Capital Gains verses Rent Income: Which way for the investors?

Capital gains or rent income? Commercial real estate rewards investors through periodic rent income and capital gains over time. Rent is realised every time your tenant writes to you a cheque. Capital gains on the other hand is realised when you dispose of your property locking in the gradual increment in the value of your property. What you must know is that rent is an object of the rental market and it is the tenants who decide how much to pay you. Capital gains are an object of the property market and it is buyers who decide by how much your property appreciates. So if you are a commercial real estate investor, which market are you operating in? Is it the rental market or the property market?

If you are in it for rent, you must choose a property that tenants will like. The property should be in a secure location, close to work places, educational and social amenities. You will need to operate your real estate like a business. Maximise your income and minimise your costs. Apartments, office blocks and shopping centres are examples of good rental properties.

However, if you are in it for capital gains, you are definitely in it for long term. Real estate tends to appreciate in value over time. Market timing should be at the centre of all your investment decisions. Real estate experiences lows and highs. You ought to buy real estate when the market is down and hold onto it as prices steadily rise. Any slowness in the market should be a signal to you to start preparing to dispose of the property. However, it will be more rewarding if you held onto the property for a much longer time through the various market cycles. If you are not sure what stage the cycle is, just make sure that at all times you buy below the market value. Your valuer should be able to advise you on this. Emerging markets are good areas to shop for potential capital gain properties. Land in urban centres are also good example of properties in this category.

I do not advise you serve two masters for the simple reason that you cannot. The two markets are independent. In a robust property market, buying is the thing. Rents lag behind and returns diminish. In a depressed property market, renting is the thing and therefore rents tend to give higher returns. If a property fetching 40,000/- per month increases in value from 10,000,000/- to 12,000,000/-, return will dip from 5% to 4%. On the other hand if the property value stagnates at 10,000,000/- and rent increases from 40,000/- to 50,000/-, return will increase from 5% to 6%.

So, my big question to you is: which type of investor are you? Are you in it for rent income or are you in it for capital gains?

Stephen Omengo
Registered Valuer, Registered Estate Agent & Registered EIA Expert
Chairman, Valuation & Estate Management Surveyors Chapter, ISK &
Real Estate Consultant at Tysons Limited, Nairobi-Kenya
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  1. Thanks for the information which is useful for all…

  2. Good Info!

  3. Hi. I just want to say you have a very nice blog, with helpful links and information as well. Thanks for sharing.

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