If you have not read my earlier blog, it gives you the concept how i think rental yield should be calculated. Please spend 3-5 minutes to read it first if you have the time :).
Sample case study: John, a 38 years old married Singaporean is considering to buy a private property as an investment. He is currently living in a 5 room HDB flat with his family for almost 10 years and has fully paid for the HDB unit.
The property he would like to invest in is a residential condo and he approached me to calculate its rental yield so he could decide whether to proceed with the purchase. Here is the vital information about the condo for rental yield calculation
Asking price: S$1,300,000.00
Market rental fee of similar unit: s$3,900.00
As John has no outstanding mortgage, he can loan up to 80% of the purchase price and due to his age, the longest loan tenure he can opt for is 27 years. To be prudent, we calculated base on loan interest rate of 2.5%.
Base on above information, I helped John to calculate the monthly mortgage installment and the amount for loan interest payment and the amount for loan capital payment. Here are the figures.
Next, we try to derive the cash investment that John have to fork out. This will be the "Cash Invested" component of my formula discussed in earlier blog. Here are the figures.
The amount of total cash invested in year 1 will be S$ 388,600.00 + S$ 38,518.52 = S$ 427,118.52. Please note that i have lumped the Mortgage (capital payment) under "Cash Invested" component of my formula as discussed earlier in my blog as well.
Note: I have made some quick estimation on Legal Fee and Other Transaction Fee, which can be easily adjusted for your real case scenario.
Next we will try to derive the "Annual Rental Cost" component for John and here are the figures.
The amount of rental cost per annum = S$ 32,970.14. I advocate prudent when we are investing and one way is to know our risks and its cost. Here I have included vacant cost of 1.5 months which means John might not be able to get tenant in 1.5 month period in a given year. This will cost him S$5,850 base on a monthly rental fee of S$3,900. Other costs are what I would list out for John but its by no mean exhaustive. I would appreciate your feedback if you do have other "large" cost item that you have experienced before and would like to share.
Finally we will derive the "Annual Rental Income" component and this will be relatively straight forward where we will multiply monthly rental with 12. Therefore the rental income per annum = S$ 46,800.00.
So what is John's year 1 rental income? (drum roll please......)
Now John know his possible year 1 rental yield. To decide if this will be a good long term investment, he need to see into the future! We will try to project 20 years rental yield along side with cash investment, cost and income changes for John with following assumptions:-
1. Income - Rental increase by 2% year on year
2. Cost - Maintenance fee, vacant cost, property tax and agent fee increase by 2% year on year
I hope the above illustration will give you a clearer picture on my way of calculating rental yield. One key point I would like to share is that I believe there are investors that would not like to keep on investing their own cash as premium (Mortgage for capital repayment) onto the investment property and would like to use rental income to cover the premium. If John is such an investor, the 20 years rental yield projection will be as follow, which to me is not a very pretty picture for value investor ;P but then again this is just a sample case study.
Lastly if you would like me to calculate your rental yield in the same way, drop me an email at firstname.lastname@example.org and provide me at least the following info:-
1. Property asking price.
2. Rental of similar property (or you can let me know the property name and size of the unit you intend to purchase).
3. Loan quantum and tenure you are eligible for.
4. ABSD you will be subjected to (or you can let me know if you are a Singaporean, Singapore PR or Foreigner. If you are first 2, i would need to know how many residential property you have currently).