Individuals that are curious about investing in property frequently get the well-meaning information to "do your sums" before making the jump. As property is frequently one of the largest purchases that you will make during your life, and often has a large mortgage that could lead to financial trouble if not managed properly, I completely agree that you should "do your sums". But what does that suggest?
It is an ambiguous term that I think covers three essential components of investigating a property purchase: 1. The attractiveness of the property relative to the encircling units, projects and areas 2. Your capability to service the mortgage including all of your other commitments and accounting for some bad eventualities (e.g. Your becoming ill or losing your job) 3. The possible upside or downside of your investment based primarily on both the potential yield and capital growth. In this article we intend to target the third part "working out your Return On Investment (ROI)
ROI outlined
ROI is just the percentage gain of an investment after subtracting the attendant costs of that investment. An easy formula to calculate this is as follows:
ROI = (Gain from investment - Price of investment) / Price of investment
Nevertheless as you may possibly have guessed, for property investments there are a substantial number of variables that go into figuring out each one of the above components, and the number also will be deformed by the employment of a loan.
Property investors typically use an Out of Pocket (or "Cash on Cash") method to calculate return. This technique investigates how much cash you put in, and then calculates your return based mostly on what quantity of money you'll get back after accounting for all expenses.
An actual example
The calculation is explained best by the utilization of an example, and I am going to use one from the book Real Estate Riches by Ku Swee Yong. In it he goes through the example of an actual property his firm International Property Adviser Pte Ltd helped a customer to source.
The property was a 3-bedroom (1,152 sq. feet) mid-floor pool-facing unit at Blue Horizon (a condominium found at West Coast Crescent). The transacted cost of the property was $1.02 million or $885 per square foot. Taking under consideration the downpayment of 40% (we presume a 60% loan), stamp duty of $25,200 and the legal charges of $2,500 (this is mostly soaked up by the bank but we will include it here to be conservative), the total cash outlay is $435,700.
This actual property had a monthly rental of $3,800 that was on a lease that would last till Nov 2012, giving a gross annual rental of $45,600.
Heading off to the costs side, if we assume a loan rate on the loan of 1% per annum, then the annual interest fees on the 60% loan will be $6,120 (this does not include principal payments). The owner will also have to cover the $3,120 yearly cost of the upkeep charge and the sinking fund, and a property tax of $4,560 (10% of annual revenue "we haven't taken out expenses to keep it simple). To keep things simple, we will think no extra costs for repairs etc. The total expenses are thus $13,800.
Subtracting this from the gross yearly rental we get a net kept rental of $31,800. Note that part of this will need to go towards reducing the principal amount of the mortgage, which is an element of the monthly mortgage payment that you make to the bank.
And therefore the return on invested cash is the net retained rental of $31,800 divided by the total cash outlay of $435,700, which gives a return of 7.3%. Not too tacky compared to deposit rates that are close to 0%, but note the return has been enhanced by leverage, and if interest rates rise this return will fall. Also it doesn't take into account any openings in the rental earnings when renters move out and the property is empty.
To sum up, you can figure out your return on invested money utilizing the following formula:
Net retained rental
(= Gross yearly rental - mortgage interest - maintenance fees - property tax - other expenses)
Divided By
Total cash outlay (= downpayment + stamp duty + legal fees)
Note the above calculation investigates only the yield of a property when owning it for rental, and any capital. Appreciation you get when you sell the property is additional, which you can then add on top of this. Happy investing, but don't forget to do your sums.
Hope that you enjoyed reading this Singapore property market article!
It is an ambiguous term that I think covers three essential components of investigating a property purchase: 1. The attractiveness of the property relative to the encircling units, projects and areas 2. Your capability to service the mortgage including all of your other commitments and accounting for some bad eventualities (e.g. Your becoming ill or losing your job) 3. The possible upside or downside of your investment based primarily on both the potential yield and capital growth. In this article we intend to target the third part "working out your Return On Investment (ROI)
ROI outlined
ROI is just the percentage gain of an investment after subtracting the attendant costs of that investment. An easy formula to calculate this is as follows:
ROI = (Gain from investment - Price of investment) / Price of investment
Nevertheless as you may possibly have guessed, for property investments there are a substantial number of variables that go into figuring out each one of the above components, and the number also will be deformed by the employment of a loan.
Property investors typically use an Out of Pocket (or "Cash on Cash") method to calculate return. This technique investigates how much cash you put in, and then calculates your return based mostly on what quantity of money you'll get back after accounting for all expenses.
An actual example
The calculation is explained best by the utilization of an example, and I am going to use one from the book Real Estate Riches by Ku Swee Yong. In it he goes through the example of an actual property his firm International Property Adviser Pte Ltd helped a customer to source.
The property was a 3-bedroom (1,152 sq. feet) mid-floor pool-facing unit at Blue Horizon (a condominium found at West Coast Crescent). The transacted cost of the property was $1.02 million or $885 per square foot. Taking under consideration the downpayment of 40% (we presume a 60% loan), stamp duty of $25,200 and the legal charges of $2,500 (this is mostly soaked up by the bank but we will include it here to be conservative), the total cash outlay is $435,700.
This actual property had a monthly rental of $3,800 that was on a lease that would last till Nov 2012, giving a gross annual rental of $45,600.
Heading off to the costs side, if we assume a loan rate on the loan of 1% per annum, then the annual interest fees on the 60% loan will be $6,120 (this does not include principal payments). The owner will also have to cover the $3,120 yearly cost of the upkeep charge and the sinking fund, and a property tax of $4,560 (10% of annual revenue "we haven't taken out expenses to keep it simple). To keep things simple, we will think no extra costs for repairs etc. The total expenses are thus $13,800.
Subtracting this from the gross yearly rental we get a net kept rental of $31,800. Note that part of this will need to go towards reducing the principal amount of the mortgage, which is an element of the monthly mortgage payment that you make to the bank.
And therefore the return on invested cash is the net retained rental of $31,800 divided by the total cash outlay of $435,700, which gives a return of 7.3%. Not too tacky compared to deposit rates that are close to 0%, but note the return has been enhanced by leverage, and if interest rates rise this return will fall. Also it doesn't take into account any openings in the rental earnings when renters move out and the property is empty.
To sum up, you can figure out your return on invested money utilizing the following formula:
Net retained rental
(= Gross yearly rental - mortgage interest - maintenance fees - property tax - other expenses)
Divided By
Total cash outlay (= downpayment + stamp duty + legal fees)
Note the above calculation investigates only the yield of a property when owning it for rental, and any capital. Appreciation you get when you sell the property is additional, which you can then add on top of this. Happy investing, but don't forget to do your sums.
Hope that you enjoyed reading this Singapore property market article!
About the Author:
Propwise.sg, a top Singapore property blog, is dedicated to helping you understand the property market and make better choices. Visit us to read moreSingapore property market articles.
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