Many a time, the layperson investor will take the annual rent collected, divide that by the price that he bought his property, and consider that percentage as his rental yield. Or even worse, there’ll be a few that take their monthly rental minus their monthly loan installments and consider the net cash flow as their rental yield.
As I said in my post on freehold property investments, maintaining a healthy cash flow is a key determinant in your success as a property investor, but it’s important to recognize that monthly installments are part interest and part principal-repayment. To accurately compare property yield to alternative investment yields, you should actually take the total rental income, minus taxes, maintenance fees, annual mortgage interest along with any other costs associated with owning the property, then divide that figure by the total cash downpayment and any related costs rather than by the purchase price.
The median rental for 1Q12 was $44.97 per square metre per month, or roughly $4.19 psf per mth. For the latest 15 transactions, a total of 22,078 sft was sold for an aggregate sum of $27,053,400.00, bringing the average transaction price to $1225 psf. Taking $4.19psf/mth times 12 to get the yearly figure, the gross yield works out to be 4.1% p.a.
Let’s just project on the basis of a hypothetical unit bought for $1,000,000, that has a yield similar to the average unit at Duchess Crest.
I think I’ve been fairly conservative in my projections and provided a fair bit of buffer against potential interest hikes, unforeseen miscellaneous expenses. So let’s have a look at what the capital gains for the last 15 transacted units were according to Streetsine data.
I think the above image, despite the small sample size, is a rich illustration of the varying fortunes of investors in the same development, even with similar time lines. ( Take for example the 8th and 9th transaction on the list. Both bought in May 2008, and both sold within 3 months of each other, yet one made more than double the gross gain of the other. ) But let’s focus on the task at hand today, how hard does our money invested in property work? Take the median capital gain of approximately 27.5%, and deduct an average transaction cost of say 5% (stamp duty, legal cost and agent commissions), so 22.5%. Decent, but modest returns, yes? But that’s where the wonders of leverage come in (mental note to self : must do a post on the pitfalls of leverage too!) Assuming a loan quantum of 80%, a return of 22.5% actually translates to doubling your initial capital outlay of 20%, or more than 100% return!
Please bear in mind that I’m not suggesting that such returns are to be expected all the time. We have been enjoying low interest rates and rising property prices for a number of years now, but it wasn’t all that long ago that the 3-mth SIBOR was at 3.5% and people paid more on their monthly installments than what they were getting on their rentals. All I’m trying to illustrate today is how you should compare your returns on property investments in relation to other investment vehicles you might potentially place your cash into.