Real Estate Tips #8: How do you calculate rate of return on property?

By international standard, all property investors should be looking at minimum 6% yearly return when it comes to property investment. Here's how you calculate the rate of return:

Rate of return = Net Annual Rental / Price

Scenario 1. Double Storey Shop House at Taman Johor Jaya
Monthly Rental: RM2000
Price: RM400,000

Therefore,
Rate of return = (RM2000 x 12) / RM400,000
= 0.06 or 6%p.a.

Remarks: Attractive investment.

Scenario 2. 8th Floor Office Suite at City Plaza
Monthly Rental: RM4400
Price: RM600,000
Maintenance Fees (monthly): RM1900

Therefore,
Rate of return = (RM4400 - RM1900) x 12 / RM600,000
= 0.05 or 5%p.a.

Remarks: Less attractive investment.

Let me share with you a rule of thumb i often use without having the hassle of going through the above calculation.

Whenever you see the price, take off the last two digits, if the monthly net rental is at least half of this new figure, then rest assured, as you are getting minimum 6%.

Take scenario 1 for example, the price is RM400,000, after taking out the last 2 digits will be RM4,000, and the monthly net rental is RM2000, which is exactly half of RM4,000, there you are, you have a rate of return of 6%p.a. Try it out with other numbers yourself and verify with the formulae given above using calculators to see if it works.

I've provided you the above the simplest model on rate of return calculation, but please also note that rate of return is only ONE OF THE MANY FACTORS that should taken into consideration when it comes to property investment. I shall share with you in near future on other factors affecting property invesment decision making process.