What is capital growth
What is capital growth?
Fundamentally, capital growth is the increase in value of a property over time.
The easiest way to calculate capital growth is by finding the difference between the current market value of your investment and the price you initially purchased it for.
For example, if you bought your house for $500,000 and sold it for $550,000, your capital growth is $50,000.
Capital growth is one of the main reasons property is considered such a valuable asset, and why property investors put their money in the housing market instead of the stock market or other investments.
Property has a proven track record of solid returns for many property owners and investors.
It’s important to remember that capital growth isn’t guaranteed. Like any other investment, there is always a chance an asset like a property could decrease in value.
What can influence capital growth?
Time in the market is often associated with capital growth, but if you want to improve your capital growth, here are some ways to do so.
Renovations
Renovating your property can be a great way to add value and subsequently, increase your capital gain. Although they can often be expensive, when you eventually sell your property, you may reap the rewards.
Renovations can range from small - like adding a new coat of paint to the exterior, to large renovations like re-doing the kitchen or bathrooms.
Other home improvements that can add value to your home include renovating or adding a deck, open plan living area or backyard.
The risk with any renovation is not seeing a return for your investment, meaning your property value does not increase as a result of these improvements. Read our helpful guide to financing home renovations to see how you might be able to save on your renovations.
Buying below market value
Easier said than done, but buying a property at a price below market value will put you in a strong position to see capital gain. The main way investors are able to secure property below market value is through research and strategy.
Research into the suburb, property type and prices in the area will help you find a property that may be under market value.
At loans.com.au, we offer property reports to help you value a potential purchase.
Or, use our helpful guide to accurately value a property.
Buy and build
Another way to generate capital growth is to buy vacant land, build a house or block of units, and then sell. In this case you would be aiming to buy land, and then build, and eventually sell for a combined value that is more than what you spent on the land and the building costs.
Building is a long and often expensive process, so make sure you are prepared financially and have the time to oversee the project.
Property type
Another key factor that will influence the long term capital growth, is the property type you purchase or plan to purchase. The three main property types you will consider will be a townhouse/apartment, a house and land, or vacant land.
When considering these options also factor in the following to maximise your capital growth:
| Volume | The volume of a property type is key to it’s long term value. For example, a coastal town may have an oversupply of apartments, meaning that property type won’t see capital growth in the long term. On the flip side, a large block of land with a family size house in the same town may be rare. This will help inform your decision of what kind of property will see capital growth. As a general rule, house and land close to capital cities will generate consistent capital gain as it will always be in high demand because there is a limited supply of that property type. |
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| Location | Researching the suburb of a property will also help inform your decision. A suburb with good schools, beaches, parks, cafes, restaurants and nightlife will be attractive to buyers and thus, will help drive up the price of your property in the years to come. |
| Features | The specific property itself will also influence the rise in its value. Features such as decks, large bedrooms and ensuite bathrooms are all influential selling points down the track. If your property is in an apartment complex, it may have access to pool or gym facilities. It’s also important to remember that features do not appeal to everyone. A young family may see a pool and large backyard as a selling point, whereas a young professional may see it as both financially and time consuming to maintain. |
| Potential | Potential for improvements or renovations will be influenced by it’s location and property type. Body corp and local and state restrictions can influence what alterations you can make to a property. For example, council regulations may prevent you from removing trees from a block of land, or extending a deck over the sidewalk. Whereas body corp may prevent you from renovating in a shared complex as it could impact other apartments in your building. Make sure you understand these regulations before purchasing as it will influence your ability to add value to the home. |
How to access capital growth
If you have invested in a property or owned your home for a period of time, and have been fortunate enough to see its value rise, there are a couple of ways to access this capital gain.
Selling your home
The most obvious and simple way to access capital gain is to sell your asset - your property. This will leave you with cash in hand that is more than you originally bought the property for.
Refinancing
Refinancing your home loan is another great way to access the equity.
Refinancing is the process of moving your home loan to a different lender or a different loan that better suits you.
When you refinance, you can also have your property re-valued. This will determine how much your property has increased in value since you took out your original home loan. When refinancing, you can then access the equity in your home.
Equity is how much your home is currently worth, minus how much you owe on your mortgage.
For example, for a $500,000 property and a mortgage of $320,000, you have $180,000 in total equity. To calculate your usable equity, you need to take 80% of the current value of your home minus your mortgage.
At loans.com.au , refinancing is as simple as applying online in under 2 minutes, chatting to a lending specialist then uploading your documents in the onTrack app. After this, you’ll sign your loan documentation, we’ll pay your existing lender then you’ll settle!
If the refinancing process is new to you, there’s always someone you can chat to via 1300 471 786, or on onTrack, or on LiveChat. Or, you can manage the entire application yourself through the onTrack app.
Using equity to buy another property
Equity is the value of your home, less any money owed on it. For example, if your house is valued at $600,000 and the current debt is $250,000, the equity in the home would be $350,000.
You can leverage the equity in your home to cover the deposit on a new property, using your existing property as collateral. It’s great to make the first step to enter the property market because once you’re in, using equity is generally much easier than saving for another deposit. Find out more about using equity to buy another home.
Tax time
If you are new to property investing, or are selling an investment property, it’s important to read up on how this capital gain is taxed.
When you sell your property for a profit, this profit is taxed as a capital gain. This means you will be taxed on the profit on your investment.
There are also tax deductions you can claim for investment properties.
Be sure to research these costs and deductions before beginning the investment journey.
About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
