Working day and night to save money, but is saving alone enough to build real wealth? Have you considered investing in real estate as a way to grow your financial future? In India, there are two primary ways to earn from property: rental yield and capital appreciation. Each comes with its own set of advantages and challenges.
In this blog, Brick & Bolt will help you understand the rental yield vs capital appreciation, so you can decide which one aligns best with your financial goals.
What is Rental Yield?
You can understand rental yield as the return on the real estate investment after renting it out. You can calculate this by comparing the rent to the property’s purchase price or market value. In simple terms, rental yield is your annual rent as a percentage of the property value.
Rental yield helps home buyers decide whether buying a house for rental purposes is a good idea. It also helps them choose the right city or location by comparing rental incomes and setting the right rent for their property.
What are the Types of Rental Yield?
There are mainly two types of rental yields available: gross rental yield and net rental yield
1. Gross Rental Yield
This is the rental yield you calculate if you just consider the total rent, without adding any maintenance costs or expenses on the property during the year.
You can calculate gross rental yield using the following formula:
Gross rental yield = ((Annual rent)/(Property value)) x 100
2. Net rental yield
The net rental yield accounts for maintenance costs and other expenses spent on the property. Here, you subtract maintenance expenses, property taxes, and home insurance premiums. The net rental yield gives you a realistic picture of the return on investment of your property.
You can calculate net rental yield using the following formula:
Net rental yield = ((Annual rent – Annual expenses) / (Property value)) x100
How can you Calculate Rental Yield?
Consider the following example:
Your house property value is 2.5 crore, and get a monthly rent of Rs.65,000.
The gross rental yield will be calculated as
= ((Annual rent)/(Property value)) x 100
=((65000 x 12) / 2,50,00,000) x 100
=(780,000/25,000,000) x 100
=3.12
If you retain the above assumptions but deduct maintenance charges of 50,000 rupees and a home insurance premium of 5000 rupees, calculate the net rental yield as follows:
Net rental yield = ((Annual rent – Annual expenses) / (Property value)) x100
= ((65000 x 12) – 55000) / 2,50,00,000) x 100
=(( 7,80,000 – 55000) / 2,50,00,000) x 100
=(7,25,000 / 2,50,00,000) x 100
=2.9
Advantages of Focusing on Rental Yield
- Speedy and stable income: Properties with rental yield present a predictable, steady flow of income. This helps to reinvest or make other uses of the income.
- Minimal risk: In various city areas, the rental market will be less volatile than property prices and can be subject to market fluxes.
- Best for small investors: If you have a minimal budget and want to invest in a small ratio or are fresher in investment, rental properties with higher yields can help you build a portfolio quickly.
If you’re considering rental properties as an investment option, you might want to explore our comprehensive guide to different types of rental properties in India to find which option best suits your investment goals.
Drawbacks of High Rental Yield Investments
- When considering rental yield investments, higher yields are often associated with areas that have lower growth potential without basic amenities.
- These rental properties usually have lower purchase costs than rental income. Areas with higher rental yields usually have lower property value growth. So, you may earn more rent, but the property’s long-term value may not increase as much.
- High rental yield properties often demand more maintenance and repairs. They usually face higher tenant turnover, leading to extra costs and vacancy losses. Managing these issues takes more time and effort, which can reduce your overall profit.
For rented properties, creating a harmonious living space is essential for attracting and retaining quality tenants. Learn about effective Vastu remedies for rented homes that can enhance positive energy and potentially increase your rental yield.
What is Capital Appreciation?
Capital appreciation or capital growth, indicates the growth in the property value over time beyond its original purchase price. Capital appreciation depends on the location, economic growth, low interest rates, demand asset outperformance, and external developments.
Commonly, investors consider capital appreciation as part of their overall return on investment (ROI), as it enhances their assets’ value without selling or trading them.
You can calculate capital appreciation as the difference between the current market value and the asset’s original purchase price.
Capital Appreciation = Current Market Value of Property – Property’s Original Purchase Price
For example, If you buy a property in India for ₹60 lakhs and its market value increases to ₹80 lakhs over a few years, the capital appreciation would be ₹20 lakhs or 33%.
One popular strategy for maximising capital appreciation is house flipping. If you’re interested in quick returns through property value enhancement, check out our complete house flipping guide for India for insights on this lucrative investment approach.
