Updated: Sep 5, 2020
PROPERTY INVESTMENTS 101
Successfully investing in properties is not just about the potential capital appreciation that a property can bring.
One of the main factors that helps lower your investment risk is to ensure that a stable income stream exists that accumulates profit even when market cycles are not in your favour.
The fact is markets work in cycles and you can never guess whether your exit plans would coincide with a bullish or bearish market.
A simple question that i like to ask would-be investors is:
Do You Gain or Lose If You Buy A Property And Sell It At The Same Price in 5 Years Time?
Before we go any further, spend a few moments to think about the answer to the above.
Have an answer in mind?
Let’s examine whether your understanding of this simple property investment theory is correct.
First, let’s establish some key factors.
We are talking about a RENTABLE property selected according to the Signals of A Good Investment Property (i.e. Right Entry Price, Growth Hotspots, Near Amenities, Transportation Modes, Tenant Catchment areas and Possessing Good Rental Returns)
It is a rented out property.
The following analysis does not apply to a property you live in.
For this example, the unit is rented out for the duration of 5 years at fair market rents. (4% rental yield. (Yes, these aren’t unicorns! Find them at https://www.squarefoot.com.sg/market-watch/rental-yield)
Now, assuming that a buyer puts down 20% for this property and takes an 80% bank loan (Valid at this point of writing),
Purchase Price: $1,000,000 Cash/CPF downpayment: $200,000 Bank Loan: $800,000 Buyer Stamp Duty: $24,600 Legal Fees: $3,000
Total Outlay: $227,600 in Cash and/or CPF.
Based on 4% rental yield, he would have collected $40,000 per annum in rent. (Purchase Price x 4% = Annual Rent Collected)
Rental collected over the 5 years will be used to pay for these expenses:
Average Loan Interest: $997/month
Maintenance fees: $250/month
Property Repair costs: $1,000/annum (A more than reasonable figure)
Brokerage Fees: $8915.80 including GST (5 years of brokerage fees)
Total Rent Collected Over 5 years: $40,000 x 5 = $200,000
Less Interest Expenses: $59,820 (Use a mortgage cal. to derive interest over 60 months)
Less Maintenance Fees: $15,000 ($250/mth x 60 months)
Less Annual Property Repairs: $5,000 ($1,000/year x 5 years)
Less Brokerage Fees: $8915.80 (1/2 month fees per year + GST)
Nett Equity/Passive Income = $111,264.
At this point, if the owner sells off the property at his purchase price of $1,000,000, he would have an outstanding loan of $689,955 and incur the following costs:
Selling Price: $1,000,000
Less Outstanding Loan: $689,955
Less Brokerage Fees (2%+GST): $21,400
Less Legal Fees: $3,000
Nett Cash/CPF Proceeds: $285,645 which means he would have made a Return on Equity of 25.5% in 5 years time even if his property had not increased in value by a single dollar.
(Remember his starting Cash/CPF used was $227,600)
Not too bad eh?
You may be wondering why this happens.
Well, simply put, these are 2 factors that savvy property investors understand and use to their fullest!
OPM (Other People’s Money) – Basically a bank loan helps you own a property sooner with minimal cost of funds.
Yes, loans are not necessarily a bad thing!
Positive Carry – Where the returns offset the cost of funds sufficiently to produce a positive yield.
So.. Did you get this right? I hope so!
The Right Real Estate Education is the first step to increasing your wealth building abilities!
Rarely are there investment instruments for the masses with such sturdy safety nets, and generous leverage that enables you to accelerate towards your retirement planning goals.
Do you agree or disagree?
Like, comment below and share this with your friends who would benefit from understanding this knowledge!
Stuart Chng, Senior Associate Executive Director of OrangeTee & Tie, is a renowned leader and personality in the real estate industry.
He adores music and can play a few instruments decently without upsetting his neighbours. When not doing so, he enjoys pillow fighting with his son and coming up with silly puns which barely amuses his wife.
Professionally, he is a licensed real estate agent, investor, team leader, speaker and columnist for several property newsletters and blogs and is often quoted in media interviews on 938FM, Channel 8, PropertyReport, PropertyGuru and other publications.
Throughout his career, he has helped many clients grow their wealth through selecting great property investments and managing their portfolios actively. Read his clients' reviews here.