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How To Calculate Your Singapore Property’s Return On Investment

People who are fascinated by investing in property regularly get the well-intentioned information to “do your sums” prior to making the jump. As property is often one of the most important purchases that you are going to make in your lifetime, and usually includes a giant mortgage that could lead to financial trouble if not managed properly, I absolutely agree that you must “do your sums”. But what does that suggest?

It is an ambiguous term that I think covers 3 necessary elements of researching a property purchase: 1. The appeal of the property relative to the encircling units, projects and areas 2. Your ability to service the mortgage including all of your other commitments and accounting for some bad eventualities (e.g. Your getting ill or losing your job) 3. The possible upside or downside of your investment based on both the potential yield and capital growth. In this post we may target the 3rd part “working out your Return On Investment (ROI)

ROI defined

ROI is simply the percentage gain of an investment after taking the attendant costs of that investment. A simple formula to work out this is as follows:

ROI = (Gain from investment – Value of investment) / Value of investment

Nevertheless as you've probably guessed, for property investments there are a substantial number of variables that go into working out each one of the above components, and the number will be deformed by the utilization of a loan.

Property investors often use a Broke (or “Cash on Cash”) system to calculate return. This method examines how much cash you put in, and then calculates your return based on what quantity of money you will get back after accounting for all costs.

An actual example

The calculation is explained best by the employment of an example, and I am going to use one from the book Property Riches by Ku Swee Yong. In it he is going thru the example of an actual property his firm Global Property Adviser Pte L.T.D helped a client to source.

The property was a 3-bedroom (1,152 square feet) mid-floor pool-facing unit at Blue Horizon (a condominium located at West Coast Crescent). The transacted cost of the property was $1.02 million or $885 per square foot. Taking into consideration the downpayment of 40% (we are presuming a 60% loan), stamp duty of $25,200 and the legal charges of $2,500 (this is usually soaked up by the bank but we are going to include it here to be conservative), the total cash outlay is $435,700.

This property had a monthly rental of $3,800 that was on a lease that would last until November 2012, giving a gross annual rental of $45,600.

Moving on to the expenses side, if we think a loan rate on the loan of 1% per annum, then the yearly interest charges on the 60% loan will be $6,120 (this doesn't include principal repayments). The owner will also have to cover the $3,120 annual price of the upkeep fee plus the sinking fund, and a property tax of $4,560 (10% of annual income “we have not taken out expenses to keep it simple). To keep things easy, we may think no extra costs for repairs and so on. The total expenses are therefore $13,800.

Subtracting this from the gross annual rental we get a net retained rental of $31,800. Note that part of this will have to go toward reducing the principal amount of the mortgage, which is a part of the monthly home loan payment that you make to the bank.

And so the return on invested money is the net kept rental of $31,800 divided by the total money outlay of $435,700, which gives a return of 7.3%. Not so shabby when put next to deposit rates that are close to 0%, but note the return has been reinforced 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 tenants move out and the property is empty.

To recap, you can calculate your return on invested cash utilizing 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 costs)

Note that the above calculation examines 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 may then add on top of this. Cheerful investing, but remember to do your sums.

Hope that you enjoyed reading this Singapore property market article!

Propwise.sg, a top Singapore property blog, is devoted to helping you understand the property market and make better choices. Visit us to read moreSingapore property market articles.

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