In this post, I will share with you rental yield calculation, if rental yield is still important, and the basic formula to estimate rental yield for new launches.
Rental Yield - Historical, Gross, and Net
It could be everyone’s dream of having a steady stream of passive income by investing into property, so that they can use that to maintain a certain lifestyle after retirement. Property, if managed well, can be an effective way of achieving financial freedom. As on top of rent, which provides passive income, capital appreciation offers a bumper return upon exit. As such, many people embark on investing without fully understand the risks and costs that comes with it.
The not so good news is, property rental market has been fallen since year 2008 due to faster price appreciation and tightening of immigration policy.
As you can see below, average rental yield has fallen from 5% to 3% over the past decade. Today, older property generally gives 3-4% rental yield, while newly completed property normally yields between 2.5-3%.
The tricky part is 3% rental yield is not the real return of your investment, but the gross rental income you received from tenant. You still have to deduct your yearly expenses to derive your net rental income. Those costs include maintenance fee, property tax, income tax, furniture, repairs, agent’s commission, last but not least, the mortgage interest.
Take $1M property above as an example, if your gross rental yield is 3%, after deducting all your expenses, your net rental yield is merely 0.7%. Terrible, isn’t it? Even if we use ROI (Return on Investment= net rental income/total upfront payment) to assess our property return, 2.5% also looks not so fantastic compared with other investment options, like equities or bonds.
Then why people are still investing into property?
Capital Appreciation vs. Rental Yield
In fact, most savvy property investors count on capital appreciation rather than rental yield to accelerate their wealth accumulation. And if you choose the right property leveraging with bank loans, you upfront capital could be well doubled in 3 to 4 years. New launch property generally gives higher capital upside compared with resale properties, that’s why most people are still buying new launches even though the rental yield tends to be low compared with resale.
In this case, is rental yield still an important factor?
Though, not as important as capital appreciation, the answer is YES. Like any type of investment, property investment has its own risk. It goes ups and down, depending on market conditions. Rental yield is like a safety net to help you tie through the cycles so that you do not need to sell with a loss due to cash flow issues. A 3% rental yield property should be able to help you cover most of the mortgages with just a few hundred dollars top up each month for other related costs, which is easily manageable for most people.
While resale property is easy to calculate the rental yield, new launch property is a little complicated to estimate the rental as it’s still a building under construction. After observed and analysed a few years on new launch projects, I have summarised some basic formulas to estimate rental income for new launch properties.
- Brand new (10% premium vs. 4-10 yrs old, 20% vs. 11-18yrs old, 30% vs. 19-25 yrs old)
- Big Land with comprehensive facilities (15%-20% vs small apartment)
- Top brand concierge service (15-20% premium vs normal condo)
- Near MRT (10% premium for every 400m radius)
- Integrated Development (15% premium vs normal condo)
Let’s test this formula with an example below.
How to Estimate Rental Yield for new launches
Imagine, if you were to buy Highline Residences before TOP. In order to estimate the rental, we can use its nearby resale condos. Regency Suites, completed in year 2008, its average rental is around 4.4psf. If you were to add in brand new premium of 10% (10 years younger), plus concierge service premium of 15%, we could roughly get 5.5psf ($4.4*1.1*1.15) for Highline Residences. If you use Emerald Park as a base to calculate, you should add brand new premium 30% (25 years younger), concierge service premium of 15%, as well as near MRT premium of 10%. This works out to around $4.9psf ($3*1.3*1.15*1.1) It’s always good to use a few nearby properties to calculate the estimated rental, so that you can get a more accurate figure by averaging them out.
Other factors, like quiet neighbourhood, water facing, high level, better layout unit, etc. could affect your rental rate by 10-20%. An experienced real estate agent should be able to work out a more accurate figure based on your project and unit selection.
Real estate can be costly to buy, sell and operate - transaction costs are significant when compared to other investment classes. However, there is potential for both rental and capital to grow over time. If you’re keen to jump onto the boat, we can be at the wheel to safeguard your journey.
