There are two components of returns - rental yield per annum and capital gain.
Rental yield per annum is the percentage return based on rental income from the property less expenses incurred to maintain the property versus the total purchase price of the property.
Here is a simple method to calculate the rental yield on property investment.
Assuming you purchase a property for RM650,000 inclusive of legal and other related costs, receive rental income of RM3,800 per month, and in turn, incur total expenses of RM5,400 per year to maintain the property.
The Gross Rental Yield would be calculated as follows:
RM3,800 x 12 = RM45,600 per annum rental income
(RM45,600/RM650,000) x 100 = 7.02% per annum
The Net Rental Yield is computed as
(RM45,600 - RM5,400)/RM650,000 x 100 = 6.18% per annum
Assuming you take an interest-only loan of RM500,000 to finance the property purchase, and the financier levies an interest cost of 6% per annum fixed for the entire financing tenor. The loan will be repaid on maturity of the financing facility or when the property is sold if it’s earlier. The annual interest cost is RM30,000.
Net Leveraged Rental Yield takes into account your property financing in calculating the rental yield. In this scenario, your capital cost is the difference of purchase price and your borrowing (ie, RM650,000 - RM500,000).
(RM45,600 - RM5,400 - RM30,000)/RM150,000 x 100 = 6.80% per annum
Capital gain, on the other hand, is a one-time gain (or loss) when you sell your property. It is calculated by subtracting your original purchase price from the selling price.
Following the same example above, if you were to sell the property 5 years later for RM850,000, the capital gain would be:
RM850,000 - RM650,000 = RM200,000 one-time gain, or
(RM850,000 - RM650,000)/RM650,000 x 100 = 30.77% over the original purchase price
Taking in to account the leverage (borrowing) effect, the Leveraged Capital Gain would be (RM850,000 - RM650,000)/RM150,000 x 100 = 133.33% over the initial capital
The total return yield from an investment property is the rental yield plus the capital gain over the investment tenor. Using the preceding example to illustrate,
|Rental (Net) Yield per annum||6.18%||6.80%|
|Total Return per annum*||11.11%||23.52%|
* Total Return comprises net rental income and capital gain over the five-year investment horizon; computed using the internal rate of return formula
Caution: Do note the example above does not take into consideration taxation. You should consult your tax accountant to determine any potential tax liability deriving from such property investment.
How to manage your investment property – select an estate agent or do it yourself
Evaluate whether you will manage your investment property or whether you will outsource this task to a real estate agent. Areas that will need to be managed include:
Managing Cash Flow
At CIMB Bank, we look forward to help you achieve your investment goals by providing the finances you need. The loan you apply for will depend on the type of property you are investing in.
Enjoy repayment flexibility where you can deposit any amount, anytime. Excess repayments will be used to offset the principal loan amount for interest calculation. Combines loan account with current account to facilitate withdrawal of excess cash.
Looking to own your business premises? This traditional credit facility is for financing the purchase of commercial properties. Repayment is in the form of fixed monthly installments of principal and interest.
BizFlexi is financing for all types of completed or under construction commercial or industrial properties designed for customers who want flexibility in repayment while enjoying the ability to save interest.
This is a Shariah-based home / business premises financing product which is based on the concept of Tawarruq or also known as Commoditiy Murabahah.