# Minimum Viable Rental Yield

It’s been a while since I last did a mathematically-heavy post. Recently, we just met with a mortgage consultant and was advised on our maximum loan amount for our IPA. It got us scouring PropertyGuru for listings within/close to our budget and we were particularly interested in units that had existing tenants at least till 2024. But we were also mindful of the current rental amount, and that got us thinking about the concept of a “minimum viable rental yield” for net zero cashflow in an investment property in Singapore.

Let’s start with some basics first, which will come with a number of simplifying assumptions. Given a property with purchase price $V$, it can be bought with downpayment in cash or CPF, $D$, and the remainder being the principal amount of a bank loan, $P$, i.e. $V = D + P$ or $V = kP$ for some $k \geq 1$ based on the loan-to-value (LTV) ratio.

Based on a fixed interest rate (per annum) of $i$ or interest rate (per month) of $r = \frac{i}{12}$, and a loan tenure of $t$ years or $n = 12t$ months, the fixed monthly mortgage payment due is $A = P\frac{r (1+r)^n}{(1+r)^n - 1}$.

Suppose we ignore all other cashflow associated with an investment property and concern ourselves only with the monthly rental and the fixed monthly mortgage payment. The gross yield needed to realise a net zero cashflow situation (i.e. monthly rental = fixed monthly mortgage payment) is given by the following formula: $\text{gross yield (in \%)} = 12A \div V = 12P\frac{r (1+r)^n}{(1+r)^n - 1} \div V$.

Let’s plug in some numbers to see how this works. In a typical private property (because HDB / public property should not be misunderstood as an investment), the maximum LTV is 75% for a loan tenure of 30 years. In this high interest rate environment, let’s go with 4.5% (which was also what was being used for our IPA).

So this means that $P = 0.75V$ if we assume that there is no Additional Buyer Stamp Duty (ABSD) or $V = \frac{4P}{3}$, $n = 30 * 12 = 360$ and $r = 4.5\% \div 12 = 0.375\% = 0.00375$. This gives a gross yield of
$12P\frac{r (1+r)^n}{(1+r)^n - 1} \div \frac{4P}{3} = \frac{9 * 0.00375 (1.00375)^{360}}{(1.00375)^{360} - 1} = 4.56\%$.

A few observations. First, the calculations are based entirely on a fixed interest rate, which is an oversimplification because such terms are not found in Singapore anymore. Apparently, it is still possible to do so in the US, but definitely at a much higher rate than the SORA that we are used to. As of writing, the 30-year fixed mortgage rate in the US is 6.125%, so the gross yield needed to breakeven will certainly be higher. So depending on how the market moves in the coming months, the magic number will also shift accordingly – A higher interest rate will naturally necessitate a higher gross rental yield.

Second, notice that this magic number of 4.56% is independent of the actual property value $V$, so long as the LTV is at 75%. If LTV were lower (i.e. another cooling measure sets in), then gross yield required also decreases because the loan amount and correspondingly the monthly mortgage payment would be lower for the same property value. For reference, 4.56% gross rental means that a $1M property will demand a monthly rental of$3,800 and a $2M property will demand$7,600. Note that it may be difficult but certainly not impossible to find a tenanted unit close to this gross yield in the current market and it is not surprising that 1-bedrooms and 2-bedrooms are viewed as investment units more than anything else.

Third, of course a big part of the investment property decision-making process comes down to the amount of liquidity one has to pay off the biggest stumbling block in the form of the downpayment and other fees such as the Buyer Stamp Duty (BSD) and Additional Buyer Stamp Duty (ABSD). I have conveniently assumed that upfront cash is not a limiting factor here but that should never be ignored. These calculations only matter after you get past that initial hurdle.

Fourth, this isn’t the complete part of the investment property in the Singaporean context yet. There are of course, MCST, utility bills, property taxes and maintenance fees that constitute part of the cash outflow of a property investment and that the property owner has to be contend with. These will of course vary from property to property. But what it does mean is that the real gross rental must be slightly higher than 4.56% to be able to realistically breakeven, though my next point will argue otherwise.

Fifth, do not forget that using CPF OA to fund your mortgage payment can constitute a cash inflow as well, as you will be “cashing out” your CPF OA via your tenant’s rental. Assuming that one is currently earning above the CPF contribution ceiling of $6k, that’s$1,380 (23% of $6k for Singapore citizens 35 years old and below). For those older or have other citizenship status, the actual percentage can be found in these contribution tables. In the coming years, the ceiling is also set to progressively rise up to$8k by 1 January 2026, which means that the same group (assuming one’s salary also incrementally grows to be above $8k by the same timeline) will be able to “cash out” up to$1,840 by then.

Also, if we are buying an investment jointly as a couple, then the CPF OA that can be “cashed out” will double to either $2,760 today or$3,680 by 2026.

So the fourth and fifth points are actually opposing forces to each other, but I’m quite sure the CPF OA amounts will more than cover all the other miscellaneous fees mentioned earlier. Of course, when it comes down to an actual purchase, the proper calculations should be done and tracked to ensure that positive returns can indeed realised. In this theoretical case, a simple rule of thumb would be to assume that the CPF OA amounts can just about cancel out the miscellaneous fees and we can live with a 4.56% gross rental yield which will in all likelihood give us positive cashflow.

Finally, this magic number should form part of your anchor on your view of the rental market outlook in the coming years. I see property mainly as an hedge against inflation. In the long-term, because of inflation and increase in construction costs, it can be expected that property prices will increase and correspondingly, rental will increase as long as rental yield remains just flat. Given that the principal of the bank loan is already fixed, it can be expected that rental yield will eventually surpass that magic number over time, as experienced by most property investors who went in just at the start of the pandemic. The question then is of course whether government might see a need to intervene, whether in the private property market (less likely than the HDB market), the rental market, bank loan policies or even CPF policies, that may cause the market to adjust its view on what constitutes a fair rental yield.

What are your thoughts on this magic number? Feel free to reach out if you want to do similar calculations tailored to your specific financial circumstances as well.

P.S. A reader pointed out that I should refer to the purchase price instead of the property valuation as these may be different. Another point to consider is that purchase price would include the ABSD as well. I have edited to reflect this point.