A rental yield is a starting point. To assess an investment properly, follow the money from rent received through operating expenses, debt repayments, tax and the eventual sale. This article continues a hypothetical $2 million fully non-residential property earning $10,000 monthly rent, held through a GST-registered investment holding company.

Assume a 70% loan at 3.5% over 25 years; annual property expenses of $22,000; company administration of $3,000; and full recovery of the $180,000 purchase GST. Cash committed after recovery is $679,600, comprising the $600,000 down payment, $69,600 BSD, $8,000 acquisition fees and $2,000 company setup. Additional reserves are excluded from that denominator and should be added when committed.

Six measures for the same property

Net operating yield here excludes finance, income tax and company administration so the underlying property can be compared independently of its owner. Acquisition cost for that measure is price plus BSD and acquisition fees, excluding recoverable GST and company setup. Definitions vary in advertisements, so always ask for the numerator and denominator.

The simplified after-tax income of $43,035 is not all spendable: $35,673 goes towards loan principal. Principal repayment builds equity by reducing debt, while consuming cash. Actual accounting profit may also include depreciation, fair-value changes or other adjustments absent from this simplified example.

A buyer without GST recovery would have a higher cost base. An investor who adds a $60,000 reserve to the company example commits $739,600, reducing first-year cash-on-cash return to approximately 1.00%. Both calculations are useful when their assumptions are visible.

Separate rent from deposits and incentives

A refundable security deposit is a liability to the tenant, not rental profit. Rent-free incentives also reduce the effective rent. For a 24-month lease at $10,000 monthly with two free months, total contractual receipts are $220,000. Effective rent is $220,000 ÷ 24 = $9,167 a month, before letting costs. Base the investment model on expected collections and timing, rather than the highest monthly figure in the lease.

Test what happens when conditions change

The following scenarios retain the $1.4 million loan, a 25-year repayment term and $25,000 annual property and company costs. The 5% scenarios recalculate repayments from the start at that rate. Costs are held constant to isolate the sensitivity; reletting and repairs could make an actual vacancy year worse.

At the base interest rate, pre-tax break-even rent is ($25,000 + $84,105) ÷ 12 = approximately $9,092 monthly, assuming full occupancy. At $10,000 a month, the property needs about 10.91 paid months a year just to cover these costs before income tax. Tax can still be payable in a cash-negative year because principal repayments are not deductible. [11,12]

For an illustrative six-month reserve, half a year’s debt service and recurring costs is approximately $54,552. Add a hypothetical $15,000 for repairs and reletting, and the reserve becomes $69,552. This is a budgeting scenario, not a universal minimum; the right buffer depends on the property and the investor’s other liquidity.

Check the rent and the tenant

Before relying on the lease, request the signed agreement and side letters, payment evidence, arrears history, deposit details and any rent-free or fit-out incentives. Compare the effective rent with completed leases for genuinely similar premises. Ask whether the tenant and seller are connected and whether the stated rent can be reproduced with an independent tenant.

Read the break, renewal, assignment, reinstatement, repairs and rent-review clauses. A three-year lease with a valid break after year one does not provide three years of secure income. Check the conditions and notice period, rather than relying on the headline expiry date. Track those dates after completion and start renewal or replacement discussions early enough to act.

Investigate whether the tenant’s business can support the rent. A $10,000 monthly rent against $100,000 monthly sales is a 10% rent-to-sales ratio. If sales fall to $70,000, that becomes 14.3%. These figures do not establish a universal safe ratio; margins and other occupancy costs differ sharply between trades.

Where a tenant will not share business figures, use the evidence available without treating missing information as proof of weakness. Payment history, trading activity, customer patterns and the ability to replace the tenant remain important. Do not treat a security deposit as a substitute for an operating reserve.

Assess location for the intended occupier

An MRT station may matter greatly to office staff, while an industrial occupier may prioritise loading access and vehicle clearance. A retail shop can be near a busy anchor tenant yet sit outside the actual customer route. Walk the precise premises at relevant hours and compare it with alternatives available to the tenant.

Investigate replacement demand as carefully as the existing tenant. How many relevant units are vacant? How long have comparable spaces taken to let? What rent and incentives secured an actual tenant? A cluster of related businesses may help demand, but dependence on one struggling trade can also concentrate risk. Verify any authority, head-lease or management restrictions on letting and alterations before promising flexibility.

Calculate the exit as well as the rent

Assume the company example is sold after five years for $2.2 million. Hold rent, operating costs and the 3.5% interest rate constant. Allow $49,000 of selling costs, comprising an assumed 2% agency cost and $5,000 legal cost, measured net of recoverable GST. These are modelling inputs, not prescribed fees.

The $200,000 price appreciation is a 10% capital return on the purchase price. After $69,600 BSD, $8,000 acquisition fees, $2,000 setup and $49,000 sale costs, the capital component contributes $71,400. Adding approximately $227,206 of cumulative after-tax rental income before principal repayment reconciles to the $298,606 total. Do not add principal repayment again: it is already reflected in the smaller loan redeemed at sale.

This scenario assumes the disposal gain is capital in nature and not subject to income tax, no SSD, no additional capital works or financing penalties, and GST on a taxable sale is charged separately and remitted. Revenue or trading gains can be taxable. Total return on initial cash is about 43.94% over five years, not per year; an annualised IRR needs the dates of cash contributions, distributions and GST recovery. [3–5,20]

For a short-lease industrial property, also test a lower exit value and the next buyer’s available loan tenure. There is no universal 20-year or 25-year price cliff. If planning to hold until lease expiry, model zero residual property value and discount the future net cash flows. A high current yield alone does not demonstrate that the purchase price will be recovered.

Sources and calculation notes

Rules checked on 11 October 2026. The numbered references support the article text. The articles use original hypothetical calculations and do not forecast returns for any named property. Recheck rates and transaction-specific treatment before publication or purchase.

Property classification and transaction taxes

[1] IRAS — Buyer’s Stamp Duty. Progressive rates, higher of consideration or market value, and mixed-use treatment.

Measuring Commercial property Returns and Landlord Risk