Is property investment a choice to consider?

TODAY’s property column written by Sam Baker lists the gross rental yields of leasehold condos and freehold condos in various parts of Singapore. (TODAY, 29 May 2015) Gross rental yield is annual rental income divided by a home’s purchase price.

The table is a summary of gross rental yields.

Condo Type Maximum rental yield Minimum rental yield Market rental yield
Leasehold 4.5% 2.1% 3.5%
Freehold 3.7% 2.5% 3.0%

Source: SRX Property

Are these rental yields good for investors?

Using gross rental yield is not accurate reflection of investment value. One must also consider expenses related to property rental. This calculation will then become net rental yield. Property related expenses include:

  1. annual property tax
  2. annual fire insurance premium
  3. repair and maintenance costs
  4. management fund contribution

The market gross rental yield of 3.5% for leasehold property or 3.0% for freehold property did not feel compelling enough for investors to sink money in property investments. The final rental yield will be lower when the expenses are deducted.

There is still another aspect of property investment to consider – mortgage interest expense. Almost all property investments are funded by bank borrowings or mortgages. The decision to invest is to compare net rental yield with cost of funds to finance the property purchase (i.e mainly CPF Ordinary account interest rate of 2.5% p.a. and the mortgage interest rate).

From this, property investment does not seem a good deal. One is better off keeping money in CPF or invests in some equity or bonds that provide higher yields. Furthermore, equity and bonds are more liquid than property investments.

Copyright © 2015, limkimtong for Living Investment

The material presented is intended to be general and written in layman’s language as much as it is possible. The author shall not be liable for any direct or consequential loss arising from any use of material written. Please seek professional advice from your financial advisor or financial institutions on material written covering financial matters.

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