Are Positive Cash Flow Properties Worth Investing?

Cash Flow Positive Properties May Not Be As Risk-Free As You Think. Photo by Eric Prouzet on Unsplash

Due to the rising real estate prices, purchasing a property that will net you positive cash flow is getting harder. Do these properties still even exist? How do you also find them in the first place? Well, finding these properties are not tricky. First, all you need to do is to sort out those recently transacted properties in the market to determine which ones have the lowest PSF.

Recent Transactions With The Lowest PSF In Singapore. Source. 99.co

What To Do Next After Compiling The List?

After compiling the list, what you do next is to find out about the market rental rates as well as the monthly mortgage. If the rentals exceed the monthly mortgage, then you have found yourself a property that has positive cash flow. Now, before you run out of the door and make that purchase, there are a few things you must be aware of. Although the positive cash flow may seem like a long term passive income stream, there are a few other considerations you have to take note. To give you a better picture, I will take the most recent transaction at Regent Grove for this analysis. Interestingly enough, I was a little surprised to see Regent Grove appear again. That condo was mentioned in my very first blog article to understand if J Gateway was a good buy.

This Regent Grove transaction (#07-17) was a four-bedroom unit (1259sqft) that was just recently sold on the 11th August 2020 with a price tag of $830,000. At only $659 psf, Regent Grove is a fraction of some of the new launches of today. Rental of the four bedrooms are going at an average monthly rent of $3000. With the assumption of a 2% interest rate over a 30-year timeframe with a loan amount of $622,500, you only need to come up with $2300.88 per month. Without taking into consideration of the maintenance fees, you are looking at a difference of $700 per month. Seems pretty decent right?

Regent Grove Cash Flow

Regent Grove 1259 sqft  
Price$830,000
Net Income Per Month$3000
Monthly Mortgage (2% Interest, 30 Year Loan, 75% Loan Quantum)$2300
Positive Cash Flow$700
In-Depth Analysis Behind A Positive Cash Flow Condo

However, when you look at the price trend of Regent Grove, the prices do not seem to be going anywhere. Let us assume we have the power of hindsight, and we manage to travel back in time to the 4th Quarter of 2016. Back then, the property price index was only 137.3 compared with today’s 152.6. Around a 10% difference. And you decided to buy it because the timing is right and that is the best “time” to acquire a property.

Assuming You Had The Power Of Hindsight And Managed To Purchase In 2016. Source: URA

 

Regent Grove Prices Back in 2016. Source. 99.co. URA.

If you were to apply a 10% difference to the prices of Regent Grove, we would expect today’s prices to exceed $700 psf. Unfortunately, this increment did not materialise.

Regent Grove Prices 2020. Source. 99co. URA.

That said, you do get some profits leasing out your unit during this time. Here is a simple calculation taking into consideration the returns after factoring the interests costs.

Regent Grove Expected Returns (4 Year Holding Time Frame)

Regent Grove 1259 sqft 
Rental Income (4 Years) $144,000
Interest Costs (4 Years)$47,361
Estimated Capital Appreciation$0
Expected Net Income$96,639

On the other hand, you could have invested in another property that does not have a positive cash flow. I will be using Forest Woods, one of the condos launched back in 2016. This development hasn’t even obtained TOP status. Which also means that there is zero rental income during these four years.

Forest Woods Expected Returns (4 Year Holding Time Frame)

Forest Woods (721sqft) 
Rental Income (4 Years) $0
Interest Costs (4 Years) (Due To Progressive Payments, Interest Is Lower Than What Is Stated Here)$60,886
Capital Appreciation$183,000
Expected Net Income$122,114
So why is this phenomenon happening?

First, the data tells you that rental prices or yields are not the most important thing when it comes to the capital upside. You may have positive cash flow and good returns, however, prices may remain stagnant like the case of Regent Grove. On the other hand, you have condos that have never been rented out, but yet the prices can still appreciate.

Secondly, if you run through the list of condos with positive cash flow, you will realise that most are leasehold. And that their tenure starts before the year 2000. Although most properties appreciate with time, the lease decay aspect is an element that may work against you. When this happens, and the prices fall 10%, you will lose half of your initial capital. Or wipe out all the rental income that you have collected for the past four years. So it is imperative to understand the context of these income-generating properties. Don’t merely jump into a purchase just because the cash flow is positive. It is much more important to understand the rationale behind them. If you need professional knowledge in understanding real estate in Singapore, feel free to drop us a message for a consultation. Meanwhile, stay safe, do your research, and always look at the numbers!

Article contributed by Jerry Wong.

Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos and has been in real estate for ten years. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Book a video call appointment and Jerry will share with you the following.

  1. How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
  2. Why timing is not the most important thing. Because some people can buy the same condo at the same time, but one end up making $100k to $200k while the other suffers losses of the same amount!
  3. Understanding your requirements and craft a solution for your real estate needs. Be it in the form of asset progression, tax planning, financial calculations, rentals, sales, etc.

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