Sunday, February 6, 2011

Why property is no longer an excellent investment (Part 1-to be continued)

Been debating with a friend on whether property is a good investment for ages!The problem with this debate is both of us just throw out qualitative statements about the good and bad of it. I gave up. Took out a spreadsheet and did a property calculator. Let this spreadsheet be the end of such meaningless debate. I have inputted the new rules implemented this January 2011. The following parameters are what have been placed into the model. I would like to add that this model serves as the best case scenario for residential private property investment. Therefore, one would very likely get less than the returns stated.

Parameters based on government rules
- 40% downpayment is needed.
This is because we are looking at property as an investment and very likely this investor has an outstanding home loan already.
- Seller stamp duty (SSD) of 16%, 12%, 8%,4% in the 1st,2nd,3rd and 4th year respectively if property is bought and sold within these years. No SSD if sold after 4th year.
- Buyer stamp duty(BSD) of 1% on first $180000, 2% on next $180000 and 3% on remaining property price.
-Property agent commission of 2% paid by seller
-Property tax of 10% of annual property value

Assumptions ( I would really appreciate it if you would tell me if i had made any unrealistic assumptions...i am open to constructive criticism. Remember this is a model)
- Net rental yield of 3.5%. This is calculated by taking the monthly rent minus maintenance minus monthly property tax divided by property price Monthly property tax is derived from the annual property tax divided by 12 months. ( i feel i might be quite optimistic about the yield already given the way i calculate it)
- Mortgage is fixed at 2% per annum. (Very good already)
- Loan tenure is 30 years
- Property is rented out 100%.(best case scenario)
- Rent amount is constant. ( best case scenario)
- Buyer legal fees is $2500 ( Is this fair?)
-Seller legal fees is $2000 ( Is this fair?)

What i have not included (because it varies greatly from individual to individual)
- i have not included the property agent's commission for renting out the property
- i have not included the renovation or repairs or furniture cost
- i have not included home insurance

The Horror Story
Mr Dick Albaross, who has a hearing problem, has $380,000 to invest. He eats fish every meal and likes to go to the wet market to buy silver pomfret from Auntie Chuck Hubert. In the wet market, he hears Auntie Chuck Hubert chant " buy pomfret", "buy pomfret". Being hard of hearing, he thought she meant " buy property" , buy "property". Since Auntie Chuck Hubert sounded so earnest, she could be right!!! Hmm, should i buy a property.....Dick pondered.

Scenario 1 (Property price stays stagnant)
( This post will be continued to show the annualised percentage gain for the different years when the property is sold......Gotta go gambling now....).

10 comments:

  1. Personally, I think the risk premium is very much higher now. The time to buy real estate in Singapore and to make a lot of money in the process was in late 2009 and early 2010. There is simply very little margin of safety now.

    With only an average rental yield of 3.5% based on today's purchase price and little upside left in capital gains, we would be much better off investing our money in some S-REITs.

    Look at AIMS AMP Capital Industrial REIT, First REIT and LMIR for higher than average yields. Good luck to one and all.

    ReplyDelete
  2. Hi AK71,

    Nice of you to drop by. Im an avid reader of your insightful blog :)

    About S-Reits, hmm probably better than an outright property investment but i wouldnt agree that its a good investment now given the impending rate increase which is detriment to such heavily geared entities.

    Im not vested into any REITs and would stay clear of them at this juncture. Really hate to face a rights issue. Absolutely abhor such corporate actions.

    SGDividends

    ReplyDelete
  3. Hi SGDividends,

    Have to make a correction to my earlier comment. Time to buy real estate in Singapore was in late 2008 and early 2009. Forgive an old man his bad memory. ;p

    I came across your blog through The Finance. I think your blog is very insightful too. Mutual back patting here... ahem.. ;)

    Regarding future interest rate increase, I won't use the word "impending". It might or might not happen this year and even if it did, it probably would not happen in a big way. 0.5% increase? 1.0% increase? Won't really make a dent.

    Also, we have to remember that many S-REITs have taken the opportunity to re-finance their loans in the current low interest rate environment, locking in these rates for the next 3 years or so. This is definitely true for AIMS AMP Capital Industrial REIT.

    As for S-REITs being heavily geared entities, I hardly think so as most of their gearing are below 35% (with a few exceptions like CIT). In fact, First REIT's gearing is a modest 17.25% while LMIR's gearing is only about 10%.

    Finally, rights issues are not all bad. In fact, I made quite a bit of money from the recent rights issues of AIMS AMP Capital Industrial REIT and First REIT. ;)

    I will leave you with a few links in case you would like to read more about these:

    http://singaporeanstocksinvestor.blogspot.com/2010/11/first-reit-rights-issue.html

    http://singaporeanstocksinvestor.blogspot.com/2011/01/first-reit-fy2010-results.html

    http://singaporeanstocksinvestor.blogspot.com/2010/09/aims-amp-capital-industrial-reit-sell.html

    http://singaporeanstocksinvestor.blogspot.com/2011/01/aims-amp-capital-industrial-reit_26.html

    Good luck for the new year. :)

    ReplyDelete
  4. Hi AK71,

    I guess you have definitely done a thourough research in REITS than me... :).

    Sounds good that they locked in a rate at such low rates. Could be worth a look.

    Thanks for the links AK71, will explore these again..

    Cheers
    Huat ah!

    ReplyDelete
  5. Hi SGDividends,

    You are most welcomed.

    Thanks for commenting in my blog. I have replied and included your blog.

    I look forward to your next quality post. :)

    ReplyDelete
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  7. Hi SGDividends, your spreadsheet isn't correct, The legal fee and any other added fee to buy the property is part of the Capital Cost. When I use your numbers and add up the rent minus the expenses I get 631.85 per month vs 2634.50. I don't know why you've listed the 2000 for sellers legal fee to your colunm. Please explain.

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  8. Cals didnt take into account of income tax, hence yield is even lower.

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