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

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's an unclear term that I believe covers 3 necessary parts of researching a property purchase: 1. The appeal of the property relative to the surrounding units, projects and areas 2. Your ability to service the mortgage including all your other commitments and accounting for some bad scenarios (e.g. Your falling sick or losing your job) 3. The potential upside or drawback of your investment based on both the potential yield and capital appreciation. In this post we may focus on the 3rd part “calculating your Return On Investment (ROI)

ROI defined

ROI is just the % gain of an investment after deducting the related costs of that investment. A straightforward formula to calculate this is as follows:

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

But as you have probably guessed, for property ventures there are a large number of variables that go into working out each of the above elements, and the number will be twisted by the utilization of a loan.

Property financiers sometimes use a Broke (or “Cash on Cash”) methodology to calculate return. This strategy examines how much money you put in, and then figures out your return based on how much money you'll get back after accounting for all expenses.

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 into account the downpayment of 40% (we are presuming a 60% loan), stamp duty of $25,200 and the legal fees 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 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 presume a rate of interest 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 need to cover the $3,120 annual price of the maintenance fee plus the sinking fund, and a property tax of $4,560 (10% of yearly income “we've not taken out costs to keep it simplistic). To keep things straightforward, we may assume no further costs for repairs and so on. The total costs are therefore $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 thus 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 compared to deposit rates that are close to 0%, but note that the return has been augmented by leverage, and if rates rise this return will fall. Also it does not take into consideration any gaps in the rental income when tenants move out and the property is empty.

To recap, you can calculate your return on invested cash utilising the following formula:

Net retained rental

(= Gross annual rental – mortgage interest – maintenance fees – property tax – other expenses)

Divided By

Total money outlay (= downpayment + stamp duty + legal charges)

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 you enjoyed reading this Singapore property market article!

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