Rental yield is often cited as the reason why investors are attracted to property. At viewings and previews, however, what the first-timer usually gets told is the gross rental yield they’d get, which doesn’t factor in all the additional payments buying and renting out a property entails. What really matters to buyers is net rental yield, which is the actual return on investment on buying a property for rental income.
Calculating net rental yield is not a straightforward affair. While there are some easy and reliable methods to work out potential rental yield for any given property development, it’s also a subject that’s open to debate. (Veteran investors each have their own sophisticated methods.)
To simplify matters, here’s the most basic method to calculate net rental yield – something you must understand before you invest in any property in Singapore:
To calculate rental yield, first know your probable rental income.
Say you’re looking to buy a 1-bedroom condo unit at The Florence Residences for S$720,000. First, open up the 99.co map and check out the rental rates for nearby 1-bedder properties (about S$2,200 monthly). Work out your gross rental income (the income before deducting any expenses) over 12 months. So if you expect a total rental income of S$2,200 a month, your gross rental income per annum is S$26,400.
Now, to be conservative, we suggest you shave 5% off this figure. This is to account for the occasional disruption, such as a weak rental market, or being forced to take on a tenant at a lower rate (it’s better than a vacancy).
So even if the gross rental income is S$26,400 per annum, we can be conservative and place the number at around S$25,000.
Next, deduct property tax, maintenance bill and commission fee.
From your gross rental income, deduct yearly operating costs. The two main costs will be your maintenance, and your property tax (you can calculate your property tax here). However, don’t forget to add expenses such as any property agent commissions you have to pay (typically one month rental for a one-year contract).
For simplicity’s sake, we will assume that our gross rental income is more or less similar to the official Annual Value of the property. The Annual Value (AV) is the annual rental income your property is expected to generate, as estimated by the Inland Revenue Authority of Singapore (IRAS).
You can check the AV of your owned property for free here (if you don’t own it, there’s a search fee of S$2.50).
Let’s assume the AV is S$24,000. Using the property tax calculator, we see that the net tax payable is S$2,400.
Next, we will assume an annual maintenance bill of S$3,400 (S$2,400 condo maintenance fee + S$1,000 for home repairs/improvement).
Next, we add a commission fee of S$2,200 for any property agent engaged (one month’s rent).
Taking the more conservative gross rental income, this gives us a figure of (S$25,000 – S$2,400 – S$3,400 – S$2,200) = S$17,000. This is the figure before factoring in the property loan interest.
Factor in the property loan interest, if there is one.
Most of us would use a loan to finance a property purchase. If you don’t need a property loan, then skip ahead. But if you do, you’ll need to factor in the interest rate.
For our property costing S$720k, we will assume a loan of S$540,000, which is 75% of the property’s price (the usual maximum). We will also assume an interest rate of around 2% per annum, over 20 years. The interest-only payment in the first year would amount to S$10,597 in total.
Subtract this from our non-loan net rental income of S$17,000, and this gives us a final net annual rental income of S$6,403.
Next, derive your total cash outlay — and work out your net rental yield.
We’re nearly there. Work out your total cash outlay, which includes the total of your downpayment, stamp duties and other upfront costs.
First, there’s a downpayment of (S$720,000 x 25%) = S$180,000.
Next, we’ll assume you’re a Singapore Citizen, and apply the 12% Additional Buyers Stamp Duty (ABSD) on top of the existing Buyer’s Stamp Duty, which amounts to S$102,600. (You can calculate stamp duty here.)
We’ll add S$15,000 for renovation and furnishings, which is a reasonable figure for a 1-bedder condo.
Finally, we’ll add an additional S$5,000 for tax on rental income and legal costs such as conveyancing fees etc.
This takes the total cost up to (S$180,000 + S$102,600 + S$15,000 + S$5,000) = S$302,600.
Now, divide the net annual rental income by the total cash outlay. This would be (S$6,403 / S$302,600) x 100 = 2.1% – your net rental yield*, also known as net return on investment (ROI). This is the percentage you’ll actually earn from renting out your investment property.
*Note that inflation has not been factored in the calculation of net rental yield. The calculation for also does not take into account any capital appreciation/depreciation over time.
Even with comparatively lower yields, investors love property for a reason.
Perhaps the most important differentiator about property as an investment is that it can be leveraged (e.g. bought with a loan). So, even if competing investment products such as stocks and REITs might earn an investor higher returns, we gravitate towards property and its rental yields because you can obtain external finance for a big portion of the actual value of the investment.
In fact, real estate is about the only low-risk investment that can be leveraged without any particular deadline to sell or return the money loaned.
