20180814 Property vs Mutual Fund (and Rental) Part 3

20180814 (Tue)

If the property you bought can be rented out RM1,000 per month as an empty unit. How much return in total would you get in 20 years if it is rented all the time?

Assuming the rental appreciation is at 10% over 3 years (becomes RM1100 after 3 years) which is a fair rental appreciation per year of 3.33%. Of course, some property would depreciate over time. To simplify our assumptions, we take the scenario that there will be appreciation due to demand and inflation.

Over 20 years this rental would be:

RM1,000 (1.10^20/3) = RM1,888 (roughly RM1,900 – which is very conservative)

Hence, if every month this rental is paid into a mutual fund earning an average annualized return of 5%, using annuity calculation for 20 years, the total money earned from rental plus interest will be

RM1,000 x {(1.00694^240) – 1} / 0.00694 = RM613,617.60.

Interest rate per month from Annualized combined growth of 8.33% (3.33% + 5%) is 8.33 / 100 / 12 = 0.0069

Therefore, added with its appreciation over time, a RM500,000 property has the potential of a total return of

RM1,761,822 (Capital Appreciation) + RM613,617 (Rental earned with interest saving)

= RM2,375,440.

RM1.5 mio (Mutual Fund – 7.16%) versus RM2.4 mio (Property with conservative Rental Yield & appreciation)

Hence, if your rental property is well managed you can out perform mutual fund of conservative return.

Tomorrow we discuss outgoings as rental property also require cost!

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