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Investing in Property Market Buy and rent investment
Why Hong Kong people like investing in property market?? • The supply of the property market is limited • Like buying gold, buying property can be a kind of saving • The values of the property: • usually grow faster than the inflation • usually will not suffer a total loss
The disadvantage of investing in property market • The growth of interest rate • Lack of liquidity • negative equity problem • Maintenance fee • Liability if injury in the public area of building
The risk of renting • cannot receive rent from the tenant • Vacancy • Damage of the infrastructure by the tenant
Mortgage Plan • Let’s consider an example: • For a 70% Mortgage Plan (25 year term) • Someone can afford the initial payment of $0.5million • Purchasing power: 0.5/0.7=1.67million
Mortgage Plan • Mortgage monthly payment • The best lend rate (p) = 5% • mortgage rate is about P-2.8%=2 .2% • Effective monthly interest rate=2.2%/12=0.183% • Monthly payment: PV=C/r ( 1-(1+r)^-n) 1.67*0.7M=C/0.00183(1-1.00183)^-300 Therefore, the monthly payment(C) =$5067.16
Expense when trading property • Initial payment=0.3* 1.67M=0.501M • Registration fee and taxes • Stamp Duty=$100 (for property worth <$2M • Registration fee is about $1500 • Miscellaneous Expenses • Sell and purchase agreement about $2000 • Assignment and Mortgage Deed about $20000 • Agency commission= 1.67M*1%=$16700 (1% of the price of the property) • Total expense is about $541300=0.5413M
Return on renting Let’s find out the rate of return on renting in the first year Assuming the maintenance fee is 0, the rate of return should be at least 0.55% (HIBOR) in order to earn as much as the risk free rate.
Return on renting • Taxes includes gov. rent 3%, rate 5% and property tax calculated by standard rate=15% • Rental income per month should not less than $3067. • If the rent rises to $5700, 1st year rate of return =5% • The rate of return will be increased as the interest payment decreases by years.
Conclusion • Property market • Good investment as it can help us saving money • It can catch up with the inflation rate • However, the risk of investing in property market cannot be ignored, especially for now there is bubbles in this market as the price grows up too fast.