Developers and agents quote property returns of 4%, 5% or 6%, while friends boast of 10% a year from shares. A viewer asked how return on investment is calculated and how to compare the two.
How is return on investment calculated for a rental property, and what counts as a good return?
“your profit versus your initial amount”
ROI is yearly return divided by the amount invested. For property, divide a year's rent by the price. A return above fixed deposit rates is already decent, and one above your loan interest rate is very good, because the bank funds most of the purchase.
Why
The basic sum
A RM500,000 property rented at RM2,000 a month earns RM24,000 a year, or 4.8% of the price.
Leverage changes the picture
RM50,000 in shares at 10% returns RM5,000 a year. The same RM50,000 as a down payment can control a RM400,000 property renting at RM1,500, or RM18,000 a year. The 4.5% is on the whole price, but you put in only about 10%.
Few assets come with a loan
Banks will lend ordinary buyers around 90% to buy property, but will not lend them money to buy shares.
What to do
- Work out yearly rent divided by price for any unit you consider.
- Compare the result with fixed deposit rates and your loan interest rate.
- Remember the return is earned on the full price, not just your down payment.
- Keep some savings in cash, shares and insurance rather than everything in property.
Editorial Note: Summarised from Sean Tan's full episode. The quoted answer is in his own words; the rest is our paraphrase. Figures reflect the recording date, so check current rates and rules before acting on them.
How to calculate Return On Investment?
Sources & Verification Data
Summarised from Sean's full English captions for this January 2019 video, made in answer to a viewer's question. The quoted line is verbatim; everything else is paraphrased. The 4.8% is worked from his own figures.
