The Real Returns of Property Part 2

In Part 1 of The Real Returns of Property, we established that many Asians and High Net Worth Individuals favour Property as an investment.

Below we explore this further and see that it is more than simply a calculation of Selling Price minus Purchase Price.

In the summary we consider a scenario which, by walking through an example of how this all comes together, will help you get a better understanding of the real returns achieved.

The Sample Scenario

Mary is a single Singaporean who bought her second property in 2017 for $2.5m. To earn a reasonable profit in 2027 she will have to sell the property for at least $3.5m.

Sale Price $3,500,000
Purchase Price $2,500,000
Gross Profit $1,000,000
Annualized Returns (10 years) 3.42%

The $1,000,000 profit does sound attractive however 3.42% annualized returns are less than inflation. In reality Mary has to sell for more than $3.5m when we consider the following

BSD $69,600 Taxable on her purchase price
ABSD $175,000 Applicable because this is her second property – like most investors.
Renovations 30,000 Assuming only 2 minor renovations in the span of 10 years
Bank Loan Interest Total for period $100,440 Assuming Mary paid 1,000,000 as a deposit in addition to the ABSD and BSD. We assume that she has a loan with a stable interest rate of 1.3% for the period of 10 years.
Agent Fees $35,000
Total = $410,040

Even before we consider the impact of other costs such as property tax or periods without a steady income through renting the unit; her estimated profit figures in this case will be:

$1,000,000 – $410,040 = $589,960

The Annualized Return now is only 2.14% over 10 years.

This is a poor return considering that, as a Singaporean, she has access to the Central Provident Fund (CPF) and other investment vehicles offering higher returns which are more flexible and easier to change.

This is after selling her house for a $1m ‘profit’, all whilst timing the market right and all of this before the impact of property tax.

To indulge you, let’s play the more ideal scenario where Mary has managed to rent her property for $7,500 per month, for the entire decade she owned the property.

If Mary has other income of $80,000 per year she would, in addition to maintenance fees, property tax and interest; have income tax to pay on the rent.

Gross Rental Income $90,000
Allowable expenses $16,700
Taxable Income $73,300
Income Tax Payable $10,927
Net Income after tax and expenses $79,073

Estimated profit = $589,960 + $790,730 = $1,380,690 Her total annual return would still only be 4.5% – and this is only if she had a tenant for every day of the 10 years. This only just beats inflation which does not seem a fair reward for tying up so much money!

Conclusion

Financial Advice SG recommends buying a property as a home, but when considering it as an investment option we hope these articles has helped you understand that there is far more to that second property you hope to buy-so-you-can-lease-then-sell-for-profit.

Sadly, given everything we have considered in this article, the real returns of property are not so attractive after all.

Just remember; that if you “sell high”, property prices will also have risen for any replacement you may wish to buy, cutting your profits further should you choose to buy yet another property for investment.

Diversification of your investment portfolio and working within your risk appetite are important factors when considering investment choices. For some, property represents that comfort. In fact, the debate about property against other modes of investment isn’t new. Our contributing writer Ian Black also wrote a similar op-ed comparing UK Pensions with UK Property; with relevance to Australia and Singapore.

Disclaimer: The views expressed in this article are those of the author’s and does not necessarily reflect the views of their current employment/business. The information does not take into account the specific investment objectives, financial situation or particular needs of any person. Advice should be sought from a licensed financial adviser regarding the suitability of an investment product before making a commitment to purchase. Past performance is not necessarily indicative of future performance. Any prediction, projection, or forecast on the economy, securities markets or the economic trends of the markets is not necessarily indicative of future performance. Whilst we have taken all reasonable care to ensure that the information contained in this document is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness. The above report may contain data obtained from third parties and as such we cannot guarantee the accuracy of this data.