Property prices up 50%, how much is your profit? (Updated)

A friend of mine who is a sales manager in an online company told me that she earned 50% profit the other day as soon as her new property was completed. She had bought the property for 4 years. Actually, if your investment of 4 years earns you just 50%, it’s above average but definitely not awesome. However, I think her actual returns are awesome. Let me illustrate.
I asked if she bought cash or is she still paying a loan for it. She said she paid just 10% for the property which is RM30,000 for a RM300,000 property and the selling price is now RM450,000 which is extra RM150,000. She bought the property 4 years ago. Let us see what she has really earned in terms of %.
Four years ago, she invested RM30,000 as 10%. If we add all the other things like lawyers fee, interest payments etc, perhaps it comes to about RM40,000. If you have invested RM40,000 in FD and left it untouched for 12 months, it’s RM1,200 interest. If we calculate the compounded interest over 4 years period, total interest you earned is RM5,020. Seems ok. However, on the other hand, with this property, when she sells, she is earning RM150,000 which if you do the below simple calculation showed she earned 90% in ‘interest’ on a yearly basis.
RM150,000 (gross profit) / RM40,000 (gross investment) / 4 years = RM37,500 per year or in simple % is 90% per year.
Yes, I know she will incur the stamp duty and the lawyer’s fee but even if we add it in, the percentage is still going to be huge.
If I were to tell you that you may earn 90% interest per year on your investment, you would tell me, it must be a scam. In property investment, if you are very lucky, you may be earning such a return. BEWARE though because IF the property price does not increase when it is completed, then you may be suffering negative returns from your initial investment. Thus, the balancing act of risk versus profit must be considered very carefully and seriously because the truth is, initial investment itself is HUGE. This, versus the risk of FD which is nearly zero. Now you know why sometimes some people are just so worried about property investment that they prefer FD instead?
Yes, the above may be applicable if you had bought during the 2009 – 2011 period. Nowadays, the return is likely to be lower or may not even move for a while due to the current negative sentiment. Thus, please buy ‘safely’ and not try to buy ‘speculatively.’ Nothing to lose if you earn lesser but huge losses if you happen to be unlucky with the very price price per sf that you paid with the thinking that the sky is the limit. Remember, if your salary cannot suddenly fly, there’s no way for property prices to keep rising till it touches the moon. Happy buying.
updated on 6 May 2015
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  1. Kenneth Lau avatar
    Kenneth Lau

    You did not factor in the bank loan interest that buyer need to pay before the property is complete

    1. Kenneth, noted and thanks. My calculation is a simplified one. Hope everyone gets the main point.

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