Besides capital appreciation and rental yield, is there a third way to profit from property investing?
In property investment, investors believe they can only profit from it through two different ways. One way is through the capital appreciation of the property value, and the other way is through the rental returns from renting out the property. Of course, most investors will hope to have the best of both worlds. They hope that the property that they invest in will increase in value in the future and at the same time, be able to rent out their property consistently with a good rental return.
So, what if an investor bought a property that does not appreciates in value and at the same time the rental returns from his property is weak? In this scenario, will the investor still be able to make money? Is there a third possibility for a property investor to make a profit if his property does not have any capital appreciation and rental return?
I believe there is a third way to profit from property investment. It is through currency appreciation.
Let us look at an example here:
Below is the chart of the exchange rate between Indonesian rupiah and Singapore dollar.
Here I am comparing the currency between the Indonesian rupiah and Singapore dollar. On 21st Aug 2019, the exchange rate is 1SGD to Rp6,950. On 14th Aug 2019, the exchange rate is 1SGD to Rp10,266. We can see that the SGD has appreciated against the Rp over a ten years period. So how much is the appreciation in percentage terms.
Percentage of increase = (10,266 – 6,950) / (6,950) = 47.7% increase
We have seen in the last 10 years; Singapore dollar has appreciated 47.7% against the rupiah.
In compound interest (using financial present value/ future value) calculation:
PV = 6,950
FV = 10,266
N = 10 years
Interest = 3.98%
We can see that the increase is 3.98% (compound interest) per year. Here we can see that if we were to invest in a property with currency appreciation, the currency appreciation itself can already help the investor make the profit.
What if I can also rent out the same property?
Assuming I can rent out the same property 3% rental yield, together with the currency appreciation, the returns is 3% plus 3.98% = 6.98% per annum yield! Not bad for an investment.
Taking Singapore property as an example
Most properties do appreciate over time. If this happens here, the returns from the same property could be even more.
Above is the graph that shows the average price of property in Singapore. We can see that over the last 10 years, property has appreciated 60.91%. Calculated in compound interest, the appreciation is 4.68% per annum.
Taking an example of the property we buy here with an appreciation of annual rate of 4.86%. Adding this to the 3% rental yield and the currency appreciation of 3.98%, the total return could reach a potential of:
3% + 3.98% + 4.86% = 11.84% per annum yield!!!
I should say that the return is indeed very good. The currency appreciation has in fact enhanced the returns on the property itself. Even if the property were to appreciate at only 2% per annum, the yield will still be 8.98%, a very good return. I believe even with additional taxes foreign buyers must incur in Singapore, it still makes sense to buy, given the potential good rates of returns.