Buying to Rent. Is Rental Yield the most important factor?

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Buying to rent

 

Many investors who intend to buy a property want to rent it out and collect rentals. For a layman, the simple answer is high rental returns, and typically that means rental yield.

Rental yield is an important factor but is not the only factor for consideration. A complete consideration includes many factors especially if one is still trying to find which property is best for investment in Singapore. These many factors include
1. Rental price movements
2. Number of Rental transactions
3. Maintenance fee payable
4. Renovations or fixes
5. Cash flows
6. Tenancy agreements
7. Tenant profiles
8. Exit strategies to sell
9. Less discussed lease term
And more (e.g. Current Goverment property regulations).

A shrewd property investor would consider rental price movements, either to ensure that its steadily upward in price or little huge fluctuations in prices.  A speculator might on the other hand prefers wider rental price up or down. Huge swings cuts both ways.

Looking at the number of transactions allow ones to look deeper and ensure that there are sufficient rentals in an entire year. It would be terrible to buy a property to rent out high only to realize that one is stuck with a property that there is hardly and rental demand for it.

For simplicity, one could consider the gross rental yield for the property as merely taking the rental income for that year divided by the purchased price of the property. Well, the reality includes more factors. As it goes on in years, you should not keep dividing by the same purchase price you had bought. (We will discuss this next time). Meanwhile, Net rental yield should subtract the amount of maintenance fee and other expenses from the annual income. In more complex ways, one can also divide the Annual rental income by its actual down payment instead, but that must take into then the annual interest amount and usually move to the term know as return on equity. Of course, you get more returns when you borrowed money for your investment, commonly known as leveraged investments. A condominium with multiple swimming pools versus an apartment with a small swimming pool, all things being equal, usually have a higher maintenance fee. As such, some investors prefers to check on this before purchase. That’s smart, of course, don’t neglect the Sinking Fund too. ( For another discussion next time)

Renovations and fixes would continually add up to the expenses for an investor. A unit would be increasing undesirable if you rent and rent for years without renovations for decades.

Rental collected are like cash flows. Subtracting the mortgage repayments from your monthly rentals allows you to look at whether your investment yields a positive or negative cash flows. In a low interest rates environment, it is commonly easy to recognize a positive cash flow. In years ago where interest rates are high, most people do not expect a positive cash flow from rentals. While it is a good period to make use of easy money from borrowing, do take note, a 1% increase in your interest rates, can take you downwards. Hence, it’s wise to retain your positive cash flows separately for rainy days.

Tenancy agreements includes many clauses. Ensure the clauses are favorable and fair for you as an owner. Having more deposits can safeguard your interest in an event of a break lease situation. Good real estate advisor will walk through these with you.

Tenant profiles within the project matters for the kind of investors you attract too. Typically, people do consider locality as to whether it’s near red light districts as well. Though, rental yield on an average in those locality seems on the higher side. Some investor loves corporate clients to be renting. Those are typically more luxurious units. Renting our as multiple rooms rentals may yield higher returns with a trade offs of more coordination work.

Exit strategies to sell is important. Some investors would invest in other types of property other than residential non landed. One can invest in cluster houses, or commercial office, or shophouses, or industrial factory or warehouse. Typically, ensure good buy and sell movements would be a good way to ensure that you can exit. If your investment property are left with only 6 years, likely, you would have to keep renting out till the end of the term.

A less discussed lease term is an important consideration for whether an investor really get a good rental yield. Typically using the same rental yield formula, one realize that the lease term is not included in the calculation. A industrial property with a shorter lease term like 30yrs would certainly be much cheaper than a similar property of 99-years lease term.

All in all, investment is hard work. Proper consideration of all factors would do good to your decisions eventually. Have a good investment hunting!

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