Posted by
Maar
11 yrs ago
I am thinking about buying a flat for investment (i.e. to rent to someone). How much should the monthly mortgage v. rent be?
If I borrow 70%, for 20 years, should the rent I receive cover the monthly mortgage repayment? Should that be considered satisfactory? Or should I make a profit every month (to compensate for regular repairs/vacancy periods)?
What would be the return on investment, if I receive a rent that covers the mortgage? Or how to calculate the return on investment?
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Can you share where you're looking to buy, and how much you're planning to invest?
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Maar
11 yrs ago
I plan to invest 4 M.
I am not looking for advise as to whether it is wise to invest in this particular loction or time. This is just a general question as to the relationship between repayment and rental, and what woud be considered "normal".
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It depends on how much you borrow, and the interest rate you pay.
Some years ago, when I owned multiple properties, I borrowed between 50-70%, depending on the property. Interest rates I paid (2-3%) were below the yields of 3% plus.
The last property acquired within my household was financed by a 30% loan, to keep the risk of cash flows being impacted by higher rates to a minimum.
You might get clearer answers, if you would say more about what you want to achieve. I certainly DO NOT think Now is the time to borrow as much as you can, and buy the most expensive property.
In fact, I would suggest that those buying "as a hedge against rising rents", might but a property under $4-5 million, and aim for a high yield in a gentrifying neighborhood. You don't need to live in it. You can rent it out, and use the income to pay your rent somewhere else. KEEP THE RISK DOWN, including the risk on the loan - is my advice.
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Maar
11 yrs ago
I plan to borrow 70% with a 25 year loan. At an interest rate of 4%, the rent should cover mortgage + management fees.
Whenever I have savings, I can repay the mortgage more than what I am due, so 25 is only the maximum length. I hope to pay it within 15-20 years (though 15 would be difficult).
With an interest rate of 3%, I would save almost 2,000/month on the difference between rent and mortgage (the mortgage+man. fees would be 2,000 lower than the rent). So I have some flexibility there.
The area isn't gentrifying. The flat is in poor conditions, which means I would have to pay 100,000-150,000 or something to repair it, but it's 700,000 to 1 M. cheper than nicely decorated flats.
It's for my retirement. I own the flat I live in, and I would live off the income from the flat during my retirement.
I read that low interest rates are here to stay a few more years, and if I wait for 3 years for a drop in the market price, by then I would have paid over 10% of the mortgage, and the price might have dropped by only 10%. So why wait?
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Maar
11 yrs ago
By the way, I would retire in 17 years.
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FWIW, I prefer to limit gearing to the point where I have a small positive cash flow after outgoings and allowance for things like repairs and vacancies etc. I just like the idea of not having to add to my investment once I have made it. In the current market this does not leave much room for gearing highly.
Carrying a mortgage in retirement is not necessarily a problem - just one more thing to include in your calculations. I retired last year and still have mortgages on my home and some investment properties.
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What is the anticipated yield:
+ Gross, and'
+ Net (after management fees)
Be sure to add in the anticipated upgrade cost in your Capital calculations, when calculating yield
I would certain aim to achieve 3.5% Net, or better, on an older flat
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As you own your own home now, be sure to include in your computation the government's double stamp duty.
For your range of investment it is $180,000 + 20% of excess over $4,000,000
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Assuming you are married, if your existing home is only in one name, then you can reduce the double stamp duty to single stamp duty by putting the new property in the other's name.
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Maar
11 yrs ago
Thank you very much everybody. Sorry for the delay. I was away for a few days. I wonder how I should calculate the revenue. If the rent covers the mortgage, should I just compare the down payment to the value of the building, and assume that in 25 years it will be worth what it is worth now?
Also, the building (close to Shatin) is already 34 years old. I wonder if it would have a great value in 25 years? It would then be 60 years old!!
It's a kind of lower-middle class building, one of the cheapest you could get if you don't qualify for public housing.
I am not so keen on the area or the building, but I can't find anywhere else where the rent would cover the cost of the mortgage (after a 30% down payment).
Again, thanks everybody for your comments!!!
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