Have you been fooled with 3 – 4% rental yields, when actual yields are really 0?
Photo by Ken Teegardin

Here’s the story/scenario that property agents or financial advisors tell you to convince you that investing speculating on a condo in Singapore to get rental income is always a smart thing to do. “If you buy a condo, then rent it to a ready and willing expat tenant, he/she will pay rent that will cover your mortgage payments and even give you some extra pocket money. And after the term of the loan (usually 25 or 30 years), the home will be yours free, paid off with passive rental income.” The story is often followed by the agent giving you a wide-eye/gaping mouth look that suggests, “everyone is doing this, this is the only way to get rich, and you would be a complete fool if you don’t do it too.” Here’s where they’re wrong:

NOTE: This article is referring only to private condos as rentals (not as primary homes). It also does not refer to BTOs or HDBs.

Gross Rental Yield Does Not Take Into Account Other Costs & Expenses

Most property agents calculate Rental Yield as a straight-forward GROSS calculation. gross yield Simplified Example: A $1,000,000 property that rents for $2800 a month (or $33,600), has a gross yield of 3.36%

What’s Wrong with this Calculation?

This gives you the impression that rental yields in Singapore are not that bad, considering that you get to keep the property after your loan term. Remember that property agents and financial advisors make money from transactions. In general, you should not think of them as your friends or as unbiased money managers who have your best interest in mind. The reason why this calculation fails is because it does not take into account any of the expenses:

1. Purchase expenses (one-off) that add to the total cost of the property:total cost 2. Rental expenses (recurring) that can vary widely from year to year. And they are particularly vulnerable to changes in interest rates and overall market conditions.

The Actual Rental Yield (Includes Other Costs & Expenses)

From the earlier example, here’s your REAL yieldnet yield More Realistic Example: The Total Cost of Property for a $1,000,000 purchase is:

Purchase Price$1,000,000
Loan Amount$800,000
Stamp Duty$24,600
Legal/transaction fee$3,000
Total Cost$1,117,600

In this example, the rental income is $2800/month (or $33,600 per year) and rental expenses are roughly $47,000!!! (This assumes a mortgage interest rate of 1.8%, ½ month agent commission, NO vacancies, NO repairs, $3000 in annual insurance, and $4500 in annual condo fees – see the table below.)

Mortgage payment
Maintenance/sinking fund
Property tax
Rental Expenses
Net Rental Yield = – 1.2% per year.

This type of real rental yield is actually quite typical in Singapore. Some people will lose even more because interest rates are higher now than they were just a few years back. Rents have also dropped. I was also a bit conservative since I didn’t factor in vacancies or repairs. I also didn’t factor in income tax (on the rent income).

Had I factored in vacancies (½ month per year on average) and repairs ($500 per year on average),  and used a more typical interest rate of 2.8% rather than the teaser rate of 1.8%, the Net Rental Yield would be -1.74% per year.

Source: Channel News Asia


Is a Negative Rental Yield Still Worth it?

Some agents and advisors would still say, “It’s ok, since your property will appreciate by more than 1.2% a year”. This is a gamble. Nobody actually knows for sure that your property will appreciate and by how much. Judging from historic trends, it seems like property prices have been artificially propped up since ZIRP (zero interest rate policy) began. This means that it’s likely for prices to decline when interest rates rise again to their typical historic levels (as shown in the above chart).

Property agents and financial advisors cling on to the dogma that property prices always go up in land-scarce Singapore. But they often forget that private residential property prices have dropped many times in the past. Just take a look at the period during the Asian Financial Crisis (in 1996 through 1998).


But Don’t I Still Get a “FREE” Property After 30 Years?

If you manage to get an annual yield which is consistently equal to 0 (your rental income covers your rental expenses completely) throughout the term of your loan, yes, you will essentially pay off your loan after the term ends (since your mortgage payment includes the equity-building principal portion).

However, had you invested your initial cash payment of $317,600 (total cost of property – loan amount) into a 2.5% investment (CPF/bond/fixed deposit/etc) for 30 years, you would have roughly $666,000 without the burden of being a landlord or the risk of changes in interest rates and market conditions.  If you invested that amount at 5% (which is not an unusual rate of return for ETFs), in 30 years, that $317,600 now becomes $1,373,000.

Remember that a property is an asset and a liability. You are liable for the mortgage no matter what happens throughout the term of the loan. A term of 25 or 30 years is very, very long. It’s hard to imagine that your life would remain unchanged or just keep improving during that entire time. Remember that the iPhone has not even been in existence for a decade; how much has your life and the general economy changed since before the iPhone?


What Should You Do?

The example here takes into account a lot of assumptions while also neglecting inflation and the use of CPF as the funding source (as well as the need to replenish your CPF along with the interest portion that would have been earned). We live in unprecedented times and things can change, especially over the course of 25 or 30 years. Here are some thoughts to consider:

  1. With such low net yields on rental income, by investing in a second property, you would be banking almost completely on appreciation in order to make your investment worthwhile.
  1. Property prices have actually come down over the last few quarters. Most people agree that this is primarily due to the cooling measures, since we’re still deep into ZIRP. When ZIRP ends, and interest rates rise, repayments on loans will go up. And property prices will likely dip even further.
  1. A mortgage uses leverage, which can be really good when it works for you. Or it can be a complete disaster when conditions are not in your favour.
  1. Investing the money that would have been used as a cash down-payment into CPF (or ETF/bond) could be a better option. It might give you the same or even higher returns, in addition to being more safe (or liquid).
  1. Being a landlord is not always a bed of roses. I’m currently taking on both roles. And while I enjoy collecting income on my investment properties (which have positive yields, because they were paid off a long time ago), I also enjoy being a renter and having the freedom to shift to a new location and change my environment and living conditions every couple years.
  1. If you bought your property a long time ago (when housing was more reasonably priced), then you probably have a positive rental yield on your investment since your total cost of purchasing and your rental expenses are both low. And in this case, much of this article doesn’t apply to you.

