Can You Get Capital Growth and High Rental Yield — Or Is It One or the Other?
For years, property investors have been told they need to choose:
- Capital growth, or
- High rental yield
The belief has been that you can’t have both — that strong growth comes at the expense of cash flow, and strong cash flow means compromising on long-term capital gains.
But what if that premise is wrong?
It sure proved to be wrong these past few years where many postcodes around Australia gave both High Rental Yields plus Capital growth.
What if strong rental yield and strong capital growth aren’t an either/or decision — but something you can achieve deliberately, by targeting the right locations at the right point in the cycle?
Recent data suggests exactly that.
Most prudent Investment Strategy most investors follow?
Cash Flow Positive or Capital Growth Investment or both …
The Old Paradigm Is Breaking Down
Historically, investors were encouraged to buy “blue-chip” property close to CBD’s, accept negative cash flow, and wait patiently for equity to accumulate.
That approach can work — but there’s a problem many investors are now running into:
“Equity alone doesn’t help you buy your next property.“
Banks don’t just lend against asset values. They lend against serviceability. Your own balance sheet.
And serviceability is driven by cash flow (salary, income, rent).
If a portfolio is negatively geared, even neutral, borrowing capacity is affected – even if the investor is sitting on significant paper gains.
This is why we’re seeing a clear shift in investor behaviour.
Why Investors Are Actively Seeking Higher-Yield Investment Grade Property
More investors today are deliberately targeting properties with strong rental yields, often aiming for:
- Neutral cash flow, or
- Cash flow positive outcomes
Not because capital growth doesn’t matter — but because cash flow accelerates portfolio growth. At the same time, they still invest where their asset has every chance at gaining capital growth at the same time as higher rental yields. A significant investment trend is to invest in higher yielding types of property; being the likes of Co-Living Homes, Dual Key houses, Group Homes or Share houses, where yields typically average around 5.5% up to 10% plus.
Here’s why:
- Equity provides deposits
- Cash flow improves borrowing capacity
- Improved borrowing capacity allows investors to buy sooner
- Buying sooner means compounding capital growth across multiple assets
In simple terms:
Cash flow controls speed. Equity controls scale.
You need both. Equity to draw down as a deposit or security on your next investment + cash flow to secure what you need to borrow for your next investment.
NB : be mindful of yield spruiked on paper, versus probable market yield on the back of doing your numbers on 75% occupancy, especially where there are more bedrooms in the Co-Living / Group Home / Share house.
The Data: Growth and Yield Can Coexist
Independent research continues to reinforce this point.
In late 2023, a national report identified 50 locations selected primarily for above-average rental yields, with an important caveat:
- No speculative mining towns
- No short-term anomalies
- Only locations with solid fundamentals and growth prospects
When those same locations were reviewed roughly two years later, the results surprised even seasoned analysts:
- Many markets delivered 30% to almost 90% capital growth
- Several achieved 50%+ growth in under two years
- All while starting with rental yields around 6% or higher
That directly challenges the long-held belief that yield and growth are mutually exclusive.
The current market cycle most of Australia is experiencing is significant population growth, very low supply, growing demand for homes to own or rent and affordability. This combined with Infrastructure Investment will continue to underpin both rent and capital growth potential. Both expecting to continue to increase.
Strategy – Strengthening Cash Flow
Focusing solely on capital growth in an Australian investment property can slow an investor’s ability to build usable equity or deposit strength -particularly as markets settle and capital growth becomes less predictable.
While capital growth remains important, properties that generate positive cash flow while also building equity tend to put investors in a stronger overall financial position. Consistent income improves serviceability, allowing investors to return to the bank sooner and secure their next loan with greater confidence.
Over time, the combination of Cash Flow and Equity Growth – both compounding together – can significantly outperform a strategy that relies on neutral or negatively geared properties and the hope of future appreciation.
For investors looking to build a scalable portfolio to support lifestyle goals, retirement, or generational wealth, prioritising positive income with the added upside of capital growth provides a more resilient, proactive, and sustainable investment strategy.
Why Suburbs Further Out Are Often Stronger Performers than their more expensive cousins closer into CBD’s
One of the strongest themes to emerge was this:
The best percentage growth consistently came from more affordable markets.
This makes sense when you consider demand dynamics and market logic:
- Affordability drives buyer demand
- Buyers move to cheaper markets as prices rise elsewhere
- Rents rise faster where supply is tight and entry prices are lower
States like South Australia, Western Australia, and Queensland — including both capital city suburbs and major regional centres, featured heavily among the strongest performers. Regional Victoria is predicted to soon follow this trend too.
Many investors were buying houses around the $450,000–$600,000 mark, achieving yields of 6%+, and benefiting from sharp rental increases over the following years.
The Role of Depreciation (Often Overlooked)
Another important factor often ignored by investors is depreciation.
Are you aware that a brand new property offers substantially higher depreciation benefits compared to a second hand property, where tax law only allows for lower depreciation, even if that property was recently built? This is why a significant proportion of investors focus on new property over already established properties.
When applied correctly:
- A 5–6% gross yield can effectively increase by 0.5–1%
- After-tax cash flow improves meaningfully
- Serviceability improves faster than many investors expect
- Why pay the tax man, when you can pay yourself first utilising depreciation to the fullest potential?
It’s a financial gain that can have an outsised impact on borrowing power — particularly when combined with rising rents. Banks prefer cash flow positive investment portfolios over negative geared ones.
Units / Apartment are No Longer the “Ugly Cousin”
Another shift worth noting is the renewed performance of well-located units.
In many locations:
- Units delivered higher rental yields than houses
- Units recorded equal or stronger capital growth
- Rental growth for apartments exceeded houses in most capital cities
When budgets are tighter, units and apartments can offer a more strategic entry point into the market. Instead of forcing an ill-suited property into your budget, choosing a property type and location that genuinely aligns with your investment capacity can lead to better long-term outcomes.
The key takeaway?
If the location fundamentals are strong, the dwelling type matters way more than people think when investing within a certain budget or wanting to achieve a certain rental yield.
Investing in an apartment / unit in the right area can mean:
- Matching the ‘investment vehicle’ to your investment strategy and budget and purpose for your investment
- Higher rental yield
- Faster improvement in cash flow
- Comparable growth outcomes
- Potential ability to invest in your next investment that much sooner
What This Means for Building a Portfolio
This is where strategy matters.
An investor who focuses solely on capital growth may build equity; but risks hitting a serviceability wall.
An investor who deliberately blends:
- Strong fundamentals
- Above-average yield
- Growth momentum
- Cash flow optimisation
- Deliberately matching the property type and location to their budget
…can often move into their second and third properties much sooner.
That earlier acquisition mathematically compounds both:
- Capital growth, and
- Rental income
Over time, this can outperform a single, negatively geared asset — even if that asset grows well.
So, Is It One or the Other?
The evidence increasingly says no.
You don’t have to choose between growth and yield.
But you do need to be deliberate:
- Location selection matters
- Time in the market matters
- Cash flow modelling matters
- Borrowing capacity matters
And most importantly, your strategy must align with how banks actually lend, not how property theory is often discussed.
Final Thought
Some of the old rules of property investing no longer hold.
The idea that you must sacrifice rental yield to achieve strong capital growth is one of them.
In today’s market, the investors who understand both sides of the balance sheet — assets and income — are the ones best positioned to build scalable, resilient portfolios.
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