|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
 |
|
|
|
|
|
T(65)6259 0880
F(65)6353 3070
1 Goldhill Plaza
#02-47
Podium Block
Singapore 308899
|
|
|
|
|
Buildings are not valued by their
brick and mortar or by their replacement costs. They are
valued by their usefulness.
A building’s usefulness is judged by how many people want to
rent it and what rent they will pay for it. If you can
increase the rent, you increase the value of your investment.
|
|
|
» rental income ...
The rental income in most property investment is net income,
i.e. the income after the deduction of expenses such as rates,
body corporate, management fees, insurance, maintenance, etc.
Gross rent refers to the rental income before the
deduction of expenses.
Commercial and industrial buildings frequently have net
leases, meaning the tenants pay most of the expenses, but for
residential property you may need to make adjustments
deducting those costs from the gross rent.
|
|
Differences between net and gross rents.
|
|
|
» a property's rate of return ...
A property’s rate of return is known as its yield or
capitalisation rate.
The yield is the percentage return that would be achieved if
you paid cash for the building i.e. the value of the building.
Arithmetically, the yield is the ratio of annual net income
(net rent) to the capital value of the building, expressed as
a percentage.
For example, a building that has a value of $100,000, a gross
rental income of $10,000, and a net rental income of $8,000
after deduction of expenses, the yield of this property is 8%.
Knowing the annual net rental income of a property, you can
assess from experience in the market what an appropriate yield
should be, you can calculate the value of the property.
|
|
Property's rate of return = Yield = Capitalization Rate (also
known as Cap Rate)
|
Cap Rate |
=
|
Annual Net Income
Capital Value |
|
|
|
» yields differ, yields
change ...
The yield will differ for different locations, different
classes of property (residential, retail, commercial,
industrial), and to a lesser extent, the quality of the
tenants and the length of the lease.
Yields change over time due to changes in economic factors
such as recessions, economic buoyancy, interest rates,
inflation, etc.
|
|
Yields differ depending on the type of property and its
location.
Yields changes over time with economic situations.
|
|
|
» higher the yield,
risker the investment, and vice versa ...
As with all investments, the higher the yield, the riskier the
investment. Thus, be prepared to accept a slightly lower yield
for an exceptionally good property.
Arithmetically, this is reflected in the higher value of the
property, thus resulting in lower yield.
Conversely, if the property is poor in quality, you would be
prepared to pay a lower price, resulting in a higher rate of
return, compensating for the higher risk you have to
undertake.
|
|
|
|
|
|