Advantages of Focusing on Capital Appreciation
- Higher returns: If your invested property is in faster-growing areas, it can increase the property value over time. This enables considerable profits by the time of sale.
- Best long-term wealth creation: Capital appreciation is a better investment if you are considering making an investment for the long run. It won’t require heavy day-to-day management.
- Tax advantages: Sometimes, capital gains tax rates may be more profitable than rental income taxes, based on the country and holding period.
Cons of Capital Appreciation-Focused Investments
- Capital appreciation investments may not give regular income and rely on long-term property value growth. In most of these cases, you can’t get immediate cash flow unless the property reliably generates rental income.
- Capital appreciation carries higher market risks and can lead to losses if sold during downturns. A drop in market conditions can reduce or eradicate gains, leading to potential losses, mainly for investors who must sell during unfavourable periods.
- These properties are harder to sell quickly, limiting access to cash when needed. Properties focused on appreciation often require longer holding periods, and selling these assets may take considerable time.
Rental Yield vs. Capital Appreciation: Key Differences
| Factor | Rental Yield | Capital Appreciation |
| Income Source | Income generated from monthly rent payments | Profit realized from the sale of property at a higher price |
| Risk Level | Generally lower risk due to a steady income stream | Higher risk as returns depend on market conditions and timing |
| Liquidity | Moderate liquidity influenced by lease terms | Low liquidity; selling property can take a significant time |
| Best For | Investors seeking regular passive income | Investors aiming for long-term wealth building through asset growth |
Which Strategy is Better: Rental Yield or Capital Appreciation?
You need to choose between rental yield and capital appreciation based on your financial status, how much risk you can handle, and how long you plan to invest. In India, both options have their own benefits and drawbacks.
When to Choose Rental Yield?
- In India, residential rental yields typically range from 2% to 4.5%, with cities like Bengaluru, Mumbai, and Gurugram offering the highest returns.
- This type of investment works well to generate steady income. For example, Retirees seek a stable side income.
- If you are an investor preferring minimal-risk investments and want to minimize exposure to market volatility, this option works well for you.
- Rental homes in busy and popular areas like Sarjapur Road in Bengaluru or Chembur in Mumbai usually stay occupied and offer rental income on time. This makes them a good choice for people who want regular income from rent.
When to Choose Capital Appreciation?
- With this option, your property will become more valuable over time. In India, fast-growing cities like Bengaluru, Hyderabad, and Mumbai have seen property prices go up a lot every year—especially in areas with new roads, buildings, and better facilities.
- Capital appreciation is especially appealing in developing cities or fast-growing neighbourhoods, where property prices are expected to rise sharply due to increasing demand, improved connectivity, and strong economic development.
Hybrid Approach: The Best of Both Investment
When you’re not sure about where you need to make the investment, you can try the third option- hybrid strategy.
It gives the benefits of both investment options. This way, you can generate consistent income and long-term property value growth.
In hybrid strategies, you can try to
1. Focus on Balanced Markets
This involves identifying markets that strike a balance between offering steady rental yields and the potential for long-term growth in property values.
2. Investment in Both Types of Properties
You can allocate part of your investments to high-yield rental properties in cities with strong rental markets while also dedicating funds to properties in high-growth areas with good potential for appreciation.
3. Geo-Diversify Your Portfolio
Make your investments across different regions or cities to minimise location-specific risks and take advantage of various market cycles. When considering investment properties, the furnishing status significantly impact both rental yield and capital appreciation. To understand the financial implications, explore our article on fully furnished vs. semi-furnished houses to make an informed decision that aligns with your investment strategy.
Benefits of a Hybrid Approach:
- Lower Risk: In the hybrid approach, you are not depending on just one type of return. Balancing rental yield and capital appreciation minimises the risk of focusing only on one return type (as you spread out your risk).
- Flexibility: This approach allows you to generate immediate cash flow while also positioning yourself for long-term gains.
- Scalability: As your portfolio grows, you can fine-tune your balance between the two strategies based on your evolving goals.
When it comes to property investment, there is no one right answer. It all depends on your personal goal—whether you want regular rental income or are looking for value growth in the long term. In India, many people buy property either to earn a second income or as a future asset. Think carefully about your needs, future plans, and financial situation before investing. Also, try to understand what kind of returns you can expect from both rental and resale value. Once you know your purpose clearly, you can choose the right property that fits your goal and gives good returns.
Hemali Patel