REC weekly #123: Is your property investment really giving you returns?

“My property rent is so Low!”

“My property price has not appreciated much!”

These 2 comments have been very common during client meetings over the last few years. Yesterday, I met a client, Ms Tan whom was referred by a friend. Ms Tan complained that she owns a property at La fiesta which was not performing well. Upon hearing this, I took out my property analysis spreadsheet and punched in some numbers. I will share more about my findings in this blog post. Before we dive into the numbers, I will share my opinion on how property investors should analyse their property returns.

Gross Rental yield

For investors, rental returns is a key factor to decide whether a property is worth investing or not.

1. Rental provides income for the investor (similar to a dividend) and

2. Provides a margin of safety in bear markets when property prices stay stagnant or trend downwards.

For the above reasons, rental yield is a simple indicator to decide if a property is worth investing. The current gross rental yield in Singapore averages 2-3%. During the financial crisis in previous bear markets, investors could buy properties that have gross yield of 5-7%. As price appreciated more than rents, yields start to compress.

By using this simple investment measure, rental yields of 4% of less are riskier investments. This is because most property investors use leverage (take loans) and interest rates are on the rise, likely to hit 3.5% over the next 2 years, while rental yields remain at 2-3%, when Rental Yield is less than Financing Cost, the investment is basically negative yield.

To calculate Gross Rental Yield, we do the following:

(Rent * 12) / Total Property Cost

Based on the formula, for rental yield to increase, either Rent must rise or Property Cost have to go down. I have written about my opinions about the outlook of rental market and property prices in a previous article, you can read more here.

Capital gains

Every investor hopes that their assets will increase in value over time. The same goes for property investors. You would probably hear phrases like “Property is a sure way to make money”. Unfortunately, I personally think the phrase are flawed and untrue.

Buying real estate for capital gains is similar to buying stocks. When buying stocks, we look for deep value, the potential for higher earnings and returns. The same is true for real estate, we look for value buys that are below market valuation, potential transformation of surrounding, future upgrades to amenities and strong demand. Unfortunately, many property investors I know do not do extensive research before they buy a property. Many tend to buy based on gut feel, nothing wrong with that, but I think the investment environment has changed in Singapore, and buying a property for investment is no longer the same as before.

Over the past 5 years, due to cooling measures, there has been many properties which have not appreciated in value. In fact, there has been some properties that has not seen capital appreciation in the last 10 years as well. These properties had unperformed inflation. If we analyse property returns on a annual basis, many properties tend to underperform inflation, which is similar to keeping your money in the bank.

A good capital gain or return on investment would then be at least 4-5% p.a which Beats inflation and cost of borrowing. Unfortunately, my view is that over the next 5 years, we are unlikely to see much capital gains if any in the Singapore property market.

Case study 1 : La Fiesta 2 bedroom , bought in 2013

Ms Tan bought a 2 bedroom, 7xx sqft unit at la fiesta , walking distance from Seng Kang MRT. As an investment she wanted to rent out the unit. Initially she had expected to get a higher rent, however rental market has been weak and she has been renting the unit for $2300 per month. She has also refinanced her mortgage to a fixed rate, in anticipation of rising interest rates over the next 2 years.

Purchase Price: $850,000

Stamp duty: 3%-5400 = $20,100

Total cost: $870,100

Loan: 80%, 25 years

Interest rate: 2.3% refinanced

Total equity outlay: 20%+(3%-5400) = $190,100

Based on the above info, I calculate the actual rental returns below

The key to a successful property investment is proper documenting of expense and income. One common mistake most property investors make is to ignore the small costs like taxes and maintenance fees which eats into your return.

A good property will be where the tenant pays for the property. Unfortunately this is not the case for Ms Tan and many many other property investors in Singapore.

As you know, your mortgage payments has 2 components

1. Principal payment – this actually pays down your mortgage

2. Interest payment – this makes the bank rich

Based on 2.3% interest rates, we calculate the exact principal paid down by the tenant (rental income).

The tenant only pays $530 of the principal, the remaining rent is used to pay your expenses.

Not to forget that Ms Tan is still required to top up $1,000 per month as the rental income does not cover the monthly mortgage payments.

She is now stuck with this Negative Cashflow property.

Below is a chart that shows where the rental income goes to.

As you can see, most of the rental income payments go to your interest payments and cost to keep up the property. When interest rates hit 3.5% or more, the $530 (orange segment) which is currently paying down principal will go to $0. The whole Rent will be used to interest and expense. While your monthly top up will be used to pay principal. Is this a worthwhile investment?

Capital gain is also not seen as the property did not appreciate much. The worst case scenario if a financial crisis hits us will be a 30-40% dip in valuation. The property bought at $850k could be worth less than $600k. This is highly possible as if rental remains at $2300, the new rental yield will be 4.6% which is more attractive.

While, the current valuation of property is around $900k, and with a 2% commission to sell, would likely give Ms Tan a very small profit. She decided to get rid of this underperforming asset as the potential downside far outweighs the upside potential. Even if she had holding power, holding a potential 30-40% loss or up to $300k is not good for her mental state.


It is important to go into the tiny details when investing in real estate. There are many property agents who try to hide such facts as these details are the most important. Over the next 2-3 years, it is safe to say that majority of properties are not performing well and it is better to move into liquid assets. If you like to know my outlook of the property market for 2019, stay tuned for my upcoming article.

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