As a landlord, getting torn between multiple properties is very common particularly for an upcoming/new landlord. Many people pay too much attention to superficial that they forget to calculate the rental yield—which is actually the reason they bought the property in the first place. Calculating your rental return dramatically determines whether or not your potential purchase is financially viable. During previews and viewings, first-timers are usually told the gross rental yield they would get which does not factor in all the other supplementary payments that buying and renting out apartments entails.
If you fail to calculate, you may find yourself at risk of making an investment that’s not lucrative like you had initially thought. What really matters to buyers is the net rental yield which is the exact return on investment—a realistic figure of the property’s financially prospect. However, calculating the net rental yield is not a 2-1 affair, though there are simple, quick, and reliable methods available to help work out the potential return. Veteran investors have their own sophisticated approach when it comes to computing the rental yield for their projects. To help you crunch the correct numbers for your prospect property, check out our simple method.
Before working out the rental yield, know the potential income first.
Let’s say you’re looking to buy a 2-bedroom condo worth one million dollars. The first thing to do is to check the rental rates for the nearest 2-bedroom properties which could be roughly $3,000 a month. Now work out the annual gross rental income without deducting any expenses so that if you’re expecting the total monthly rental income of $3,000, your annual gross rental income should be exactly $36,000.
It’s essential to note that this figure can never be exact as calculated because of the miscellaneous occasional disruptions caused by the weak market that may force you to lower the monthly rental charges on some tenants. Therefore, it will be advisable that you cut off 5% of your figure to avoid exaggerated expectations. If your rental income is $48,000, you can conserve and make the value around $30,000.
Deduct the commission fee, the maintenance bill, and the property tax
Now let’s deduct from your gross rental income, the yearly running costs. The main expenses are property tax and management costs. Some of the operating costs may include the agent’s commission (if you have one) typically one month payable for a one-year contract.
To reduce complications, we will assume that your gross rental income amount is almost similar to the Annual Value (AV) of the property— the yearly rental income that your property has the potential of generating as approximated by Inland Revenue Authority of Singapore (IRAS). You can always check the AV of your property for clarity purposes.
If your AV is $30,000, your net tax payable amount should be $3,000. Assume that the annual running bill to be a total of $2,000. We also include the property agent’s commissions (probably a one month’s rent based on how you agreed). Now to get the average figure before factoring in the interest if there was a property loan involved, the value should be ($30,000-$3,000-$2,000-$2,000= $23,000).
If you want to buy the property through a loan, subtract it from the net rental income.
Most property owners prefer purchasing property through loans while others have enough saved for the task. If you don’t need the property loan, you don’t need to subtract any amount from your rental income, and in this case, it will be $23,000.
However, if you are going through the loan style, for a property worth one million, we shall assume a loan of $800,000 which is 80% the price of the property. We shall also consider an interest rate of 1.6 per annum of over 25 years. Your annual interest (only) payment will be $12,800 yearly. Subtract this amount to your yearly rental income of 23,000, and this gives you an annual rental income of $10,200.
Calculate your net rental yield
Now you have some figure ready and some good non-exaggerated approximations. The next thing to do is calculate your total cash expense which includes stamp duties, your own down payment, and other instinctive costs. One of these down payments is the $200,000 from the property price that the loan didn’t cover ($1,000,000 – $800,000= $200,000).
Let’s also assume that you’re a Singapore citizen and apply the 7% Additional Buyers Stamp Duty on top of the primary Buyers Stamp Duty. You can calculate your rate from the IRAS portal. In our case, the amount is $24,600. We will also add a reasonable amount of $30,000 for furnishing and renovations.
We will include a $ 15,000 for legal costs such and additional rental income tax. This will total to ($200,000+ $24,600+$30,000+$15,000= $269,600).
Finally, to get your annual net rental yield also called the net Return on Investment (ROI), you divide your annual rental income by the total expenditure. This would be ($10,200/$269,600) x 100= 3.78%. This is the actual percentage that you will earn after renting your property.
Essential additional factors you should put into considerations
This method of calculation does not address certain risks like appreciation of properties and increase of mortgage interest rates. For instance, if the mortgage interest rate used to be 1.6% and it rises to 1.9 %, your net rental yield will reduce from 3.78 to about 3.3%. That is why it is crucial to refinance once in a while to keep the costs down.
This calculation does not take into account that your property can depreciate instead of appreciating –although the chances of this happening are very minimal unless you have neglected your property. It is also important to pay attention to the property market most substantially the rental property market, because if the market weakens you may end up with very many vacancies.
In most cases, this happens to a developing town or city where there are a number of upcoming buildings every other time. That is why you need to check the location, the likelihood of more condos coming up, the rates and many other factors that may influence the property market.
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