Photo by kwerfeldein

Singaporeans are obsessed with housing as an investment. Considering the large number of people scrambling to buy a house even during such times are telling signs that you can know nothing about equities, forex, commodities and derivatives, but you can never miss out on properties.

“Land is scarce, so property is a sure win bet here” are one of the main reasons why the HDB auntie next door and the lawyer opposite are saving hard to fund their next property.

I rarely hear people asking how much they will be yielding on their housing investment if you buy and rent for 20 years.

Many are simply just interested in the absolute gain. The absolute monetary gain (if any), is likely to be large as housing like derivatives are leveraged products!

Before I comment further, let’s do some maths here to see if it is really worth our while to buy a 2nd property for investment.

Assumptions:

35 year old Mr. Tan just bought a new 99 year leasehold, 1000 square feet property beside Kovan MRT station, for \$620,000 that will TOP in June 2011.

He intends to rent it out in 2011 and has started paying the monthly installment of his home yesterday (2009 May).

He intends to hold the property for 20 years (till 2029), before selling it away. Note that the property will have a remaining lease of 77 years when he sells it away in 20 years.

His has opted a 3% fixed interest rate for a 20 year loan, at 80% cost of the property which is \$496,000.

He will need to pay \$2,750.80 monthly to the bank for 240 months. Total amount paid is \$660,193. Hence, the property actually costs Mr. Tan \$124,000 (20% downpayment) + \$660,193 (interest and principal payments) = \$784,193.

He estimates that he will collect an annual rent of \$30,000 per year (4.8% yield based on \$620,000), after factoring all expenses, including property tax (10% of rent), repairs, fittings and furnishing, maintenance fees (estimated to be \$300 monthly), and property agent fees of the apartment. (Take note that your tenant do not need to pay the monthly maintenance fees as they are part of the rent. You need to fork it out for them!)

Mr. Tan is making conservative estimate that for the first 10 years, net rental income will be \$30,000 per year. The next 8 years (since rent only starts coming in on 2011), net rental income will be \$40,000 (net of expenses) yearly. He is conservative because he is aware that there are times his property might not have tenants (like during sars and now) and if he needs to renovate the house, there will also be no rental income for 1-2 months. Besides, when his property is 15 years old, he might not be able to rent it out at a premium as there may be more and newer apartments around his neighbourhood for rent, depressing his rental. The rental will be used to pay for his monthly installment to the bank as Mr. Tan’s CPF is currently used to service his HDB flat. Total rental income from the Kovan apartment is estimated to be \$620,000 for the 20 years of investment.

Effectively, Mr. Tan got his Kovan apartment for “free” after renting out for 18 years! Sounds good! His payback period for this investment is 20 years.

Mr. Tan feels that it is reasonable to assume that his \$620,000 property will appreciate at 4% per year when he bought it this month. Hence at the end of 20 years, he will be able to sell it for \$1,358,000.

What is the annual yield of Mr. Tan’s investment after 20 years?