Sunday, February 19, 2012

Buy and rent out private property to get passive income?

Recently my wife and I have been exploring the possibilities of buying a private as an investment to increase our passive income. Well it turns out one will need to have strong holding power and huge initial capital to do that.

Holding power is very important as one might not be able to find a suitable tenant for a period of time. And to make thing worst one may just lost his or her job during that time. So one must have enough money as back up.

Initial capital is also very important so as it determines how much one will pay for the month instalment. The lesser the loan quantum, the less one will pay for the monthly installment.

Let me give a scenario of buying a new two bedders condo unit for investment at $750,000, with $200,000 as down payment. By using 2% interest rate for the housing loan with a loan term of 25 years, one will need to pay about $2330 per month .

Let's assume that the maintenance fee is $350 per month, utility bill is $200 per month, property tax is about $100 per month (or $1200 annually), and miscellaneous internal repair (aircon serving, changing tap and light bulb) is about $50 per month. All these will add up to around $700.

So in order to rent out this condo for passive income, one must find a tenant that is willing to pay more than $3030. Anything lower will become a liability to the owner. For someone who wants to get 5% rental yield on the initial down payment of $200,000 , he or she must rent out around $3900 to achieve that. The question is whether is it easy to find such tenant to pay that amount?


Lizardo said...

Perhaps hold at 0% yield until the loan principal has been fully paid off; presuming the yield is not really needed till 25 years later (retirement timeframe?).

In addition, there are some potential tax deductibles on the interest paid on the rental unit loan.

Alternatively, pay more on the cash component to lower the loan principal and hence monthly outlay?

Guru said...

Hdb rental has the highest yield.
You should rent out your hdb and stay in the condo

Jamesneo said...

I think that condo is the worst property investment. In many countries with property bust, typically the condo market fared quite badly as the supply of condos are usually oversupplied due to the ease of building large amount of units per area compared to private landed properties. The condo market in singapore is likely to face drastic correction in the next three years due to economic problems. It would be much better to invest in reits if you want some property play.

Freedom Achiever said...

Hi Jamesneo,

I do agree with your points.

Freedom Achiever

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I think that residence is the toughest residence financial commitment. In many nations with residence breast, generally the residence industry worked out quite horribly as the supply of apartments are usually oversupplied due to the convenience of building lots of systems per area in comparison to private arrived qualities.

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jackjack said...
This comment has been removed by the author.
jackjack said...

Yes, I have a flat in East London and I'm thinking on same line to rent out it and get some good passive income. You post could help me achieving it.
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Carlos Miguel De Villa said...

Hi Mr. Freedom achiever, I think paying a condo rental of almost $4000 is very expensive that's why I think finding a tenant would be difficult. In that case it is more economical if you make the condo as your own. There are affordable ones in Singapore like Sentosa Cove Condo.

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