How do you calculate the ROI on your investment property? Any wise ones out there?
Gerald Tay published an article to Yahoo on property ROI.
https://sg.news.yahoo.com/property-valua...51396.html
I did the calculations. The following is my calculation of the total return of your investment if you sell the property at the 5 year mark (5 years after date of purchase).
**Assuming the following:
- Additional stamp duty does not apply. You are s'porean buying 1st property.
- No seller's stamp duty for property held for more than 4 years.
- Total amount spent on renovation in the 5 years is capped at $10,000.
Purchase price: $1,300,000
Down payment : $260,000
Annual Mortgage: $27,700
Annual Interest: $15,600
Buyer Stamp Duty (1.3 mil x 3%) - $5400 = $33,600
Monthly gross rent: $4,000
Rental agent fees (1year lease): $2,000
Renovations: $10,000
Annual property expenses: $8,660
Total return if property is sold after 5 years =
(total income) minus [total outgoing = (annual outgoing x 5) + (one-off payments)]
/divide by Cash Down
240k - 269,800 / 260k = negative 11%
(his article gave 2.7% net rental yield, which seems to be on a totally different formula)
Capital gains leh?
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The interests consist of 2 key components. The interests of borrowing and the payment of your property. Your actual cost should be interests of borrowing only since property is yours.
Why don't Investwinner pose this question to Gerald Tay directly and then share with us his calculation here?
(01-09-2014, 02:00 PM)corydorus Wrote: [ -> ]The interests consist of 2 key components. The interests of borrowing and the payment of your property. Your actual cost should be interests of borrowing only since property is yours.
Yes, it should be the way. The separation of the two can be easily done with bank annual statement. OCBC has it, and I assume other banks have the same.
Just some quick numbers to assess if this property is worth buying, assuming your annual mortgage means the annual average paydown of the loan itself.
Total annual rental (assuming no downtime!) = $48,000
Total annual money out of pocket = $27,700 + $15,600 + $8,660 + $2,000 = $53,960
My annual rental is not able to cover the total money out of pocket. This means that I will need to fork out $6,000 annually as long as I holding the property. Not really a worthwhile investment.
Only when selling off the property, then I can see money back to me, assuming that the selling price is to my favor.
Will anyone else buy this property?
Ofcourse I will buy. Assume 30 years loan. Net outflow = $180K. But i get a $1.3M condo for it ! This is a steal. 19% annualized returns if you paid 180k in full today. Since we are not, we are talking of even higher returns. And this is ignoring appreciation over 30 years because labor and building cost will go up.
Noob property investors forget that rental is cyclical too.
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We are back to cashflows vs capital gains argument. There is no simple answer but generally value investors go for cashflows. But Australia has been on negative rental yield for a long time due to negative yield curve before GFC. So we do have to take circumstances into perspective.
We also have to consider Freehold vs 99 years prepaid expense. The real reason why property is attractive is actually similar to FX trading. It is the leverage on large quantum. By itself the capital returns are not spectacular. If we go back to Korea pre-90s where there is no mortgage, people don't speculate on properties. They save for decade to buy house.
If CPF special account is unlimited contribution and one can lock in 30 years funding cost of 2%, it would be interesting as well
if one is really saving for retirement
Negative rental yield is not happening just in Australia. A friend had told me before that in the early 2000, property rental was very bad in Sg too. The rental rate was low, and the interest rate was high. Owners just wanted to rent out their place to minimise losses.
To me, it is not just about cashflow or capital gain. It's about future affordability. If every property I buy need me to fork out $6k every year, I will be limited and there will not be limited growth. I will always need to find funds to feed these properties. Only if the property is returning me positive or even just break even, then I can continue to expand and acquired more properties, be it for cashflow or capital gain.
Cory,
Regarding your calculation, you had missed out the initial downpayment as well as the stamp duty. If you add those in, the return over 30yrs is just around 3.8%pa if you do a full paying of $260k + $180k + $33k, assuming the price stay flat, of course.