Rental yield gives you an idea of how much rental income you could get from a property, in relation to your cost.
A version of the Singaporean Dream used to be to own properties and live off rental incomes, but is it still feasible today?
I asked our Property Investing trainer, Jeff Ong for his insights.
What’s a good rental yield?
According to Jeff Ong, our Property Investing Trainer, rental yield for residential properties in Singapore is about 2.5% per annum, on average. This is highly dependent on location and demand for rental units.
In fact, according to Square Foot Research, the historical rental yield in Singapore has been on a downtrend.
Jeff finds this to be a depressing trend and has spent years globalising his property portfolio. He prefers to invest in markets with rental yields of at least 6% and he generously shares where and how he picks investment properties at his live webinar.
2 Ways to Calculate Rental Yield
There are two ways to look at rental yields – gross rental yield and net rental yield.
Gross rental yield refers to the yield in relation to the property purchase price.
Gross Rental Yield = (Annual Rental Income / Property Purchase Price) x 100
Net rental yield refers to the yield in relation to the property purchase price plus all other expenses. It is more accurate as it takes all the additional cost of maintenance, rental and taxes into consideration.
Net Rental Yield = (Annual Rental Income / [Property Purchase Price + Renovation / Maintenance Cost + Taxes + Interest Cost]) x 100
The rental yield that’s usually reported is the gross rental yield because net rental yield will vary depending on additional costs.
Is Rental Yield an important factor for property investing?
Not really, here’s why.
Despite a strong preference for high rental yield, do keep in mind that it only forms part of the equation to property investing.
Firstly, rental yields are derived in relation to your property price. This means, if you can find an older property in a location with high demands for rental units, you may be able to increase your yields.
Rental yields are usually reported as an average of a number of transactions. Serious property investors will need to put in the effort to hunt down optimal investment properties that could general higher yields. In such cases, property prices play a greater role than rental yields because if you can find a cheap property, your yields could be above average.
Second, rental yield does not include capital appreciation nor resell value of a property.
With the right approach, your investment property could appreciate in value over time or you might even be able to sell it for a good profit if it undergoes an enbloc process. Rental yields do not help you to spot such opportunities.
Instead of using rental yields, Jeff prefers to use a process he terms “BRRR”:
In order to achieve financial freedom, you must be able to conduct BRRR (Buy, Refurbish, Refinance, Repeat). This is the basic requirement that determines whether a city or location is worth investing in. We do not have the time to buy one or two properties, hold it for decades, only to sell it for a lump sum cashflow. The properties we select must also fulfil two requirements, high capital growth and positive cashflow. For that to happen, the rental yield must be substantially higher than the mortgage interest!
Jeffrey Ong
tl;dr
I’ve shared about the average and good rental yields in Singapore above.
Our property investing trainer, Jeff prefers to hunt for rental yields of 6%, on top of capital appreciation. He believes that Singapore property investors should globalise their portfolio. Hear his thoughts on property investing, directly from the horse’s mouth at his upcoming live webinar.