What is the faster way to create massive wealth for yourself? Some people will say stock market investment while some say property investment. Well, stock market is the most risky way to earn money for me as you will need to have certain experiences, knowledge, do lot of research about the market, knew some experts and the people who can provide you some “tips”. In addition, you must be smart enough to know the timing of getting in and getting out otherwise you will lose money.
On the other hand, I have more faith in property investment as it is the most steady way to earn passive income. It also have some risks though, but its risk won’t be higher than stock market. If you buy a right property, you will get the a significant returns from property appreciated after 5-10 years. Alternatively, you can buy a right property and do a proper renovation and decoration, then rent it out and you will get the rental income as well as generate cash flow every months. Hence, this is the great method to starting the wealth creation journey.
Ok, no more comparison. In today, we will talk about 3 types of returns from property investments which is Rental Yields/ Short-term Return, Property Appreciation/ Long-term Returns and Balance Sheet Effect. In order to let you understand this concept in details, we will state out the calculations method as below.
Let’s begin with a case study;
|Property Type||Ready-built apartment|
|Property Size||980 square feet|
|Purchase Price||RM 160,000|
|Deposit||RM 40,000 (not include stamp duty and legal fee)|
|Loan||RM 120,000 (20 years @ 8% p.a.)|
|Monthly Repayment||RM 1,000/ month|
|Gross Rental||RM 1,300/ month|
|Assumption: RM 300/ month is prepare for service charges, property repairs, tenant moving in/ out where 1 or 2 months rental income may be lost.|
|Nett Rental||RM 1,000/ month (RM 1,300– RM 300)|
|Monthly Cash Flow||Nett Rental – Loan Repayment = 0|
Let’s calculate the 3 types of return for the above property;
1. Rental Yields/ Short-term Return
Firstly, assume that you have RM 160,000 in your Fixed Deposit account and gaining 3% p.a. and you decide to buy this property with cash or without any bank loan. Then, the calculation would be;
(Nett Rental x 12 months / Property Purchase Price) x 100%
= (RM 1,000nett x 12 months / RM 160,000) x 100%
= 7.5% p.a.
To prove that this is a good investment, you will need to compare it with something else. Let’s compare it with your Fixed Deposit account.
Fixed Deposit @ 3% p.a.
Property @ 7.5% p.a.
This property will be a good investment compare to saving your money into Fixed Deposit account.
2. Property Appreciation/ Long-term Return
Do you know how much will this property worth after 20 years. In fact, you can only make the assumption of it as you can’t predict what thing will happened surround this property in the future. But, we still need to roughly calculate what you will earn from this property after 20 years.
Let’s assume that the property have been appreciated at around RM 280,000 after 20 years. In order to predict how much you will earn after 20 years, you will need to take the money that you have put down in this property into this calculations;
(Future Capital Worth – Deposit) / (Present Capital Worth x No. of Years) x 100%
= (RM 280,000 – RM 40,000) / RM 40,000 x 20 years) x 100%
= 30% p.a. for the next 20 years
Hence, you will earn about 30% from this property after 20 years.
3. Balance Sheet Effect
Balance Sheet is a table that list down your Assets and Liabilities
Your Net Worth = Total Assets – Total Liabilities
When you buy this property, your Balance Sheet would be like this;
Asset (A) = RM 160,000 Liability or Bank Loan (L) = RM 120,000
Your Net Worth = A – L = RM 40,000 (which is the deposit of the property that you have paid)
Let’s assuming that this property has appreciated from RM 160,000 to RM 180,000 after 5 years. And your bank loan may be reduced around 12.8% to RM 104,617.
Now, your Balance Sheet will look like this;
Your Net Worth = RM 180,000 – RM 104,617 = RM 75, 383 (up to 88.5% from the deposit @ RM 40,000)
You can work out the similar calculations for 10 years, 15 years, 20 years and so on. Determining how your property appreciates may be difficult, but you can determining how your bank loan reduces is easy predict whether there is any changes in interest rates.
Before you buy any property with the purpose of investment, do make sure you have practice the above calculations over and over again in order to determine whether this property is good for investment. Once you’re ready for it, you are good to go for property investment journey.