To sell or to rent, when property price appreciated

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#1
Hi folks, happy new year:
Here some example to share or to discuss on property subject.

Mary bot a pty last year at $250k and now the market price is $390k, over the weekend she sit down and have a deep tot on whether to sell or to carry on renting out.

Below is her work-out, based-on some simple small amount using old rule of 90%/10%
to compare "whether to sell or to rent."

Pty cost $250,000
Downpayment (10%) $25,000
Mortgage (90%) $225,000
Loan tenure 25 yrs
Monthly installment $1,450

Outstanding loan as at 31/12/2010 $185,000

Assumption
Rental (based-on cost) 900x12/250,000 = 4.32%

Rental yield (based-on market price) 900x12/390,000 = 2.77%

Annualised rental appreciation rate (compound) : 5.72%

IF SHE SELLS
Pty selling prices $390,000
Less: outstanding loan $185,000
Nett Amount $205,000

She has excess cash flow as she does not have to pay a monthly mortgage $1450 x 36 = $52,200

Assuming she choose to invest her capital gain and amount that she 'saves' from monthly installment at a nominal annual return of *6% p.a. She expected total return after 3 yrs is $302,403 (* 6% p.a. Return 'over 3 years' not sure whether this target is achievable, must ask the expert )

IF SHE RENT OUT
If she rent out the pty at $900 a mth, these are her finances after 3 yrs:

Monthly loan installment $1,450
Less: mthly rental received $900
Mthly net cash outflow $550
Total cash outflow for the next 3 yrs $19,800

Pty value after 3 yrs @5.72% annual appreciation $460,825
Nett cash $296,320
Less: Cash outflow during 3 yrs -$19,800
Total net proceed $276,520

Based-on the calculation above, selling appears to be the better option for her solely on the financial consideration and other factors such as potential capital gain and her future needs for the property.


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#2
hi, just my 2 cents.
You assume an investment return of 6% vs 5.72% (although the base number is different), so obviously sell give better result, if based solely on numbers.
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#3
not worth to sell, just rent it out and collect 5% annually...

After her bank loan completed, HO SAI LIAO! she got a FREE PROPERTY!! Big Grin hope it's freehold!
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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#4
I think the element of age is not taken into consideration.........If she is young, 30yrs old, selling now may not be a good idea (Becos, what would she do with the money? ....is reinvesting really better? .....or let inflation do a dance routine on it)

Furthermore, if it's on lease, the remaining years must be taken into account........

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#5
(31-12-2010, 08:28 PM)koh_52 Wrote: Pty cost $250,000
Downpayment (10%) $25,000
Mortgage (90%) $225,000
Loan tenure 25 yrs
Monthly installment $1,450

Outstanding loan as at 31/12/2010 $185,000

Hi, koh_52,

Is this real data or modified data? What property costs $250,000 and able to get 90% financing, and still able to rent out? Huh
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#6
egg san,
I oreli mentioned in the heading based-on simple small amt using the old ruling...it a 'modified data'...sori i cant revealed the real data, cos deal not closed yet...but 1 forummer here know i not bluffing.

Okay, a few key real data just fyi only
bot in oct'09 - 550k
now jan'11 an indonesian had offered 718k...30% capital gain
rental 2500/mth, yield 4.15%
---------------------------------
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#7
If Mary is rich, then I think it is ok to keep the property.
If she is not, then she may have to consider the effect of rising interest.

Protecting against the downside is always more important than getting a possible windfall in the future.

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#8
Koh_52 said "selling appears to be the better option" that means he thought the other option to keep the property could be better.
I think your assumption of Monthly loan installment of $1,450 does include "principle" and not just "Interest" so the comparison is not "Apple" to "Apple" . we also need to factor in:

1) Transaction costs (to sell and buy the property again later) Cost = commission (1-2% depends on HDP or private), Stamp Fee
2) Cost of maintaining the property : Property Tax and Maintenance (for old and small condo can be a lot if the property is old and need repair/enhancement )
3) Inflation and property depreciation (type of the property 99 or 999 and freehold)

May be you should post a real data again ?
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#9
koh san, thank you for the clarification. BTW, why do you use san? You dealing mostly with Japanese?

From the numbers, selling will allow her to lock in her profit on this property and look for other types of investment.
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#10
It is always better to rent than sell for capital gain especially when the property is freehold. The reason is that the owner can receive continuous cashflow for life and beyond. Once the mortgage payments are fully paid at the end of the 25 or 30 years period (depending on loan period), the monthly cashflow received is much higher since there is no more monthly installment payments to be made.

Monthly mortgage installments alone can make up quite a large expense, so with it gone the cashflow really can increase much. Thereafter, the owner only need to take care of expenses such as maintenence charges, property taxes and miscellenous expenses (such as house repairs here and there) which is quite manageable compared to mortgage expenses.

However, if the current rental cannot even cover all expenses (and allows the owner to earn monthly cashflows), the owner is suffering from a negative cashflow. There is consistent cash outflows monthly and the house becomes a liability instead of a positive cashflow generating asset. Then, it may not make sense to hold the property if there is a potential capital gain to look at if he sells.

Unless, he foresees better days ahead that the rental can increase to allow for a positive cashflow scenario. If the property is really that good, it should generate a positive cashflow from capturing a high rental. Look at whether the property is near areas where people work. Where there are jobs, people flock to the area and properties in such areas will be more valuable. So, if the property is valuable, it can and should be able to ask for good rentals and thus have positive cashflows.

It is better to hold on to properties that are in good locations with potentially even higher capital gains in years to come. While holding on to such valuable properties, one still enjoy the benefit of positive cashflow from rentals while sitting on potential substantial capital gains with the appreciation in value of the house.

Capital gains is important. Positive cashflows for life and beyond is even more important.

My two cents worth......I am not a finance expert, so take my sharing with pinch of salt..... Tongue
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