Crunching The Numbers on Property Yields

Let’s get to it. If you have not done the calculation before, the end result may either be a pleasant surprise or a hard truth disappointment. The assessment below is based on an apartment in a strata scheme.

The same model can be used for other types of strata properties. For landed properties, amend the model to omit item (1) and replace item (2) with repairs under the landlord’s portion.

For a better understanding of what deductions to make and what not to include to reflect the quality of the property, read my article on how to determine net yields.

Net Yield– Fully Furnished Apartment

Estimated market value: RM 2,100,000. Current monthly rental: RM 8,000 (RM 96,000 per annum) Size: 2700 sq. ft.

(Figures are rounded off based on actual income and expenses.)

Note: Read my article on yields for an explanation of void allowance

The allowance for void is on the premise that the lease is 3 years, and it would take 3 months to secure a tenant. It would be unrealistic not to deduct an amount in the current less-than-optimum market condition brought on by the COVID-19 pandemic.  The void period varies depending on the property type, location and tenant. Check with agents in the locality on the average period to secure tenants and length of stay for similar properties.

If you exclude the void period for one property, then exclude for the other properties so that the comparison is on the same level. To compare with other types of investments, it could be significantly inaccurate if there are long periods of void. If one property — due to its location or type — is expected to have a longer period of void, the calculation would be off as well when comparing with other properties that are easier to secure tenants.

The net yield is about 4% if we remove the void allowance. Keeping all costs constant, if the annual rental reduces by 5%, the net yield becomes 3.37%. If the market value is RM2,000,000, the percentage becomes 3.78%. Play around with the figures to see the sensitivity of yields in response to changes in the outgoings. Obviously, the high costs are the primary determinants.

Measuring ROI

Now that we have done the rate of return, we can measure the return on investment (ROI). This is what I wrote in my previous article on ROI. 

Here, the net annual rental is divided by the initial capital outlay and not the cost or market value of the property. 

ROI = Net rental income / Capital Outlay

From the net annual rental of RM 75,620, deduct the loan interests incurred in a year and add incidental costs of acquisition and stamp duty for the transfer of title to the initial capital outlay. Assuming you took a loan of 70%, your capital outlay would be about Rm 630,000. The stamp duty cost works out to be about RM68,000, based on Rm 2,100,000. This is following the current scale. Starting 20th June 2020, with the reintroduction of the Home Ownership Campaign, there are new stamp duty exemptions under the short-term economic recovery plan (PENJANA). You could also add agency letting fees and income tax into the calculation.

As I wrote above, the measurer can make the calculation as detailed as he wishes, but he needs to do the same when determining the ROI of other investments.

Net yields and ROI do not take into account capital appreciation. If your percentages are very low, then you are banking on a good capital appreciation. If your investment becomes negatively geared, i.e., expenses exceed the rental income, it would be a losing asset unless there is a sizeable capital appreciation to compensate for it.