Have you ever wondered how much rental income you could make from renting out your home (and moving back home with your parents)? Whether you’re just idly curious, or seriously thinking of taking that step, here’s how to make an estimate. Remember it’s not as simple as finding a tenant and then rolling around in cash; there are other costs to consider as well:
Step 1: Look up the official Annual Value (AV) of your property
Visit the Inland Revenue Authority of Singapore (IRAS) website, and use this page. For $2.50 per enquiry, you can get the official AV of your property.
The AV is the estimated rental income you can collect from your property, over one year. So an AV of $30,000 means it’s estimated you can receive $2,500 a month in rental income. Note that the official AV is not the set amount you can rent out your property for, and you can hopefully get much more for it (see below).
Nonetheless, knowing the official AV is at least an estimate of the rental income you’ll fetch, and you’ll need this number to work out your property tax later.
Step 2: Look up surrounding rental rates and work out the median
Head to 99.co, and type in the street name of your property. From there, look up the rental rates of surrounding properties.
Be sure to use the property types that match your own. For example, if you’re thinking of renting out your HDB flat, then look up the rates for flats and not private properties (if you own an Executive Condominium, use non-landed private properties to compare).
Look at the rental cost on a per square foot basis, rather than the total rental cost.
Next, work out the median, and not the average, rental cost per square foot (the average may not be accurate, as one freakishly high or low price can skew the results). For your convenience, here’s a calculator.
Your rental rate will be about this amount, plus or minus 10 to 15 per cent. Being able to command a higher rental rate depends on how close the property is to amenities – such as proximity to a train station, bus interchange or a major mall. Likewise, you may have to go under the median if your unit is located further from these.
There isn’t an exact science to this; it depends a lot on the persuasive powers of your property agent.
Step 3: Work out your new property tax rate, and deduct it from the estimated rental income
The property tax rate for non-owner occupied properties is different. The tax is based on a tiered system. But there’s no need to memorise it or crunch the numbers yourself; you can see the chart (and just use the inbuilt calculator) here.
Deduct the cost of the tax from your rental income.
Step 4: Deduct other probable, but variable costs
In general, it’s better to assume one month of non-occupancy of the unit for every year. On the basis that most tenants sign a one year lease, you may have a brief period of non-occupancy between the time they leave and when the next tenant comes in.
You also need to deduct the cost of the property agent’s commission (we’ll give an estimate of one month of rent for a one-year lease), and the maintenance fees. It’s safe to assume you’ll pay the agent’s commission once a year, while they find you a new tenant.
Note that utility bills, Internet charges, and any repairs made while the unit is tenanted can be deducted from property tax.
Step 6: Calculate the rental yield
You’ll need to know this, to decide if it’s worth renting out your home:
(Net annual rental income / total cost of property) x 100
The net annual rental income is the total amount of rent you collect in a year, after paying property taxes, maintenance fees, commissions, and other miscellaneous costs.
The total cost of property means you need to include the various extra fees, such as stamp duties, conveyancing fees, renovation costs, and so forth.
For example, say your property generates $4,000 a month in rental income. But you pay $4,000 in agent commissions once a year, have one vacancy, and pay $4,728 in property tax. There is a further $420 a month for utilities and maintenance ($5,040 per year).
Your net annual rental income, after all that, is $30,232.
Say the total cost of your property is $1.4 million, inclusive of all the stamp duties, conveyancing fees, renovations, and so forth.
The total rental yield is ($30,232 / $1.4 million) x 100 = 2.1 per cent
Step 7: Consider what the yield means by comparing it
If your rental yield is 2.1 per cent (as illustrated above), but the home loan interest rate is 1.8 per cent, you can see you’re only coming out ahead by a small margin of 0.3 per cent. Is this a figure you’ll be happy with and a big enough incentivising factor to find alternative accommodation while you rent out your home?
Alternatively, if your intention is to purchase an investment property for example, you could work out the rental yield of the second property you’re buying by going through the steps above. You can then decide if it’s more worthwhile to move into the new place and rent out your old one, or vice versa.
May the rental yields be ever in your favour!
Interested in finding out more? Read our articles on Subletting HDB flats: 6 things that will get you in trouble, and What types of renovations should landlords do before renting?