PROPERTY INVESTMENTS 101
Successfully investing in properties is not just about the potential capital appreciation that a property can bring. The essence of successful investments is in finding a stable income stream that safeguards your downside risks and helps you make a consistent profit even when market cycles are not in your favour.
Do You Profit or Lose if you bought a Million Dollar Investment Property and sold 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.
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Have an answer in mind? Good! Let’s examine whether your understanding of property investment is complete and correct.
First, let’s establish some key factors.
We are talking about a RENTABLE property selected according to the Fundamentals of Good Property Selection (i.e. Right Entry Price, Growth Hotspots, Near Amenities, Transportation Modes, Tenant Catchment areas and Decent Rental Returns)
It IS a rented out property. The following analysis does not apply to a property you live in.It 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,
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 asking 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 certainly 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? Let me know your thoughts in the comments below and remember to share this article with your friends if you have benefited from learning this!