Is Rental Income a Good Passive Income

[Laguna]

There is fundamental difference between income and cashflow.
Many people are talking about passive income rather than cash inflow.

If u buy an unit at $1.6m, take a 80%, 30 years loan, at 1.2% pa interest, and rented out at 3.5% ie 3.5% X1,600,000 as income, with mortgage payment, property tax which is 10% on AV....

do u there is still a positive cash inflow, if yes, it is minimum....

lazy now...can someone table the calculation...

[Allthepies]

There is fundamental difference between income and cashflow.
Many people are talking about passive income rather than cash inflow.

If u buy an unit at $1.6m, take a 80%, 30 years loan, at 1.2% pa interest, and rented out at 3.5% ie 3.5% X1,600,000 as income, with mortgage payment, property tax which is 10% on AV....

do u there is still a positive cash inflow, if yes, it is minimum....

lazy now...can someone table the calculation...

lazy to calculate, still need to know maintenance fee, ur income tax bracket. rough guide is 5% gross rental yield definitely got cash inflow. 4% gross rental yield probably breakeven cashflow

[phantom_opera]

At current market price, only HDB got positive cash flow ... if SIBOR hits 3% .. negative jialat jialat

[sh]

Now with 60% LTV, easier to cover cost....

[focus]

I've been talking about this.. Very hard to replicate passive income from properties at current yield.

But if you are interested in capital appreciation while letting someone pay for your installment, then property is good.

From my tabulatino above, you will get an ROI of 10% yearly(incl. principal repaid) or -0.6% yearly (exclude principal repaid).


And as can be seen, if interest rate do rise to 3% without corresponding rise in rental , you will have to see a drop in sale price to make buyers bite.

[phantom_opera]

I've been talking about this.. Very hard to replicate passive income from properties at current yield.

But if you are interested in capital appreciation while letting someone pay for your installment, then property is good.

From my tabulatino above, you will get an ROI of 10% yearly(incl. principal repaid) or -0.6% yearly (exclude principal repaid).


And as can be seen, if interest rate do rise to 3% without corresponding rise in rental , you will have to see a drop in sale price to make buyers bite.

you are absolutely right, no difference from holding gold ... only capital appreciation is expected due to wage inflation

[leesg123]

There is a flaw in this calculation. Let me give you an example,if you put in 1000 into a bank which gives 1 year 2%. At the end of the year, how much money? 1020 right?

Likewise for property rental, people like to GROSS RENTAL - LOAN payment (and other cost). But bear in mind that LOAN payment constitue INTEREST and PRINCIPAL payment. INTEREST is real cost, and goes to bank, PRINCIPAL payment goes to your pocket (asset). Go figure out, that is the reason why the people still invest in property for rental, despite what people say about negative yield. wrong calculation.

[leesg123]

I've been talking about this.. Very hard to replicate passive income from properties at current yield.

But if you are interested in capital appreciation while letting someone pay for your installment, then property is good.

From my tabulatino above, you will get an ROI of 10% yearly(incl. principal repaid) or -0.6% yearly (exclude principal repaid).


And as can be seen, if interest rate do rise to 3% without corresponding rise in rental , you will have to see a drop in sale price to make buyers bite.

Yes, i would prefer to look at it from the point o view that someone is paying off my property.

[amk]

There is a flaw in this calculation.

We all are very well aware of the principal part. No need to go into detail example. That's not TS's point.
It's about whether it can be used as an INCOME. With a pty on mortgage, it cannot be used as an INCOME, simply because it's negative. It can become riskless income only when it is fully paid up.
But this does not mean it can not be used to generate yield. Provided y already have other income.

[Ringo33]

Now with 60% LTV, easier to cover cost....

50 years loan?

[dtrax]

50 years loan?

not at all, 35yrs will do. In fact based on 1.5% at 40% LTV for 2 condos, a 750k condo with 3k rental can easily pay almost all the annual expenses (bank loan+condo fees) for this condo itself + another 700K+ condo for self-stay.

