let market has grown considerably over the past decade as housing demand and a long period of mortgages being difficult to obtain has played into investors' hands.

There are generally two related reasons for investing in buy-to-let property; for a pension and for financial freedom. This can be achieved by generating income from properties and/or through capital growth.

One of the big questions investors often ask us is whether to invest for capital growth or rental yield?

Whilst it is possible to have both strong capital growth and high rental yield in the beginning of the next property cycle (as we find ourselves today), it is rare and many investors blend both approaches to create a diverse portfolio mixing strong income properties with ones they hope will grow well in value. But which of the two approaches is better? The answer is not straightforward because each investor has a different set of personal and financial circumstances; so let's explore both of these approaches a little further...

The Growth Approach

Capital growth is the term used for when a property increases in value over time and due to price rises or falls being hard to predict with any certainty (in the short to medium term at least) this is out and out speculation, hoping prices rise is not 'investment' in our view.

Nonetheless, it often has a place in investors' portfolios as long as they have long enough time-frames or have other steady investment income secured already. Prices can of course go up or down and it can never be assumed that the value of a property is always going to increase.

There are many factors which affect the capital growth of a property, such as the location of the property and the economic climate.

At present, many investors are turning to the buy-to-let market for capital growth instead of seeking income, as property prices have now started rising again in most parts of the country.

The average property price in the UK hit £250,000 in December 2014, yet prices are charging ahead in London and the South at a much faster rate currently than other parts of the country. Average rents in London are more than twice the national average, however, because of their higher purchase price, landlords have bigger mortgages to service making lower profits and are often having to subsidise the rent to pay the mortgage.

This is a risky strategy and cash flow negative property is not an asset in our view but more of a liability unless the speculation pays off in the future and the sales price makes you a profit that exceeds your subsidy of the rental income.

Better to locate property with great growth potential as well as providing a comfortable income after all costs, as you are then being paid to speculate on prices. Yields may be higher in the North, but capital growth has been more substantial in the South due to the greater housing supply demand imbalance and perhaps it is better to consider speculation in the South and investment north of London.

The Income Approach

A yield is the annual rental income a tenant pays as a percentage of the price paid/value of the property. It is essentially a performance figure that shows you how well your investment is working from a gross and net cashflow perspective, a little like a return on a bank savings account or a dividend from shares. The key to investing for yield is to generate a strong enough net yield to service a mortgage, pay other costs and also to be able to repay the property over a reasonable period of time (in our view properties that can repay their 65% mortgages in under 18 years are strong income producing properties and those that can do so in under 12 years are very strong.

Property bought for yield tends to generate a secure, hassle-free retirement income so a reliable net yield with minimum hands-on involvement are two of the key reasons for buying this kind of property. The resale market and indeed capital growth outlook is a less important factor because strong yields tend to be purchased for the long-term through and to the end of retirement and to benefit from the gradually inflating income delivered as an alternative to the failed pension annuity system that the Government recently took strong action over.

Demand for rental accommodation remains very strong in the UK, and in many regions it is outstripping the supply of private rental stock. However, in the current climate yields in most parts of the UK have begun to fall due to the fact that the average price of a typical buy-to-let property has grown even faster than average rents as the recovery starts in earnest. The disparity in house prices across the UK is mirrored by the yields available. Investors in the North of England recorded higher yields than those in the South in 2013 due to prices being more reasonable versus rental income than in the South. Income-seeking investors should look outside of London for properties generating a high rental yield and also consider other property classes designed solely for income such as quality managed student accommodation.

It is a wise idea to set yourself income and growth targets, as otherwise how do you know how your asset is performing, and that you made the right choice?

The Assetz Approach

To aid the construction of a balanced portfolio, Assetz classifies buy-to-let property into one of two categories. Accelerators (growth properties which accelerate your capital or equity) and Generators (income properties which generate you income to live off for retirement or financial independence.


A generator is a property primarily purchased to generate long-term reliable income or yield. If the rental income is based upon robust tenant demand then it can be highly predictable and can be classed as a true income-producing investment.


An accelerator is a property primarily purchased for capital growth to potentially accelerate a retirement date. As growth cannot be guaranteed, particularly in the short term, these are essentially speculative purchases unless also underpinned by strong rental income.

Balanced Portfolio

It is important to remember when planning and building your portfolio that you get a good balance and carefully blend together appropriate income generators and accelerators. This will mean that your properties can perform very strongly.



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Risk Warning and Disclaimer:

The price of property can go down as well as up. Historic performance should not be taken as a guarantee of future performance. Geared property investment with mortgages can increase risk of losing money as well as increasing the possible gains. Mortgage products referred to in the website can be withdrawn by the lender or have rates or other terms changed without notice and reference to any products does not imply they are certain to be available in the future. Mortgages referred to may also have certain applicant restrictions and are for indicative purposes only although reasonable endeavours have been used to ensure that they are available at the time of publication and are applicable to a significant number of our purchasers. This site is for information purposes only and nothing on this site should be taken as definitive investment advice for your particular situation without you seeking additional guidance directly from ourselves or from other finance and property professionals. Property particulars on this site do not form part of an offer or contract. The developer and Assetz Property Ltd, whilst endeavouring to ensure complete accuracy in these property particulars, cannot accept liability for any errors. Valuations of property or indicated rents achievable are either estimated or derived from valuations and/or comparables and can change and should not be relied upon without your own additional valuation and research, but we have carried out reasonable endeavours to achieve accurate indications for these figures. All descriptions, dimensions, areas, reference to condition and, if necessary, permissions for use and occupation and their details, are given in good faith as provided by the developer and are believed to be correct. However, these are subject to change, especially, but not wholly, relating to any property that is off-plan or not yet complete. Any intending purchaser should not rely on them as statements or representations of fact but must satisfy themselves by inspection or otherwise as to their accuracy. The onus is on each individual investor to undertake their own due diligence, enquiries and inspections. Where shown, net yields are calculated as rental income less expected service charges less expected ground rent as a percentage of the property price. No void periods, optional letting agent costs, repairs or other costs are deducted. Our standard Terms and Conditions of Sale will apply. E. & O. E.