The best way to Calculate Your Singapore Property’s Return On Investment

By Andy Chen

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 defined

ROI is simply the p.c. gain of an investment after taking the associated costs of that investment. A simple formula to work out 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 stockholders often use an In the Red (or “Cash on Cash”) system to work out return. This method looks at what quantity of money you put in, and then works out your return primarily based on how much cash you will get back after accounting for all costs.

A case study example

The calculation is best illustrated by the use of an example, and I will use one from the book Property Wealth by Ku Swee Yong. In it he is going thru the example of an honest to goodness property his firm World Property Advisor Pte Limited helped a client 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 particular property had a once per month rental of $3,800 that was on a lease that would last till Nov 2012, giving a gross annual rental of $45,600.

Moving on to the expenses side, if we think an interest rate on the loan of 1% per annum, then the once a year interest costs on the 60% loan will be $6,120 (this doesn't include principal repayments). The owner will also need to cover the $3,120 annual value of the maintenance fee plus the sinking fund, and a property tax of $4,560 (10% of yearly money “we have not taken out costs to make it simple). To keep things easy, we intend to presume no additional costs for repairs for example. The total costs are so $13,800.

Subtracting this from the gross yearly rental we get a net kept rental of $31,800. Note that part of this will have to go towards reducing the principal amount of the mortgage, which is part 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 paraphrase, you can work out your return on invested money using the following formula:

Net retained rental

(= Gross annual 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!

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.

Article kindly provided by UberArticles.com

Topics: Investments | Comments Off

Tags: Investments, Property Guru, Singapore Property, Singapore property market, Singapore property news, singapore reits

Reprint Rights

Comments are closed.