This excludes the additional cost like property tax, misc fees and possible increase in interest rates in future.

For example:
60% LTV for both condos at 1.5% interest rates for 35yrs:

1. 750k Central Area MM condo renting at $3k p.m @ 4.8% yield for investment
Income: 3k x 12=36k/yr
Expenses[condo fees+bank loans]:1.7k x 12= 20.4k/yr

2. 700k Mass market 2rm condo for selfstay
Income: $0/yr
Expenses[condo fees+bank loans]:1.6k x 12= 19.2k/yr

Total Income: 36k/yr
Total Expenses: 39.6k/yr
Net: -3.6k/yr [-300 p.m]

If we include property tax/misc + 3% interest rate then Net amount will be increased from -3.6k to about -17k p.a [-1400 p.m]

[dtrax]

Focus made a gd point that at today's market even with low interest but shitty yield ~ <4%, a 80% LTV property is quite challenging to generate passive income but things are different if it is a 60% LTV but of cse with higher initial capital

[Ringo33]

I've been talking about this.. Very hard to replicate passive income from properties at current yield.

But if you are interested in capital appreciation while letting someone pay for your installment, then property is good.

From my tabulatino above, you will get an ROI of 10% yearly(incl. principal repaid) or -0.6% yearly (exclude principal repaid).


And as can be seen, if interest rate do rise to 3% without corresponding rise in rental , you will have to see a drop in sale price to make buyers bite.

how did you arrive $65810 in total expenses?

Mortgage payment : $53016
Property Tax : $6400
Total : $59416

(Diff) : $6394

Maintenance : $500 per month??

[Kelonguni]

how did you arrive $65810 in total expenses?

Mortgage payment : $53016
Property Tax : $6400
Total : $59416

(Diff) : $6394

Maintenance : $500 per month??

Consider maintenance plus income tax (for rental income), plus replacement of damaged furniture and electrical appliances? Just speculating.

[carbuncle]

all these yield calculations should actually be based off your actual cash outlay, eg your downpayment plus misc fees. and not the whole buy price unless of course if you paid in full cash. that's the true yield.

if this method is used, factoring in loan interest, tax etc the actual yield should in double digit or high single in percentages.

[carbuncle]

I have posted a set of calculations for a RV shoebox at the thread titled Paying for a shoebox if anyone is interested

[DC33_2008]

That is the power of leveraging especially in the current economy climate at least till mid 2015. Wow, those who bought earlier is laughing to the bank.

all these yield calculations should actually be based off your actual cash outlay, eg your downpayment plus misc fees. and not the whole buy price unless of course if you paid in full cash. that's the true yield.

if this method is used, factoring in loan interest, tax etc the actual yield should in double digit or high single in percentages.

[Allthepies]

Having high cash flow and getting high returns (gain over capital invested) are 2 conflicting components.

To get high positive cash flow, u pay up as much as possible (ie 60% LTV, 40% LTV or even fully paid up), but when u do this ur return yield is lousy.

To get high return yield, u pay as little capital as possible (ie 80% LTV), but however ur cash flow will be lousy.

[phantom_opera]

This kind of discussion repeated donkey times already, amk summarized it vet well last time, in general professionals are after capital appreciation, not yield ...

[cnud]

This kind of discussion repeated donkey times already, amk summarized it vet well last time, in general professionals are after capital appreciation, not yield ...

After a while, you know yield is buying time for capital appreciation.

[30years]

Real case, my own:

D11, 2br luxury condo, about 800 sq ft, purchased for S$550K in 1988, during the Asian Financial crisis, with corporate tenancy at S$3200 per month. 90% LTV, staff loan at 3.5% interest.

Investment looks good at point of purchase, collect S$3200 cash monthly, mortgage payment from CPF. Net cash inflow, no outflow, like drawing money out from CPF.

Year 2000, similar unit transacted at S$800K. Less than 2 years, price went up about 45%. Felt good and happy. It is like having a peacock on my head, to show off. Did not sell. Got capital gain tax at that time.

