The Most Powerful Stress Test to Determine Good Investment Property Buys!
There are so many indicators/stress tests for an investor to use before choosing the right investment property to buy. And there’s no common indicator that can be used for ALL investment properties.
It will be largely depending on the type of investment property one is looking at (eg., commercial, industrial, landed properties, condominiums in CBD areas versus condominiums in heartland areas etc.) and also the objective of the investor (eg. cash flow, capital appreciation, rental yield, capital preservation etc.)
Let’s use an example to illustrate how this indicator can be used.
Project name: Icon at Tanjong Pagar Unit type and size: 581 sqft, one bedroom unit Purchase price: $1.05mil Expected conservative monthly rent: $3000 (average rent is between $3,200 to $3,500 per monthly)
Assuming one is taking 80% loan, at 2% interest rate, 25 years loan tenure Monthly instalment: $3600 (round up to nearest hundred) (Monthly loan interest is $1400/mth conservatively as this interest amount will get lower as the loan amount gets lesser every month)
Question: Rent collected: $3000 is less than the monthly loan instalment of $3600. Is this a lousy buy or is this worth considering? Let’s crunch some numbers and do some assessments!
Buying expenses when you first bought this unit: 1) Stamp duty: $28,000 (round up) 2) Legal fees: $3,000 3) Others: $2,000 Subtotal (a): $33,000
Monthly expenses if you rent out this unit: 1) Loan interest: $1,400 2) Maintenance fees: $250 3) Rental income tax: $200 (depends on individual’s tax bracket) 4) Property tax: $200 5) Others: $200 (eg., repairs, furnishing, vacancy periods when the unit is not able to rent out) Sub total (b): $2,250 Monthly gain: $3,000 (rent collected) less $2,250: $750 Yearly gain: 12 months times $750: $9,000 (c)
Monthly cashflow: $3,000 less (items 2-5 for monthly expenses: $850) less $3,600 instalment: ($1,450)
Total gain: $1,100,000 (selling price) less $1,050,000 (purchase price) plus yearly gain of $9,000 (c) times 5 years less buying expenses $33,000 (a) less selling expenses $30,000 (d) : $32,000
Initial downpayment: 20% of $1,050,000: $210,000
Percentage gain on initial invested capital: $32,000/$210,000 times 100%: 15.2%
Yearly percentage gain on initial invested capital:
15.2%/5 years: 3.04%
Breakeven price of this property if one is to sell on the fifth year: [yearly gain of $9,000 (c)
times 5 years less buying expenses $33,000 (a) less selling expenses $30,000 (d): ($18,000)]
+ $1,050,000 (purchase price): $1,068,000
Breakeven year of this property if one is to sell at same price: [Buying expenses $33,000
(a) plus selling expenses $30,000 (d): $63,000] / Yearly gain: $9,000 (c): 7th year
Summary and analysis of this investment (just on rental yield perspective):
1) If one see more upside in this area, meaning there are many catalysts for growth (eg., Keppel area redeveloping, CBD area, proximity to MRT, high rental demand, high investors’ interests etc.), appreciating by more than $50,000 in 5 years’ time or longer would be highly possible.
Do look at the historical prices too. If historically, the price of Icon unit has hit much higher than the entry price, then there may be a chance that it may hit that price again.
2) On a very conservative approach, if one is satisfied in just getting more than the returns as compared to putting monies in safe vehicles like time deposits (1-2% interest rates on average) or Singapore bonds (2-3% interest rates on average), then this investment would be ideal because even by using the most conservative way of calculating (assuming rent price remain this low throughout, marking up the monthly and the transaction expenses etc.), the yearly returns on the invested capital is already 3.04%.
3) If market price remains stagnant all the way, and the purchaser sells the property on the 7th year at the same entry price, he will not lose money!
4) Always invest only when you have enough spare cash after setting aside monies for your needs. One must be prepared to top up close to $1,500 per month assuming rent remain low at $3,000 per month.
I would consider this unit as a good investment to look into.
For those with a bigger budget and/or higher risk appetites who want to invest in something of higher returns, properties like landed properties, conservation houses, condominiums in Orchard or even Sentosa may whet their appetites. Assessing these properties will require a different set of indicators. Using rental yield approach will not work because these are capital play vehicles and rental yield will be very low.
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