Scenario of Rental Income
Property Price : $1,140,000
Monthly Rental : $3300
Yield at Cost : 3.47 %
Annual Net Income
After considering below
1. Condo maintenance cost : 400 monthly
2. Rental Agent fee = 0.5 month annual.
Monthly Net income : $3300 - 400 - (0.5 month / 12) = $2763
However, usually people borrow quite an amount to finance the purchase. So there is leverage in play. And this is where Math becomes complex.
3.. How much you leverage
4. Stamp Duty & Fees : 2.72% one time
5. Interest Cost.
Let's assume item 4 in build into the condo valuation. Basically ignore.
Leverage resulting I need to pay $606 of interests portion monthly
Monthly Net income : $3300 - 400 - (0.5 month / 12) - 606= $2157
Implied, Annual Net Income = $25, 884
YIELD
Now, let's talk about Yield. Yield at Cost based on net income : 2.3 %. This Math sucks right ?
One thing to note. Property valuation can change with time. If property valuation increase 35% after 10 Years. The capital returns are then plough back into the monthly income in simplify manner.
Yield at today valuation approximately 4%. Basically doubled. And that's before property tax, tenant issues, empty months, .... alamak. Still no good enough.
However let's assume 33.3% of the property is my money injected. The rest are borrowed.
At current valuation yield will be 6.9%, or 12% if price increase by 30% 10 years later.
This are all rough estimation. Should I just stick with Reits or it can be another form of diversification that we cannot afford to miss as I like the Maths now.
Rental Income Tax (updated from feedback)
Depending on one tax status. Can varies widely between a retired and a director level salary income tax.
Please DYODD.
Cory
2020-1115
U didn't consider opportunity cost of the 33% down-payment
ReplyDeleteNot sure the relevance here since reit or others have the opportunity cost to it too. Maybe you can elaborate more.
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