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Why is capital growth important?

Tuesday, 1st Jun 2010

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It’s a common debate in the property industry about income vs. capital growth – I don’t believe they are necessarily mutually exclusive. You can generate income and capital growth if you know what you are doing. Income is important, however; to truly grow wealthy from property investment you must have capital growth.

Successful investors understand the miracle of compound growth. Continuous growth in the value of investments year after year has generated vast fortunes over time. A comment often attributed to Albert Einstein is, “Compound interest is the greatest mathematical discovery of all time.” Most investors probably don’t see much difference between getting 8% per annum and 11% per annum from their investment. While 3% per annum doesn’t sound like a huge amount, you might be staggered to find out the cumulative differences to the level of wealth created over time.

If you invested $400,000 in property and received a capital growth rate of 8% per annum (let’s ignore income and expenses for this illustration to keep it simple) it would be worth $1,864,383 after 20 years. If you managed that investment just a little better and you could derive 11% per annum, that same investment would be worth $3,224,949 after twenty years. That’s a staggering $1,360,566 difference! The impact of leverage makes the difference on the return on capital invested even more impressive.

The other great benefit of capital growth is that you don’t pay tax on the gain until you sell. If you hold a property forever you never pay capital gains tax. The ability to defer capital gains tax on the gains made each year is extraordinary. This gain continues to compound each year, delivering fortunes to those who know how to find the right investment properties.

There will be properties that will produce 2-3% per annum compound growth above the median property price. To be a successful and wealthy property investor, it is essential that you employ the strategies and research to enable you to achieve this goal. At Momentum Wealth, it is our mission to find you the properties that outperform the rest.