Whether as a newbie or seasoned investor, buying an investment property should be a decision based on sound financial sense. Numbers never lie and with the right calculations, you can quickly decide whether a property fits your investment goals or portfolio. Here are a few simple ways that will let you quickly ascertain if a purchase is a great investment.
Capital Appreciation (Self-Funded Purchase / Own Equity)
As the name suggests, capital appreciation measures the rise in the property’s value against the initial amount spent, which is the capital invested. It is a one-time gain or projected gain, derived when you dispose or sell the property. Here is an example:
Selling Price – Purchase Price (starting amount invested) = Capital Appreciation i.e. RM650.000 – RM500.000 = RM150.000
Here is the formula in a percentage figure:
Capital Appreciation In Absolute Numbers / Original Purchase Price x 100%. i.e. RM150.000/ RM500.000 x 100% = 30%
However, this calculation is too simplistic. One also needs to factor in renovation or refurbishment costs (if any), transaction and legal fees and real property gains tax (RPGT) if the property is sold within five years of its purchase. A more realistic calculation would be:
Selling Price – Purchase Price – Legal Fees (during purchase and sale of property) – Stamp Duties – Renovation Costs – RPGT and Other Taxes = Real Capital Appreciation
i.e. RM650.000 – RM500.000 – RM7000 (legal fees and stamp duties) – RM19.500 (agent’s commission at 3%) – RM25.000 (refurbishment, renovation, etc.) = RM98.500
Now if the property is sold in the 5th year, it is liable to be imposed with a 15% RPGT levy.
Hence, final gains would be:
RM98,500-RMl4,775 = RM83.725
Percentage wise, the capital appreciation is:
RM83.725 I RM500.000 x100% = 16.745%
* At present, RPGT in Malaysia is calculated based on the following tier system:
Capital Appreciation for Loan Funded Purchase
With a bank loan, things get fairly interesting. The capital gains are considerably more attractive because as the price rises, your loan liability remains the same. You only measure pure returns against pure out-of- pocket expenses:
Selling Price – Loan Amount – Legal Fees (during purchase and sale of property) – Stamp Duties – Renovation Costs – RPGT and Other Taxes = Real Capital Appreciation
i.e. RM650.000 – RM450.000 (loan principal amount) – RM7.000 (legal fees and stamp duties) – RM19,500 (agent’s commission) – RM25.000 (refurbishment, renovation, etc.) = RM148.500
Assuming the property is sold in the 5th year and is liable for 15% RPGT levy:
RMl48,500-RM22,275 = RM126.225
Percentage wise, the capital appreciation is:
RM126.225 I RM500.000 x100% = 25.245%
This is one of the benefits of using OPM (other’s peoples money) i.e. leveraging on bank loans to invest in property.
Annual Capital Appreciation
If you would like to annualise your returns, just divide the projected capital gains against the number of years you have held that property to get a yearly average appreciation percentage.
Capital gains of XX% or RMYY / Number of years held, i.e. 25.245% / 5 = 5.049% per annum or
RM126.225 I 5 = RM25.245 per annum
Calculating Rental Yield
The other common ROI measurement for property investment is rental yield. Rental yield measures the value you are getting from leasing the property against the money spent. This is useful if you are considering whether to buy a property for recurring rental income or for capital gains. You will need a few key numbers before starting.
- Purchase price of property: RM500.000 (inclusive of legal and other related costs i.e. renovation)
- Rental income received: RM3.000 per month
- Loan installment payments: RM2.000 per month
- Loan principal amount: RM450.000
- Downpayment: RM50.000
- Maintenance cost / service charges, etc.: RM6.000 per annum
Rental yield (leveraged rental yield) is calculated as follows:
Annual Rental Income – Loan Instalment Payments – Maintenance Cost and Service Charges / Downpayment x 100% = Gross Rental Yield
RM3.000 x 12 = RM36.000 – (RM2.000 x12) – RM6.000 / RM50.000 x 100% = 12%
If the property purchase is self-financed (zero loan), then the rental yield calculation is as follows:
Annual Rental Income – Maintenance Cost and Service Charges / Purchase Price x 100% = Gross Rental Yield i.e.
RM3.000 x 12 = RM36.000 – RM6000 / RM500.000 x 100% = 6%
Once again, it makes financial sense to get a loan. The key factor here would be the interest rate of the loan, which will affect monthly repayments. The lower the interest rate, the lower the instalments and better the rental yield.
Calculating Total Returns
So how would you calculate your total ROI from a property consisting of capital gains and rental included? A time factor is included as the gains would constantly change based on the year of calculation. Using Examples 4 and 7:
- Capital appreciation of RM126 625 upon sale of property in the 5th year
- Rental yield of RM6000 x 5 years = RM30.000
Total value in absolute numbers = RM126.225 + RM30.000 = RM156,225
Now, you will also need to subtract all expenditure and outgoings for the said property. For illustration purposes, let’s just keep it simple and assume there are no costs involved.
Total value in percentage = RM 156,225 (profits) / RM50.000 (invested capital) x 100% = 312.45%
The above example is just a basic illustration to give you a starting point on calculating total returns.
Remember to always include miscellaneous fees and hidden expenses. Here is a rough guide to give you an estimate on what these fees could be and how much they would cost:
Loan I Financing Charges:
- Loan Agreement charge by the panel banker’s lawyer: 0.5% of the loan amount
- RM50 to RM300 depending on loan amount
Stamp Duties / Transfer of Title
- 1% for the first RM100.000
- 2% for the next RM400.000
Disbursement Fees (registration of charge, land search and bankruptcy check on seller)
- RM300 to RM700
Penalty (if any) for early repayment of loan via sale of property
- 2% to 3% depending on bank, commonly imposed on loans settled
within 3 to 5 years (for conventional property loans) and can be longer for Islamic-based financing. Consult your end financier for more details.