How do you evaluate rental yield?

[koja6049]

Let's say I've bought a new condo, assuming with cash, @ 300k. According to market rental prices, the yield is around 4%. It is also assumed the rental price is stable for around 5 - 6 years.

When the condo is completed after around 4 years, the valuation of that property shot up to 600k. In that case, do you calculate your rental yield to drop to 2%, or still based on your purchase price @ 4%?

 

[crimsontactics]

Let's say I've bought a new condo, assuming with cash, @ 300k. According to market rental prices, the yield is around 4%. It is also assumed the rental price is stable for around 5 - 6 years.

When the condo is completed after around 4 years, the valuation of that property shot up to 600k. In that case, do you calculate your rental yield to drop to 2%, or still based on your purchase price @ 4%?

I would use 4%.

 

[TabascoSauce]

2%. current rental/current price. thats the opportunity cost u r incurring. i believe many ppl have the tendency to make the mistake of using current rental/purchase price.

 

[wahkao3]

depend what is your purpose
u wan to buy/sell use current market prices
u wan to use it as passive income, use cost price

 

[Shiny Things]

Let's say I've bought a new condo, assuming with cash, @ 300k. According to market rental prices, the yield is around 4%. It is also assumed the rental price is stable for around 5 - 6 years.

When the condo is completed after around 4 years, the valuation of that property shot up to 600k. In that case, do you calculate your rental yield to drop to 2%, or still based on your purchase price @ 4%?

It's 2%. You need to be able to compare that rental yield with other investments, so you need to use the price today.

Think of it this way. Imagine your alternative to owning the condo is to stick the money in Singapore government bonds earning 2.5%. If you calculated your rental yield based off the old price, you'd think "oh I'm making 4%"... but you would get more dollars of yield if you sold the condo and moved into the 2.5% government bonds!

You can even do the math on this: you're receiving $12,000/yr of rent for your condo. After four years, you're still receiving $12,000 a year of rent... but if you sold the condo, and put your $600,000 into those 2.5% bonds, you'd earn $15,000/yr.

The yield of the bonds must be higher than the yield of the condo, because you're getting more dollars for the same investment.

 

[antonpoh]

Let's say I've bought a new condo, assuming with cash, @ 300k. According to market rental prices, the yield is around 4%. It is also assumed the rental price is stable for around 5 - 6 years.

When the condo is completed after around 4 years, the valuation of that property shot up to 600k. In that case, do you calculate your rental yield to drop to 2%, or still based on your purchase price @ 4%?

After 4 yrs you don't get to set the 2% or 4%. It will all depend on the market. No calculation now can predict what kind of rental yield you're going to get after 4yrs.