UNDERSTANDING THE DIFFERENT TYPES OF RETURNS ON PROPERTY
When it comes to building wealth, one of the most important decisions you’ll make is which asset class to invest in. Should you buy property? Invest in stocks? Consider bonds? Or take a chance on cryptocurrency?
Watch our YouTube video, Property Investment Returns versus Shares Returns?
Each asset class has its pros and cons—but today, let’s focus on how the returns of property investment compare to other asset classes, and how to calculate those returns effectively. Whether you’re a new investor or growing your portfolio, this is for you.
1. Understanding the Different Types of Returns on Property
When you invest in property, you earn money in two main ways:
-Rental Income – the monthly cash flow you receive from tenants.
-Capital Growth – the increase in the property’s market value over time.
This dual-income stream is what makes property so powerful. And the best part? You can calculate each of these returns quite easily to assess performance.
2. How to Calculate Rental Yield
Rental yield gives you a percentage return on your investment based on rental income. It’s one of the simplest ways to evaluate the income performance of a property.
Formula:
Rental Yield = (Annual Rental Income / Property Purchase Price) × 100
Example:
Property Purchase Price = R1,000,000
Annual Rental Income = R100,000
Rental Yield = (100,000 / 1,000,000) × 100 = 10%
A 12% rental yield is considered excellent in most markets. Even a 10–12% yield can be very strong depending on the location and other factors.
3. How to Calculate Capital Growth
Capital growth is the increase in your property’s value over time. It shows how your asset is appreciating and helps build long-term wealth.
Formula:
Capital Growth Rate = ((New Property Value – Original Purchase Price) / Original Purchase Price) × 100
Example:
Original Purchase Price = R1,000,000
New Property Value (after 5 years) = R1,500,000
Capital Growth Rate = ((1,500,000 – 1,000,000) / 1,000,000) × 100 = 50%
To calculate the annual average capital growth rate, just divide the total capital growth rate by the number of years:
Annual Capital Growth Rate = 50% / 5 = 10% per annum
4. Calculating Total ROI (Return on Investment)
Your Total ROI includes both rental income and capital growth over a period. It’s the best way to evaluate your property’s overall performance.
Formula:
Total ROI = ((Capital Growth + Total Rental Income) / Property Purchase Price) × 100
Example:
Capital Growth = R500,000
Total Rental Income over 5 years = R500,000
Property Purchase Price = R1,000,000
Total ROI = ((500,000 + 500,000) / 1,000,000) × 100 = 100%
So, over 5 years, your total return is 100%—you’ve doubled your investment.
5. Using Leverage: Geared Internal Rate of Return (IRR)
One of the most powerful features of property investing is leverage. By using the bank’s money (via a mortgage or bond), you can control a large asset with a relatively small upfront investment. This significantly boosts your return on the amount you personally invest.
Let’s say:
Property Value = R1,000,000
Your Capital Investment = R200,000 (20% deposit)
Over 5 years, Capital Growth = R500,000
Total Rental Income = R500,000
That’s a return of R1,000,000 on R200,000 invested:
Return = (1,000,000 / 200,000) × 100 = 500%
Now, to understand the true annual return, especially when there are multiple cash flows over time, you use the Internal Rate of Return (IRR). This calculation factors in:
-Your upfront capital
-Your bond repayments
-Rental income each year
-Final sale price or market value
IRR is best calculated using Excel or a financial calculator using the =IRR() function.
Sophisticated investors often aim for geared IRRs of 15–25% annually on well-structured deals.
Watch our YouTube video, Properties That Can Generate Positive Cash Flow From Day One.
6. Comparing Property to Other Asset Classes
Let’s now compare property to some of the most common investment options:
Stocks:
Typical Returns: 7–10% per year (average over time)
Pros: High liquidity, diversification
Cons: Volatility, emotional investing, timing the market
Bonds:
Typical Returns: 3–6% per year
Pros: Low risk, predictable income
Cons: Lower returns, inflation risk
Cryptocurrency:
Typical Returns: Wildly variable (some years 100%+, others -80%)
Pros: Huge upside potential
Cons: High volatility, speculative, regulatory uncertainty
Property:
Typical Combined Return: 10–20%+ per annum (rental + growth, excluding leverage)
Pros: Tangible asset, cash flow, appreciation, leverage, tax benefits
Cons: Illiquidity, maintenance, vacancies, management effort
7. Why Property Can Be So Powerful
Beyond the numbers, here’s why property investing remains a favourite among wealth builders:
-Leverage – Banks finance 80–90% of the deal, but you get 100% of the growth.
-Stability – Property markets generally move slower and are less volatile than stocks or crypto.
-Control – You can increase your returns through renovations, better management, and negotiation.
-Tax Efficiency – Interest deductions, depreciation, and smart structuring can significantly reduce your tax bill.
-Cash Flow – Monthly rental income can cover your bond and expenses—and often leave you with profit.
8. Risks to Consider
Every investment comes with risks, and property is no exception. Some key ones to note:
-Vacancy risk – If you can’t find tenants, you still owe the bond.
-Maintenance and repairs – Properties need upkeep.
-Interest rate increases – Can eat into your cash flow.
-Market cycles – Property values don’t always go up.
However, these can be mitigated with due diligence, professional management, and long-term strategy.
Conclusion: Is Property a Better Investment?
There’s no universal answer. But when you look at the real, measurable returns from rental income, capital growth, and the ability to leverage other people’s money, property investment can outperform many traditional asset classes—especially over the long term.
It’s about more than numbers. It’s about control, strategy, and building generational wealth.
Read our article, Don’t Mind Me… I’m Just Over Here Building My Empire.