Property investment: Returns of 6 percent per year, buy?

I read a Facebook comment about property investment returns a few days ago. The property price for the said property in Singapore has appreciated 30% over a period of 5 years. The comment was that 30% is not a lot. I think what the writer wanted to comment was that 30 percent divided over 5 years is only 6% simple returns per year. Thus, this is considered low. Honestly, if a property investment gives us a return of just 6 percent, it’s best to skip this altogether. The time, effort and risks are not not worth 6 percent. Fixed deposits give up to 4.5 percent these days and it’s risk-free no matter how bad the property market becomes. Actually, if a property has appreciated 30 percent over a period of 5 years, I would be happy to sell it, especially since it’s after the Real Property Gains Tax (RPGT) period. The return on investment is huge!
Imagine the original property price to be RM300,000. 30 percent appreciation is equivalent to RM90,000. With a loan of 90 percent, the total capital invested is RM30,000. Stamp duty comes up to RM5,000. Loan agreement is around RM5,000. Lawyer’s fee is RM3,503. So, how much is the actual return on investment? Well, if we assume the capital invested to be RM30,000 + RM8,503 (stamp duty + legal fees). To make it simpler, we put the total as RM40,000. The return is thus RM90,000 / RM40,000 = 225%. Total return over a 5 year period? 225 percent divided by 5 years = over 40 percent per year. Yes, if the property price has appreciated by 30 percent, I would be very happy and would not be commenting that “it’s not that much.” Imagine if the same amount of RM30,000 was left in the Fixed Deposit paying 4.5 percent per year. Total gain at the end of 5 years is only RM7,400. Sigh….Inflation would have eaten away much of this FD gain.
What if the appreciation per year is ONLY 3 percent? Well, RM300,000 x 3 percent for a period of 5 years would meant that the property has appreciated by RM48,000. Using the same calculation as per above, total returns over the 5 years would be around 20 percent. Still pretty encouraging right? Of course, we must still ensure that we are not buying a property which is overvalued or buying the wrong one. Do note that when we bought the wrong one, whether it’s upturn or downturn, we will still be looking at losses when we sell. With sufficient reading and analysis, property investment is one of the best investments we can ever venture into. The capital needed versus the potential returns would be the highest most of the time even when compared to stocks, commodity or even unit trusts. Happy thinking and venturing into one yeah.
written on 3 Feb 2016
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