Property Investment Blog (Singapore)
Buying A Property And Selling It At The Same Price in 5 Years?
Contrary to popular belief, successfully investing in properties is not simply about the potential capital appreciation that a property can bring.
One of the main factors in lowering your investment risk is ensuring that a stable income stream exists.
This allows you to accumulate profit even when market cycles are not in your favor.
Let’s face it, markets work in cycles and you can never guess when your exit plans would coincide with a bullish (rising market) or bearish market (descending market).
Table of Contents
Property Investment 101
To ensure a stable income stream, basically, you will need to have a good rental yield. Crunch the numbers to ensure that your potential property cash cow is not overpriced in the first place.
The value of the property may fall below your loan amount which will leave you with a highly unwanted negative equity. Needless to say, you should have positive cash flow after accounting for all costs.
Additionally, rushing into the first tenant you find would not be a wise thing to do and hence, aim to be financially liquid for the first six months of purchasing the property.
Quick-fire decisions may lead to negative rental yields or terrible tenants.
In case of financial disasters, you should minimally ensure that your property loan is covered for the next six months.
This way, you and your property agent do not have to go into a full panic mode and rush to sell the property.
No matter how great your property agent is, he or she will still need time to assess and market the house, conduct viewings and negotiate a good price for it. What’s more, the more urgent you are to sell the house, the less you will likely get for it.
Buying a property and selling it at the same price in 5 years, do you gain or lose?
Before we go any further, I would like you to spend a few moments to think about your answer to the question above.
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Have an answer in mind?
Good!
Let’s examine whether your understanding of this simple property investment theory is correct. We will do this with a scenario.
First, let’s establish some key factors.
The property in question features all the Signals of A Good Investment Property (i.e. Right Entry Price, Growth Hotspots, Near Amenities, Transportation Modes, Tenant Catchment areas and Possessing Good Rental Returns).
It is a RENTABLE property, not one that you live in.
For this example, the unit is rented out for the duration of 5 years at fair market rates at say, a 3.5% rental yield. (Yes, these aren’t unicorns! You can find them at https://www.squarefoot.com.sg/market-watch/rental-yield)
When looking for passive income generators, property investments are actually able to provide one of the highest returns with the leverage it offers. This is especially so in Singapore where land is scarce but the population is constantly growing.
Case Study
Now, assuming that a buyer puts down 25% for this property and takes an 75% bank loan (current max Bank Loan),
-Purchase Price: $1,000,000
-Cash/CPF downpayment: $250,000
-Bank Loan: $750,000
-Buyer Stamp Duty: $24,600
-Legal Fees: $2,500
Total Outlay: $277,100 in Cash and/or CPF. (we will be using only cash for calculation this case study)
Based on 3.5% rental yield, owner would have collected $35,000 per annum in rent. (Purchase Price x 3.5% = Annual Rent Collected)
Rental collected over the 5 years will be used to pay for these expenses:
Average Loan Interest: $1,050/month (Base on 1.7% interest)
Maintenance fees: $250/month
Property Repair costs: $1,000/annum (A more than reasonable figure)
Brokerage Fees: $7,802 including GST (5 years of brokerage fees)
Total Rent Collected Over 5 years: $35,000 x 5 = $175,000
Less Interest Expenses: $59,630 (use a mortgage cal. to derive interest over 60 months)
Less Maintenance Fees: $15,000 ($250/mth x 60 months)
Less Annual Property Repairs: $5,000 ($1,000/year x 5 years)
Less Brokerage Fees: $7,802 (1/2 month fees per year + GST)
Nett Equity/Passive Income = $87,568
At this point, if the owner sells off the property at his purchase price of $1,000,000, he would have an outstanding loan of $649,970 and incur the following costs:
Selling Price: $1,000,000
Less Outstanding Loan: $649,970
Less Brokerage Fees (2%+GST): $21,400
Less Legal Fees: $2,500
Net Cash Proceeds: $326,130 which means he would have made a Return on Equity of 17.7% in 5 years time even if his property had not increased in value by a single dollar.
(Remember his starting Cash/CPF used was $277,100)
Not too bad eh?
You may be wondering how this happened.
2 Factors that savvy property investors understand and use to their fullest!
Other People’s Money (OPM) – Basically a bank loan helps you own a property sooner with minimal cost of funds.
Yes, some loans are not consider bad!
Positive Carry – Where the returns offset the cost of funds sufficiently to produce a positive yield.
So.. Did you get this right? I hope so!
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I have successfully advised and helped many of my clients, both property owners and investors alike, to upgrade their lifestyle and build-up their property portfolio.
I too, am grateful for the continuous opportunity to value-add in their property journey.
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Lets get in touch today to kickstart your property wealth planning journey.
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Self Introduction
Rick Long, Associate Division Director of Huttons Asia Pte Ltd, has been in the Real Estate industry for more than a decade.
He is driven, committed and is enthusiastic about real estate investments.
Today, he leads Team Youhome.sg, and together, he aims to provide his clients with the best experience in their property journey.
Well-equipped with expertise in residential properties, Rick often impressed his clients with knowledge of market trends, advising on timelines, financial calculations and best options for his clients.
Amidst the hustle and bustle, Rick enjoys quiet time and indulges himself in the intricate art of tea-brewing and teapot appreciation.
He would also take this chance to energize himself and reflect on his personal development and areas of improvement.
He is also a proud fur daddy to 2 rescue kitties and loves spending his free time with his wife and furbabies.
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