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Why You Shouldn’t Worry When the Rent Is Lower Than the Monthly Loan Instalments

On the surface, it might seem like a very bad situation to be in when one is not collecting monthly rent that is enough to cover the monthly loan instalments for the property.

However, the property may not necessarily be an unsuccessful investment as a loan instalment is not entirely an expense; it comprises of loan principal and interest.

Let’s use an example to illustrate this point:

Project name: Icon at Tanjong Pagar Unit type and size: 581 sq ft, one bedroom unit Purchase price: $1.05 million Expected monthly rent: $3000 (a conservative estimate)

Assuming one is taking an 80% loan, at 2% interest rate, with loan tenure of 25 years Monthly instalment: $3600 (rounded up to nearest hundred) (Conservatively, the monthly loan interest is set at $1400/month, as this interest amount will get lower as the loan amount gets lesser every month)

Question: The rent collected is $3000, which is less than the monthly loan instalment of $3600. Is this investment property a liability or an asset to the property owner?

Let’s crunch the numbers and do some assessments!

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 rented out) Subtotal: $2,250

Monthly gain: $3,000 (rent collected) less $2,250: $750 Yearly gain: 12 months multiplied by $750: $9,000 Although there’s a need to top up every month to service the loan instalment and other expenses, this property is still able to give a positive return to the property owner as the monthly rent collected is more than enough to cover the monthly expenses.

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