After the $3200 per month corporate tenant left, unit was rented out to Indonesian mother and schooling daughter at $2200 per month. Had to spend $30K to renovate the bathrooms and the kitchen. Without renovation, no takers. Rental can drop, be prepared.

In 2005 I had to sell but best offer was S$580K versus my minimum S$600K asking price. I lost my job, staff loan becomes ordinary loan with 5.5% interest. After 6 months without tenant and not able to sell at my asking price, I rented the unit to an Indian IT couple for $1600 per month only. Rent can drop further, be prepared. Interest can go up, be prepared.

Unit sold in early 2007 for $710K. Very happy then, to have a monkey taken off my back. I did not advertise. Some buyer/agent probably saw my old advertisements and snatched the unit from me. One 2 br unit similar to mine was sold a couple of days earlier at $850K but did not show up in the URA website which I checked. It showed up later. Be careful when someone offers to buy your unit, when you did not advertise to sell.

Latest transaction for 3 br in that condo is $$1500 psf. When I bought the unit, I planned to keep it to pay for my children's university education. They were 1 & 3 years old then. Would have been a good investment if I had been able to hold on to it until today.

Property is good for passive income and capital appreciation, if you can hold on to it during the bad times. Try to time your purchase. Best time to buy is any crisis, when the rest are scared.

[phantom_opera]

More leverage means more risk in exchange of higher capital appreciation potential, yield alone is not enough

[leesg123]

Real case, my own:

D11, 2br luxury condo, about 800 sq ft, purchased for S$550K in 1988, during the Asian Financial crisis, with corporate tenancy at S$3200 per month. 90% LTV, staff loan at 3.5% interest.

Investment looks good at point of purchase, collect S$3200 cash monthly, mortgage payment from CPF. Net cash inflow, no outflow, like drawing money out from CPF.

Year 2000, similar unit transacted at S$800K. Less than 2 years, price went up about 45%. Felt good and happy. It is like having a peacock on my head, to show off. Did not sell. Got capital gain tax at that time.

After the $3200 per month corporate tenant left, unit was rented out to Indonesian mother and schooling daughter at $2200 per month. Had to spend $30K to renovate the bathrooms and the kitchen. Without renovation, no takers. Rental can drop, be prepared.

In 2005 I had to sell but best offer was S$580K versus my minimum S$600K asking price. I lost my job, staff loan becomes ordinary loan with 5.5% interest. After 6 months without tenant and not able to sell at my asking price, I rented the unit to an Indian IT couple for $1600 per month only. Rent can drop further, be prepared. Interest can go up, be prepared.

Unit sold in early 2007 for $710K. Very happy then, to have a monkey taken off my back. I did not advertise. Some buyer/agent probably saw my old advertisements and snatched the unit from me. One 2 br unit similar to mine was sold a couple of days earlier at $850K but did not show up in the URA website which I checked. It showed up later. Be careful when someone offers to buy your unit, when you did not advertise to sell.

Latest transaction for 3 br in that condo is $$1500 psf. When I bought the unit, I planned to keep it to pay for my children's university education. They were 1 & 3 years old then. Would have been a good investment if I had been able to hold on to it until today.

Property is good for passive income and capital appreciation, if you can hold on to it during the bad times. Try to time your purchase. Best time to buy is any crisis, when the rest are scared.

Thank u for sharing! Is a good timely reminder. Actually, just like buying stocks, dont time the market. Buy what u can afford and can hold. With inflation, prices of properties will go up over the years.

[andy]

This kind of discussion repeated donkey times already, amk summarized it vet well last time, in general professionals are after capital appreciation, not yield ...

So how much capital appreciation do you think is better before cashing out. 40% of 3 years or 100% over 10 years?

[yowetan]

Real case, my own:

D11, 2br luxury condo, about 800 sq ft, purchased for S$550K in 1988, during the Asian Financial crisis, with corporate tenancy at S$3200 per month. 90% LTV, staff loan at 3.5% interest.

