The economic boom in Singapore following its independence in 1965 resulted in an increase in property prices. Due to this, Singaporeans look at investing in properties as the best way to succeed financially. But it is essential to know if you are really getting a return on investment (ROI) on the property you have purchase. To know if you are getting your property ROI, you should have an idea on how it is calculated.
Return on Investment
Return on investment is the percentage profit you get from the investment you made after deducting the cost. A simple way to get the ROI is subtract the cost of investment from the sale of the investment divide by the cost of the investment.
But a number of factors have to be considered when you calculate ROI. When a loan is take out for the investment, it will have an effect on the property ROI. Many investors use the Cash on Cash or Out of Pocket system in calculating ROI. This essentially takes into consideration the cash used in acquiring the property and calculating the ROI based on the cash you receive after selling the property.
For instance, you acquire a four-bedroom flat with a total floor area of 1,200 square feet at a price of S$2 million. If the down payment made on the property is at 40 percent with a stamp duty of S$54,600 as well as legal fees amounting to S$2,500, your total cash outlay will be at S$857,100. In this situation, the rest of the payment for the property will be make use a bank loan.
Annual revenue and expenses
A one-year lease for this property is at S$7,600, which means the annual gross rental is at S$91,200. In terms of expenses, let us assume that the annual interest for the loan is at 1 percent. This means your annual interest payment will be at S$12,000. But this does not include your payments for the principal. You will also have to consider the annual maintenance cost of S$6,240 and property tax amounting to S$9,120. The property tax is 10 percent of your annual revenue. When you add up all expenses, your total annual expense will amount to S$27,360.
Annual income from rental
The annual income of the property will be at S$63,840. When you divide this amount with your initial cash outlay, you will get a property ROI of around 7.4 percent, which is a good percentage when compared to the deposit rates you get from the bank. It is also good to take into account that the return will decrease if interest rates will increase. These figures also do not include the principal repayments to the bank.
The preceding sample is based on property put up for lease. The property ROI may change if it is put up for sale rather than for lease.
Singapore has one of the highest real estate prices in the world, which makes it is essential to make the necessary computations before you make your purchase. You should also take into account principal repayments if you will take out a loan to purchase the property. These are some of the things you need to consider if you are looking at investing in Singapore.
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