Is Rental Income Really Passive, Positive Cashflow?
[Full Disclosure: I’m a licensed real estate salesperson with PropNex. Updating and maintaining this blog helps me condense and express my thoughts about the real estate scene in Singapore. Hope you enjoy the read! Feel free to ask me any question here, or drop me a DM on Facebook.]
A lot of people are under the impression that if you were to buy a property (or multiple properties), you can rent them out, collect rental as passive income (or cash flow) and retire early.
Some even think their tenant is “paying off their mortgage”.
So not only do they get rental income each month, they also get to own a property “for free” (after using rentals to pay for the monthly mortgage).
I have done the math and I’m here to tell you that is NOT the way you should be looking at it.
What you see or/and hear is only HALF the story… And I’m going to prove it to you in this article with real calculations.
By the end of the article, you will get the other half of the story and you can decide for yourself if rental income is really passive income or positive cash flow.
(This will help save you from making a couple of really expensive mistakes in your property investing/buying journey)
First, let’s understand what does positive cash flow actually means?
Assuming you buy a property for 1 million dollars.
You then took a bank loan covering 75% of the sum. That’s $750,000.
Assuming the interest rate is about 1.5–1.8% and you took out a 30 years mortgage, the monthly mortgage is roughly $2,500 every month.
Say you manage to rent out your property at $3,000/month.
That’s $3,000 rental income.
So $3,000 (rental income) — $2,500 (monthly mortgage) you have to pay back to the bank, every month you get $500 cash flow.
A lot of people talk about this $500 as passive cash flow or cash in the pocket/funds for retirement. But is this really the case?
Nope. Because this is only half the story.
What most people don’t know (or don’t talk about) is the whole range of costs in owning a property.
There are 8 Inevitable Costs in holding on to a property.
It doesn’t matter if you’re buying an HDB, industrial, commercial, landed property…
ANY property you buy in Singapore will be subjected to these 8 Inevitable Costs of ownership.
8 Inevitable Costs Of Ownership
They are 💸💸
- Bank Interest
- CPF Accrued Interest
- Maintenance Fee
- Property Tax
- Legal Fee
- Renovation
- Stamp Duty
- Agent Fee (when you sell the property)
As you can see, it’s a lot! But exactly how much damage does it cost?
I won’t talk about all 8 costs as that’s too much to cover and every house is different. If you want to know specifically how much your current or new house will cost you (or how much you can profit), you can reach out to me at +65 84845484 or thomastongs@gmail.com.
For this article, let’s talk about what most people are most confused (or interested to know more about) — CPF Accrued Interest.
⅛ of The Inevitable Costs Of Ownership: CPF Accrued Interest
First, what exactly is CPF Accrued Interest and how does it work?
When you keep your money in your CPF account, the Government pays you an accrued interest of 2.5% P.A.
However, if you take it out from your account to buy a property, you will have to incur that same 2.5% interest rate yourself. And this money will come from your cash proceeds when you sell your property.
So, not only are you
1️⃣ NOT getting money from the government
2️⃣ You have to bear the cost of the accrued interest with your own cash!
The real opportunity cost here is actually 5% 🤯🤯
Let me illustrate this.
Let’s say you buy a condominium for 1.1 million dollars.
With a 25% down payment, 25% X 1.1 million dollars = $275,000.
Given that you didn’t have enough cash to cover the downpayment, you took $275,000 out of your CPF.
Say you are looking to move/upgrade and decide to sell your house after 10 years, after 10 years of incurring the 2.5% CPF Accrued Interest, the 275k you took out from your CPF has generated an accrued interest of $77,023.
This is “free” money that would be yours (given by the government as interest on your CPF) if you didn’t take the 275k out of your CPF 💸💸
Instead, now you have to cover this $77,023 either through the cash proceeds from selling your house or out of your own pocket (if the proceeds from the house aren’t enough to cover it).
Your total loss = $77,023 (“free” interest money) + $77,023 (CPF Accrued Interest you have to pay) = $154,046 🤯🤯
Should I Buy To Rent?
Hopefully, the illustration above gave you a clearer view of what CPF Accrued Interest is.
If you would like to know more about the other costs, I went in-depth in one of my previous articles where I shared a real-life case study about one of my clients who suffered under these 8 Inevitable Costs Of Ownership and lost $400,000. You can check the article out here.
Now, back to the main topic of this article — rental income.
Should you buy a property solely for rental income? Is rental income really “passive income”?
The answer is:
It could be.
You got to do the math. Every property is different. The main question you should be asking yourself is:
“Will the rental income I collect (e.g $3,000) be enough to offset the 8 Inevitable Costs Of Ownership?”
The 8 Inevitable Costs Of Ownership is the REAL cost of property ownership and very often, you’ll find that rental income is not enough to cover the cost of you holding on to a property.
To really profit and/or build wealth, your property has to have some form of capital appreciation.
Otherwise, you may end up in a situation where you have to dig money out of your own pocket to cover the 8 Inevitable Costs.
I hope this article has been useful. Don’t fall into the trap of thinking rental income is “passive” or “easy money”. There are more factors and costs to consider.
Of course, like all things in life, there are exceptions to this matter.
There could be a couple of rare cases/opportunities, but you’ll have to know where and how to find these opportunities PLUS know how to do the proper math to make sure you can profit when you sell down the road.
If you’d like to learn more about how you can begin your property investment journey, or find the best property for you and your family, I’ll be happy to meet up with you for a non-obligatory consultation, absolutely free of charge.
Feel free to contact me at +65 84845484 or thomastongs@gmail.com.
You can also receive more real estate advice from me via Facebook and Instagram.
