Capital Appreciation or Income?
Tuesday, October 24th, 2006
While buying a first home, many buyers confront this dilemna - do you buy a property that has a good return, or a property that is likely to appreciate more?
It isn’t an easy decision, and there is no single right answer. That said, for a first time buyer it makes more sense to concentrate on return rather than appreciation potential, for the following reasons :
- Return is easier to quantify - it’s based on rental income, expenses including mortgage payments, and price. Capital appreciation is more subjective and harder to measure upfront. That makes it more risky.
- Properties generating returns are typically in more-developed areas, where land use and zoning patterns have already been established. That makes it less likely to have fluctuations in value. In contrast, maximum capital appreciation comes when land gets re-zoned; you make a killing if and when it does, but you could lose substantially if the re-zoning is adverse.
- Mortgage financing for a first time buyer is a lot easier and cheaper when it’s income property.
- Regular cashflow helps make the payments - a big plus when your income is low, which typically is the case for a first time buyer.
- Last but not least - good income generating property sells faster even when the market is down, helping you keep your options open, if you ever need to liquidate it.
That doesn’t mean you close your eyes to capital appreciation. It’s important, too. Just make it your second factor, and keep income potential up top.
Leave a Reply
You must be logged in to post a comment.