Last Updated: Mar 19, 2020
So you have finally built up enough resources to purchase a new condo launch as an investment piece after months of leg works and research. Eventually 2 pertinent questions remain: What is the rental yield and, the capital appreciation for my new condo?
Consequent to the above questions would be: Which is more important?
The general answer would be both are equally important from an investment perspective. After all, investment means Return On Investment (ROI) potential; or in lay, profit or revenue from investing in something. Taking a step further, there is also opportunity cost involved. Simply put, if you had parked your money elsewhere such as with a time deposit, you would have been assured of a fixed interest per year.
If I am forced into favouring either one, the choice would be capital appreciation. Why? Capital appreciation is viewed as a long term approach to investment. It is tantamount to buying a blue chip stock that has great potential because the company is profitable and responsible; has fantastic products; run by capable management team; etc. A valuable blue chip, for example can easily triple or quadruple its market value in 5 years. At the same time, the profitable company would also pay out dividend yearly, say anything between 3 to 8%.
Back to the investment of your new condo. The capital appreciation is equivalent to the increase in the blue chip’s share price, while the rental income is the dividend payout.
Take for example you have bought a $1,300,000 new condo Singapore launch with a steady state monthly mortgage of $4,500. Your real estate agent managed to negotiate an excellent rental of $3,600 per month for the next 2 years. Effectively you only need to top up another $900 to service the monthly mortgage.
2 years on, the Singapore property market takes a little dip. Rental market softens. Your condo unit now can only fetch $3,200 of rent per month. Unwillingly you accept the new rental. So now you would need to top up $1,300 to service the mortgage loan. That effectively sets you back by an additional $400.
Another year later, the property market picks up. Your new condo unit is now worth $1,600,000. That’s a $300,000 appreciation in price! That would be music to your ears!
Thus, for the long haul, do not take issue with the fluctuation in rental yield. Just like a healthy blue chip that has to ride a bad economy, dividend payouts shrink for a year or two but once the economy turns bullish, the stock automatically regains its deserving market value.