AnalysisProperty Returns: Here Is The Right Way To Calculate It
- by Sean
- November 23, 2019
- 4 min read
I’m sure many of you have a friend or two that have casually remarked to you:
“Oh, I bought my condo for $1.5 million and sold it 5 years later at $1.8 million for a $300k return man!”
…Or at least something along those lines.
Now while the math works out, this really isn’t the correct way to go about calculating your property returns.
In fact, the final number could actually be quite far off. In some cases, you could even have lost money despite the positive returns!
So what is the right way to calculate your property returns then?
It’s actually quite simple.
All you have to do is to make sure that you have factored all your costs in.
Let’s look at an example.
You purchased a condo for $1 million.
To make things easy, this figure includes all the usual costs like lawyer fees and stamp duty.
After 10 years you decide you want to cash out, and manage to actually sell it for $1.2 million.
Now, most people would assume you just made a solid $200,000.
… But if you really look at it, was it really a positive return after all?
To be certain, the very first thing that you have to take into account is the interest on the loan.
Say you loan a total of $750,000 based on a typical down payment of 25 percent.
At a 2.2% interest rate and a 10 year loan repayment period, you are looking at a total of $138,553 in cumulative interest payments.
This means your profit of $200,000 has now been significantly cut down to just ($200,000 – $138,553) $61,447.
That’s not all.
Remember those monthly maintenance fees you were paying? Surprise surprise, they’re back to haunt you.
Let’s say this fee was set at $200 – a relatively reasonable price considering the condo’s $1 million quantum.
If you multiply this $200 over a period of 10 years, you will realise that you have spent a solid $24,000 on just monthly maintenance fees alone!
Which leaves us with a remaining profit of ($61,447 – $24,000) $37,447.
Note that we are not taking into account maintenance of your individual unit – which by the way, can really add up. Especially if you settled for an older apartment.
Notice how quickly our profits are already dwindling?
Now we also have to factor in the property taxes that you have been paying.
Let’s go with an Annual Value of the property at $36,000.
This comes up to a yearly net tax payable amount of $1,120. (Feel free to do the math again)
After 10 years, you would have paid a total of $11,200.
That leaves us with a remaining profit of ($37,447 – $11,200) $26,247.
Normally, you would also have to include the cost of renovations in. But for simplicity’s sake, let’s assume it was a new launch and you went ahead with minimal renovation that cost just $20,000.
And so, that leaves you with a total of ($26,247 – $20,000) $6,247.
Finally, we have to account the agent fee for selling your home.
Let’s take the standard 1% commission fee, which leaves you with a grand (not positive) total of ($6,247 – $12,000) $5,753.
So you have actually made a loss of $5,753 – despite the $200,000 lump sum resale return!
To paint a clearer picture, you are looking at an annualised return of –0.06%.
And to further put things into perspective, any fixed savings account or insurance policy would have undoubtedly better appreciated with this volume of money.
True, you did have a place to call your own for a good 10 years. But imagine if you have actually paid more attention to all this beforehand and put some financial measures in place to ensure easy and better rewards!
Let us put the figures into a table for easy reference:
|Price of Property||$1,000,000|
Now that Singapore has officially taken top spot in the world for property investment prospects from a 2020 price increase standpoint, it is only natural for people to start looking at diversifying their portfolios and increasing their profits with property investments.
We hope that this piece has gone some way in helping you accurately calculate your property returns in line with this trend.
If you have any questions, feel free to reach out to us at firstname.lastname@example.org!