Originally Posted by
Nestor
Hi,
I was having a conversation with an agent recently and the following example came up and after some reasoning, I had a conclusion but I think it's fundamentally flawed somewhere... hopefully someone can point out what's missing.
Assuming a property of 1.2 mil. This place is tenanted at 3.2k monthly for 2 years and the property is over 10 years old freehold. I did some simple calculation and thought that it's a bad buy due to the following reasons.
At 80% loan, this place will be 960k and monthly will be at about 2.8k for the current low interest rate. With property tax of 10%, assuming at $3000, that make it $36k annual, or $300 per month. If the maintenance fee goes at $300 monthly, it will mean that the owner needs to pay 2.8+300+300= 3.4k. In other words, the owner is making negative yield and needs to pay $200 every month out of his own pocket for that unit.
Take a few possible scenarios in terms of capital appreciation gains, like if property price goes upwards and they place is now worth 1.5mil. The rental rate needs to go up more in order to attract future buyers at about $4300 if interest rates remain constant, or else no one should be interested in the place just like how it's a bad buy now (and that's not considering the age of the property yet).
If property price dip below 1.2 then the buyer is bleeding on both capital gain and rental.
More scenarios:
Property up/rental up more/IR same = can possibly sell with some interested buyers
Property up/rental up but not enough/IR same = can't sell because probably no one will buy
Property up/rental up more/IR increase = cannot sell because loan is too expensive
etc
If I try all the possible permutations for property price + rental + IR, it will seem quite foolish to make the purchase.
Now apply the the same logic across all properties, For another property at 2.9 mil, it would seem reasonable for the rent to be at 8.2k minimum to cover cost, even though it's still a bad buy because of poor rental yield. Yet I'm seeing properties at this price range renting out at 8k (Levelz) in propertyguru. Am I missing something or are these units just not "buy-able" ones?
I'm under the impression that this reasoning might be fundamentally flawed, or I'm missing something altogether. What if someone loan at 50-70%? In that case the yield will seem better but he would have paid more upfront in the first place, in which case he can possibly sell later for capital appreciation, but he will still be 'trapped' with the possibility of not finding buyers for the place due to low rental rate and high property price later, or any of the scenarios described above.
Can someone point out if this is flawed to being with and where are the holes?