13 Comments on Your REAL Rental Yield in Singapore is likely ZERO

  1. Totally agreed with all your points and it is kinda sad to see many Singaporean still believe in buy properties as the fastest way to become rich or collecting rental as a passive income. They often assume the best case scenario and neglect to calculate the net rental yield. Its true, in the past, people get rich by flipping properties. However with these cooling measure in place, this is no longer an option.

    I have read your other posts, really well written, I hope you can keep it up.

    By the way, I am a financial planner 🙂

    • Hi Des,

      Thanks for your feedback. I really appreciate it! It’s nice to know there are other financial planners in Singapore that don’t dogmatically tout buying property as a sure-fire means to building wealth. And thank you also for reading and supporting this site! 🙂

  2. Hi, this article is Informative. Due to my citizenship & single, I am unable to purchase a hd , so would need to resort to buying a condo.I may not need to stay there and just rent out for 5 years.having the thought of getting a loan at a younger age to and (condos price are kinda crazy expensive. What are your thoughts about this? Btw, I’m 35.

    • Without knowing your complete situation (employment situation, emergency fund, family needs, personal values, etc.), I can only give a very general recommendation on the top 4 things I would consider if I were in your shoes (given the little amount of info I know about your situation). There’s plenty more to consider but that would make this comment way too long.

      1. Timing of purchase? – When interest rates increase, property prices will fall. At the same time, mortgage payments will go up. This nearly 8-year period of ZIRP (zero interest rate policy) will eventually end. If you buy now, can you afford a drop in your home value? How about an increase in mortgage payments once the “fixed-rate” period is over?
      2. Bubble? – Property prices are still at historic highs. It might make sense to buy now only if you’re planning on staying in the home for a very long time. Is this likely? Bear in mind that most people who tell me they will “die in their property” end up living in it for less than 10 years.
      3. Economic uncertainty? – Given the uncertainty of the global economy, would you want to lock yourself into a 25 or 30 year mortgage? In this brave new world, “job security” is no longer a guarantee for most people. How well can you survive a job loss or a lower paying job?
      4. Family situation? – You mentioned that you’re single. Buying a home may inadvertently limit/complicate some choices if you meet someone. What if that person is from another country? What if that person is Singaporean and qualifies for a HDB?

      BOTTOM LINE: Personally, at this time, I wouldn’t consider buying a private property in Singapore. The economy is going through not just a cyclical downturn, but a complete restructuring which some say is the 4th industrial revolution. Property prices are still at all-time highs. Interest rates are at near-zero. When rates increase, prices will fall. Although the cooling measures have caused a slight decrease in prices, they have not returned to historic levels (in part, due to low interest rates). Remember that renting is not throwing away your money (http://wp.me/p4iMdp-61). You are getting use from the property, and you are (hopefully) investing the money you would have locked up in a down payment.

  3. This comment may come much later but not sure if you will see my message but what if you pay all in full for an off plan condominium, so you wont get affected by the low interest rate or future spikes. Will that make a difference?

    • Hi Cat, thanks for your comment! Yes, owning a property free and clear (with no mortgage) definitely makes a difference, as it means you won’t have the interest component or any expense associated with having a mortgage (like mortgage insurance). Therefore, your yield will be higher, since these expenses (associated with loans) are zero. This article was primarily focused on Singaporeans who buy second properties for investments and take up a mortgage. In a different article (http://frugalinsingapore.com/the-myth-of-home-ownership-in-singapore-and-why-i-choose-to-rent/ and http://frugalinsingapore.com/home-ownership-calculations/), I had mentioned the advantages of a fully-paid property. But unfortunately, these days fewer and fewer people have fully-paid condos (HDBs are a different story). In the condo market, most people through continuous refinancing or frequent relocating, don’t end up ever having a fully paid property. Though having one that is yours free and clear makes a tremendous difference in your ROI.

  4. your mortgage payments is inclusive of principle repayments….so the overall rental expenses should be lower than as you show

    • Hi Aa, thank you for your comment! You’re absolutely right, the “mortgage payment” is inclusive of the equity-building “principal” portion. In calculating net rental yield, I’ve seen people include the total mortgage payment (P+I), just the interest portion (although this is a hard calculation because the figures constantly change), or no mortgage at all (assume a paid-off property). There is really no one-way to do this calculation. The reason why I chose to include both principal and interest is because that’s the cash that ultimately leaves your pocket. I did, however, take into account the equity-building portion in the paragraph “Don’t I Still Get a “FREE” Property After 30 Years?”. If “rental income” = “rental expenses”, then the only way the answer to that question is “yes” is because part of your rental expense pays off the principal.

  5. I received an email from a 99.co team member regarding this article. They’ve written a similar article on this topic, and it’s worth checking out. Here’s what her email said:

    “I came across your article on ‘Your REAL Rental Yield in Singapore is likely ZERO’, and do agree that Singaporeans really need to consider all factors instead of blindly jumping into renting out their house.

    Our team has written an article, ‘How much rental income could you make from your home right now’, which shows a step-by-step guide on how to calculate your home’s true rental income. It can be found here: https://www.99.co/blog/singapore/rental-income-house-right-now/

  6. Especially in Singapore, it is highly likely that the value of real estate will appreciate … The gross yield that you receive is the yearly rental of your property.

Leave a Reply