| Cost/Valuation | $1,000,000 | |
| Sell | $1,200,000 | |
| Profit | $200,000 | 20.00% |
| Interest Rate | 1.00% | |
| Years | 30 | |
| Rental | $3,000 | 3.6% |
Let's now look at some calculations showing why property investment is a good investment tool and why many Singaporeans are hooked onto chasing this property bubble. The above assumption is based on you buying a property for $1m and reselling it for $1.2m. This looks like you can earn a cool $200k profit in a rising market. However astute investors may ask what is the big deal of 20% profit? Question is, is it really just a 20% profit? Let's delve further...
| 10% | 20% | 30% | 40% | 50% | |
| Downpayment | $100,000 | $200,000 | $300,000 | $400,000 | $500,000 |
| Loan Amount | $900,000 | $800,000 | $700,000 | $600,000 | $500,000 |
| Stamp Duty | $24,600 | $24,600 | $24,600 | $24,600 | $24,600 |
| Total Initial Outlay | $124,600 | $224,600 | $324,600 | $424,600 | $524,600 |
| Interest Cost (1yr) | $9,000 | $8,000 | $7,000 | $6,000 | $5,000 |
| PMT | $2,894.76 | $2,573.12 | $2,251.48 | $1,929.84 | $1,608.20 |
| Total Outlay | $124,600 | $224,600 | $324,600 | $424,600 | $524,600 |
| Profit | $202,400 | $203,400 | $204,400 | $205,400 | $206,400 |
| Rate of Return | 162.44% | 90.56% | 62.97% | 48.37% | 39.34% |
Looking at the chart above (which assumes that the property is sold after 1 year), the rate of return depends greatly on the downpayment....bringing us to the greatest part of property investment.... LEVERAGE.
If you can leverage on a 90% loan, the profit is a cool 162%. Of course, when you leverage less, the rate of return drops correspondingly. However, do note that I am using 1% interest rate which to me is relatively low in the long run. For flippers (which I am not), the interest rate is not really a concern as they will be selling in the short term, i.e. little impact due to the short term of loan. However, when interest goes up, it will be a lot harder to sell the property. Here's why....
| 10% | 20% | 30% | 40% | 50% | |
| Downpayment | $100,000 | $200,000 | $300,000 | $400,000 | $500,000 |
| Loan Amount | $900,000 | $800,000 | $700,000 | $600,000 | $500,000 |
| Stamp Duty | $24,600 | $24,600 | $24,600 | $24,600 | $24,600 |
| Total Initial Outlay | $124,600 | $224,600 | $324,600 | $424,600 | $524,600 |
| Interest Cost (1yr) | $36,000 | $32,000 | $28,000 | $24,000 | $20,000 |
| PMT | $4,296.74 | $3,819.32 | $3,341.91 | $2,864.49 | $2,387.08 |
| Total Outlay | $124,600 | $224,600 | $324,600 | $424,600 | $524,600 |
| Profit | $175,400 | $179,400 | $183,400 | $187,400 | $191,400 |
| Rate of Return | 140.77% | 79.88% | 56.50% | 44.14% | 36.48% |
The above is based on 4% interest rate which is very possible in the mid term. As you can see, the rate of return drops by as much as 22% for 90% leverage but it is still relatively attractive (as the flipper sells within 1 year). However, it is no longer as attractive to buy the property. At 1%, the monthly payment is $2895, meaning that if he can loan out at $3k, the property is self-financing. However at 4%, it is now $4297, i.e. the new owner will have to cough up at least $1300 more. At 8%, this figure goes up to a whopping $6604, way beyond what most investors can afford or are willing to pay.
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