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Real estate investment in the United States mainly refers to commercial real estate. Although rental apartments are residential, they are classified as commercial real estate. In general, commercial real estate investment in the United States belongs to the category of non-public market alternative investment. It is not traded in the public market and is a medium- and long-term investment. If your product is short-term, the investment cost will be very high and the volatility will be large.
The commercial real estate and stock market in the United States are relatively disconnected, and the impact of the U.S. stock market on us is very small, basically no impact. Many families will allocate 20% or even 30% in the commercial real estate sector, a big reason is that it can hedge with the public market. So, when investing in real estate in the United States, which one is more profitable, "rental income" or "asset appreciation"?
While it is possible to obtain a property that has both strong capital growth and high rental yields, this is rare and investors will usually need to choose between the two.
What is Rental Income?
Rental income is ROI (Return on Investment or Rental Yield), which is also known as "renting to support a house". It refers to the ratio of rent earned from renting a house to the price of the house. Rent can be used to measure the investment income of a property and can truly reflect the real demand of the market. Rental income is important because it can help pay off the loan, which is the main purpose of buying an investment property in the first place.
The advantages of renting are lower investment risk and the ability to generate cash flow, which helps protect investors from interest rate shocks while reducing the potential need for ongoing cash investment.
Of course, when the property is sold, the capital gain will most likely be lower than a property with strong capital growth (a house), especially when the impact of the annual compound growth rate of the house is taken into account, which is its most obvious disadvantage.
What is Capital Growth?
Capital appreciation is the so-called Capital Gain or Capital Growth, which is the value gained or lost by deducting the purchase price from the current asset value of the property.
That is, when the selling price of a marketable asset (such as stocks or real estate) is higher than the original purchase cost, a profit is generated, which is realized capital gain.
When considering buying a property for capital appreciation, achieving substantial capital growth is every investor's goal. In the long term, strong annual capital growth is defined as inflation plus 4% - 5%, so the capital appreciation rate considered should be between 6.5 - 7.5%. The most capital appreciation potential is generally for detached houses.
The advantage of capital appreciation is that it has the potential to generate long-term capital income. The disadvantage is that you will be exposed to interest rate risk during the period of holding such investment properties. If the mortgage interest rate increases, you will most likely have to pay more for the monthly mortgage payments.
Generally speaking, if you are buying a home for the first time or want to generate cash flow through the house every month, "rental" is more suitable for you. If you invest in multiple houses, choose a few houses with high rents and use the extra cash to pay for the expenses of other houses with high capital appreciation; if you have sufficient funds, of course, "capital appreciation" is a better choice.
