Ways To Calculate Your Property Investment Returns

Ways To Calculate Your Property Investment Returns

Property investment in Singapore is one of the most popular investment tools, Singaporeans could not resist the idea of generating extra income from property investment. Although there are couple of cooling measures to prevent house prices soar in Singapore but most of the regulations are applicable to buy and sell of the houses, regardless it’s a HDB flat in Jurong or Helios condominium in Orchard. As for rental, it is still lax where the idea of renting out your property and collecting income while still seeing the prices going up is what many are dreaming of. While the dream concept of income generator is there but there’s more than that, it is crucial to understanding fully the risks and costs of generating income. There are some risks attached to it just because property prices will increase over time. Let us share some of the ways and stuffs you can use to calculate your property investment returns. 

Before we go further into the calculation methods of assessing your income and risk, there are some costs you will need to consider. Firstly, the stamp dutiesspan> – Buyer’s Stamp Duty (BSD) or Additional Buyer’s Stamp Duty (ABSD). The basic BSD rate is about 3% of your property cost price or buying price while the ABSD applies when you already have multiple properties in your portfolio which can be as high as 10%.

Other transaction costs including legal fees of close up to $3,000, agent’s commission up to 2% of the  transaction price, administrative costs at about $1,000. After you’ve bought your property, you will need to consider the interest costs, the amount you have borrowed, maintenance fees, renovation costs, agent’s commission for renting out your unit, property taxes, property insurance and funds that you will need for repair, upkeep and maintenance your property. That’s not it, any income you receive from your property investment, it is subjected to tax with the exact amount varied depending on your current income. Finally, you will need to prepare the downpayment of your property which is 20%. Now, let’s recap the amount of costs you will need to prepare for investment, shocking as it seems because property investment is not cheap and easy as you think it is.

We have listed down the costs incurred for property investment, let’s look at the risks that we will need to be aware of. It doesn’t matter if you’re investing a private condominium like Helios or landed property in Bukit Timah or even overseas property, you will always need to be aware of the property market scene. The stagnant property market scene that has not been reaching to your desired market price or economic downturn that you will need to fork out more cash to leverage on your properties or even tough rental market that turns your property into a vacant one for long period. 

Also, be wary of government regulations and restrictions such as the raise of Seller Stamp Duty (SSD) up to 12% if your property is sold within a year. Total Debt Servicing Ratio (TDSR), where investors have to ensure that your total property loans and any other debt you will have to repay is within 60% of your monthly income. Lastly, the Loan-to-Value (LTV) ratio, you may be limited to as low as 20% on the amount of loan you will receive on property purchase. Include those numbers to your calculations and you’re good to go assessing your property investment calculations. 

Price appreciation 

The simplest and commonly used method to calculate your property investment returns. Due to it’s simplicity, this method is not the most accurate measure for property returns – no cashflows with both positive and negative value into consideration which includes rental income and also expenses relating to property transactions and upkeep. This method of calculation is best used to give you an overview of your homes that you are living in but also expecting prices to rise or if you are investing in the property with high chance of going en bloc.

Return on investment (ROI)

The total returns method that adds up the price appreciation method by including positive and negative cashflows in the calculation, it takes into account of the costs incurred that we have mentioned earlier.

Let’s create a scenario, assuming your property purchase is at $1million and your costs and expenses is about $100,000. 

On returns in this scenario, the property sale price assuming at $1.5million and rental income is at $4,000 a month. 

If the property is sold in one year with a gross return at $500,000 from price appreciation and $48,000 from one year or 12 months of rental income, we also realise negative cashflow of $100,000 in costs.

The formula we can use here:

((sale price + rental income) – (purchase price + other expenses)) / purchase price to work out this amount. à (($1.5 million + $48,000) – ($1 million + $100,000)) / $1 million, delivering a return of 44.8%.

This shows that the context for someone who earns $448,000 on a $1 million investment. So, you can see that this calculation method is the percentage we will receive at the end of our investment, but it does not take into consideration of the time we spent for investment and it does not take into consideration of the borrowed money that funds the investment. 

Cash-on-Cash Return

Most of us would want to get the property loan to the maximum when we are investing in it. However, if it’s a residential property, we are only be able to take up 80%  or even 50%. But, if it’s other than residential, we are able to take up the loan of up to 80% of the property value. Assuming there’s 80% loan for this scenario which means that we would only be paying up to $200,000 of the initial $1 million investment, assume that the additional $100,000 costs, $40,000 paid in mortgage and of this amount $26,000 was for principle repayment while $14,000 for interest payments.

If we sold property after one year, the loan left would be $774,000 to repay. Let’s deduct off our sale price of $1.5million we would left with $726,000 in cash. This formula can be use to calculate our cash-on-cash return: (total income) / (cash outflow). This translates to (sale price – outstanding loan + rental income – cash outflow) / (initial cash outlay + additional expenses)

($1.5 million - $774,000 + $48,000 – ($200,000 + $100,000)) / ($200,000 + $100,000), giving us a cash-on-cash return of 158%. We are able to achieve this return primarily because we were able to leverage on debt of purchase of property. It gets trickier as we move into future years as we have to consider additional rents, principle paid back to the bank during our mortgage repayment and any additional cash utilized in upkeeping the property.

With these basic calculations, you’ll be able to assess your property investment decision making and estimate your returns and costs.