Investment looks good at point of purchase, collect S$3200 cash monthly, mortgage payment from CPF. Net cash inflow, no outflow, like drawing money out from CPF.

Year 2000, similar unit transacted at S$800K. Less than 2 years, price went up about 45%. Felt good and happy. It is like having a peacock on my head, to show off. Did not sell. Got capital gain tax at that time.

After the $3200 per month corporate tenant left, unit was rented out to Indonesian mother and schooling daughter at $2200 per month. Had to spend $30K to renovate the bathrooms and the kitchen. Without renovation, no takers. Rental can drop, be prepared.

In 2005 I had to sell but best offer was S$580K versus my minimum S$600K asking price. I lost my job, staff loan becomes ordinary loan with 5.5% interest. After 6 months without tenant and not able to sell at my asking price, I rented the unit to an Indian IT couple for $1600 per month only. Rent can drop further, be prepared. Interest can go up, be prepared.

Unit sold in early 2007 for $710K. Very happy then, to have a monkey taken off my back. I did not advertise. Some buyer/agent probably saw my old advertisements and snatched the unit from me. One 2 br unit similar to mine was sold a couple of days earlier at $850K but did not show up in the URA website which I checked. It showed up later. Be careful when someone offers to buy your unit, when you did not advertise to sell.

Latest transaction for 3 br in that condo is $$1500 psf. When I bought the unit, I planned to keep it to pay for my children's university education. They were 1 & 3 years old then. Would have been a good investment if I had been able to hold on to it until today.

Property is good for passive income and capital appreciation, if you can hold on to it during the bad times. Try to time your purchase. Best time to buy is any crisis, when the rest are scared.

Hi.. Are you still vested?

[phantom_opera]

So how much capital appreciation do you think is better before cashing out. 40% of 3 years or 100% over 10 years?

do u think next 7y, median income for family earning 12k now can go up another 60%?

[cnud]

So how much capital appreciation do you think is better before cashing out. 40% of 3 years or 100% over 10 years?

For me, if capital appreciation exceeds yield by 10 years, I let go.

Meaning, nett rental profit per year X 10.

But now very hard due to CM.

[focus]

how did you arrive $65810 in total expenses?

Mortgage payment : $53016
Property Tax : $6400
Total : $59416

(Diff) : $6394

Maintenance : $500 per month??

Actually, just estimating and conclude roughly it's around 10% of your gross rental.
1) Maintenance is $300*12mths = $3600
2) Income tax is on Income - expenses(exclude principal), so is roughly $500.
3) the other is agent commission of $5000 for 2 years will become $2500 for 1 year.

[focus]

all these yield calculations should actually be based off your actual cash outlay, eg your downpayment plus misc fees. and not the whole buy price unless of course if you paid in full cash. that's the true yield.

if this method is used, factoring in loan interest, tax etc the actual yield should in double digit or high single in percentages.

Yup. That's why i mentioned the ROI (include principal) is around 10% , but if exclude principal it will be -0.4%.

So, for passive income(the TS question), it will not be desirable.
But for capital appreciation while letting tenant pay.. will be desirable.

But do note it is at 1.5% interest rate, if it goes up to 3% without corresponding increase in rental, your ROI(with principal) will be 4%, but your ROI(WITHOUT principal) will be -4.2%(means you have to come out of pocket 4.2% yearly). And when you want to sell at that time or the general market developer is selling, the pricing will have to be decreased to have ROI(without principal) equal to at least 0% and above. (ie., you go buy a new launch and developer tell you , you have to top up cash every month as the rental cannot cover installment. You want? )

Negative yield play in Australia was very popular.. but a lot of them got burnt by the 2008 crisis and now a lot more advocating positive cashflow buys.

[andy]

For me, if capital appreciation exceeds yield by 10 years, I let go.

Meaning, nett rental profit per year X 10.

But now very hard due to CM.

Just curious why 10 years nett rental profit and is the capital appreciation over 3 years or 5 years?