Capital growth, or capital appreciation, is the value by which the property goes up over time. The value of a property can also depreciate.
The percentage of the original purchase by which the property has increased will represent the return on the investment from a capital growth point of view.
To work out capital growth you will need to compare the price you paid for the property with a current market appraisal, which an estate agent will be able to help you with. This can be added to the return on the rental income for a total return.
If we take the same property from the example above and imagined it had increased from today’s price of £200,000 to a price in five years’ time of £225,000, the following calculation would be used to show the return in investment, which in this case is 12.5%:
Price five years from now (£225,000) – Purchase price (£200,000) = £25,000
Increase (£25,000) / Purchase price (£200,000) = 0.125
0.125 x 100 = 12.5%
In the long term, property prices tend to go up, but in the short to mid-term, they also go down, so predicting what the property’s price will be in the future to calculate capital growth is pure speculation, and you can only accurately calculate capital growth after the event.
When it comes to selling the rental property, you may need to pay capital gains tax on the profit.