Plus, financing for property is extremely cheap. Interest rates for home loans are lower than practically every other type of loan, simply because the bank can hold the property as collateral. In fact, it’s super low right now.
So, as long as the pricing of the property you’re eyeing is competitive and rental demand for the location of the property is high, a property investment may be the safest and most secure way for an investor to gain additional passive income as part of a broader portfolio.
All said and done, there’s more than one way to calculate net rental yield – this is just one of them. More sophisticated methods require data that won’t be available to the layman. If you want to explore these, a property agent can help, using data acquired from their firm and research partners.
Some additional important factors to consider:
There are some risks that aren’t addressed in this method to calculate rental yield. Remember that, if the mortgage interest rate rises, your ROI will drop. For example, the 2% interest used in our example may rise, and if it does your ROI will fall accordingly. This is why it’s important to refinance from time to time, to keep costs low.
The calculation also doesn’t take into account that your property might devalue, instead of appreciating. It’s not common for Singapore properties to devalue sharply though, other than those very close to lease expiry, or properties that–for some reason–were bought far above valuation. Sentosa Cove comes to mind.
Finally, your net rental yield could also fall, if the rental market weakens or you end up with a lot of vacancies. A sudden glut of new condos in the area might be the cause of the latter. If the issue is specific to location, your solution might be to rent out the property you’re living in (if the net rental yield is higher) and move into the condo that you had initially bought for rental income – a tactical substitution, to borrow football parlance.
Will you buy a property to rent out? Let us know in the comments section below.
If you found this article helpful, 99.co recommends 9 quick property hacks to spot a good investment unit and New launch versus resale: which makes a better investment property?
Looking to sell your property?
Whether your HDB apartment is reaching the end of its Minimum Occupation Period (MOP) or your condo has crossed its Seller Stamp Duty (SSD) window, it is always good to know how much you can potentially gain if you were to list and sell your property. Not only that, you’ll also need to know whether your gains would allow you to right-size to the dream home in the neighbourhood you and your family have been eyeing.
One easy way is to send us a request for a credible and trusted property consultant to reach out to you.
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That’s a shrewd answer to a tricky qutsoien
My calculation of net rental yield is 1.1%. I assume that the apartment after 2 years will require some painting, etc. I also assume that it remains empty for 2 months out of 24 months (7-8% vacancy rate). Your estimate for maintenance ($200 pm) appears on the low side. Since I have cash, I will not borrow money.
Appreciation – the Govt has already said that it would not allow property prices to exceed wages. The economy is expected to grow at 2-3% pa.
This gives an overall return of 4.1%. However, property investment is riskier than, say, a corporate bond with a coupon of 4%. This demands that property give a higher return.
Looking at the number of apartments already there and coming up (take a drive thru the CTE or near Changi Park), I think there will be an over-supply.
Politics is NOT going to allow our population to grow to 10 million!
The above is a correct calculation but a very basic one. For example, when the blog post says the property investment needs to be compared to investments with similar risk on the stock exchange, it would have been great to account for the fact the property investment in the example above is leveraged (i.e. financed with a loan), which is not possible with stocks. With stocks, you could lose all your invested cash. With property, you could lose even more than that. I learned all that thanks to a great property agent I found looking for best-ranked agents in Singapore on propseller.com and while buying my last investment property (that we found on 99.co).
Thanks. Perhaps I missed it, but where’s your ongoing principal repayment on the mortgage in this calculation? That’s a big ongoing cash outlay that doesn’t seem to be factored in here?
Hi Clement, great question. For the investor, the principal here is the value of the underlying asset (i.e. the property). There are two components to property investment, one being rental yield and the other being capital appreciation/depreciation of the property. For rental yield, it’s a calculation on the cost of borrowing to hold the underlying asset (i.e. interest) against the potential revenue we get in doing so. Any capital appreciation of the property (i.e. the principal) will add to the rental yield, and any depreciation will subtract from the yield.
This also explains why we see an investor preference towards new launch condos, because of perceived better prospects for capital appreciation. Check out our article on Bala’s Curve for more insight into this: https://www.99.co/blog/singapore/balas-curve-leasehold-property-value/
This article provides a great insight into how to calculate rental yield for Singapore property investments. It’s important to understand the concept of rental yield as it helps property investors evaluate the potential return on investment of a particular property. The article breaks down the calculation of rental yield step by step, making it easy for readers to understand. Furthermore, it highlights the importance of considering other factors such as vacancy rates and maintenance costs when calculating rental yield. This is a very informative article for anyone considering investing in rental properties in Singapore.