Buying your first property is a lot like getting married; it’s a huge commitment and you have to be ready for the ups and downs of the journey. If that wasn’t troublesome enough, now you want to consider a second property investment? The truth is, it doesn’t get any easier the second time around (just ask anyone who’s been married twice). Here are the things you need to consider before you invest in property in Singapore:
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Before You Consider Investing in Property, You Should Be Able to Pay Off Your Current Home Loan
If you can’t service your existing mortgage, don’t even think about buying a second property.
Putting aside issues like high taxes or vacancy costs, let’s look at something very basic: your Loan-to-Value (LTV) ratio. The LTV is how much you can borrow from the bank to finance your property.
An LTV of 75% means the bank will loan you up to 75% of the property price or valuation, whichever is lower.
The general cap is now 75%, but that’s not the case if you have an outstanding home loan. For example, if you have one outstanding mortgage, the maximum LTV will drop to 45%.
| No outstanding home loan | One outstanding home loan | Two or more outstanding home loans |
| Your LTV is 75% if your loan tenure is 30 years or less, and it’s paid off before your 65th birthday. | Your LTV is 45% if your loan tenure is 30 years or less, and it’s paid off before your 65th birthday. | Your LTV is 35% if your loan tenure is 30 years or less, and it’s paid off before your 65th birthday. |
| Your LTV is 55% if your loan tenure is more than 30 years*, or it’s paid off after your 65th birthday. | Your LTV is 25% if your loan tenure is more than 30 years*, or it’s paid off after your 65th birthday. | Your LTV is 15% if your loan tenure is more than 30 years*, or it’s paid off after your 65th birthday. |
*25 years if the property being purchased is an HDB flat.
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For example, say you want to buy a second property for investment, and it costs S$1.5 million. However, your current home loan is not yet paid off. Your LTV is 45%, so the bank will lend you S$675,000.
This leaves you to pay the remaining down payment of S$825,000. So why not just fork out that money from your pocket?
Even if you do have that much cash, sinking it all into one property is debatable. If it leaves you with no money for other investments, it’s a one-way, unhedged bet with no diversity.
This is the kind of thing that gives your financial planner a headache.
So, before you’ve paid off your first mortgage, hold off on property investment. If you want to invest in something property-related, consider buying some Real Estate Investment Trusts (REITs).
As a Property Investor, You Need a Substantial Savings Fund
As a landlord, you can’t always count on rental income to cover all the bills. For example, say you buy an investment property that generates a rental income of S$4,000 a month. The loan repayments for the property are S$3,200 a month.
Great! You’re making S$800 a month, and your asset is appreciating.
But what happens if the rental market slumps, and your rental income falls to S$2,500 a month?
Worse, what if you can’t find a tenant for a few months, and your property remains vacant?
Besides a weak rental market, remember that home loan interest rates can change. A sudden spike in monthly repayments can eat away at rental income and capital gains, so you need to be prepared for that.
You need to have enough savings to continue servicing the loan and ride out the bad times. Even if you want to use the last resort, which is to sell the house, you can’t just call your broker and get it done by tonight, like with stocks.
It often takes months to find a buyer with a reasonable offer.
Mortgage Fund
Another fund you need to set up is a mortgage repayment fund. A mortgage fund consists of six months of repayments, just in case.
Should something unexpected happen (like a retrenchment or job loss), this will ensure you have holding power over the property, being able to wait longer for a good price to sell, or find a new job to avoid selling.
Holding power is the defining element of success in property investment.
Some landlords choose to ignore this fund, but we advise against it. If you can’t afford this currently, at least take the time to gradually build up the fund.
We’ve estimated the mortgage repayment for each sample property with an interest rate of 1.8% per annum over a 25-year loan tenure.
For a S$1 million condo unit, the monthly repayment is about S$3,106, and the fund amount is S$18,636.
This means your mortgage fund should be able to cover at least six months of home loan repayments if something goes wrong. Furthermore, this fund must cover any emergency home repairs, such as burst pipes, kitchen fires, and damage caused by those mindless tenants.
Don’t forget you also need to pay maintenance fees (S$200 to S$400 a month) and higher taxes during this period.
Sum up all such expenses over half a year and ensure you have enough reserve funds as a buffer before you become a landlord.
As a Property Investor, You Need to Do a Lot of Homework
Want to be a property investor? Then let’s get to class. You’ll need to learn to calculate rental yields, look up historical price movements in an area, and fully understand the Urban Redevelopment Authority (URA) Master Plan.
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Usually, by the time you hear about a property hotspot, it’s too late because prices have to rise first before the media can report it. So, even if you spend all your waking hours poring over the property section of The Straits Times or attending seminars, it’s futile.
You really need to do a lot of on-the-ground research, searching the country for hidden gems that others haven’t discovered yet. Sometimes it can be counter-intuitive, like we’ve mentioned before that run-down Geylang properties with expiring leases could be an untapped potential resource.
Property investment may seem easier than stock market trading, but thinking any form of investment is “easy” often leads to huge losses.
Remember, due to its illiquidity and the large sums of money involved, making a mistake in the property market can lead to much more severe losses.
Ideally, You Should Learn More About Different Ways to Buy and Sell Property
Many times, property investors will have to use other methods to get the financing they need.
For example, you could set up a company and manage your property assets through it (when you borrow to buy a house, you can opt for a commercial loan instead of a mortgage).
You might need to use asset-based lending, in which case you use a stock portfolio or another property as collateral.
You might also want to understand how property auctions work, so you can get a better price in a mortgagee sale.
We’re not saying you have to know all of this, but it really helps.
In other words, you don’t need to be an Olympic-level swimmer to go out to sea, but the more you accumulate beforehand, the more it will benefit you when you’re navigating choppy waters.
You’d Better Be Prepared to Handle All the Taxes
The first and foremost is the Additional Buyer’s Stamp Duty (ABSD). Remember, Singapore citizens pay an extra 17% of the property price as ABSD on their second property, and 25% on their third.
For Singapore Permanent Residents (PRs) buying property, the ABSD is 25% for the second property and 30% for the third.
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Additionally, you need to know how to calculate your property tax rates. As shown on the Inland Revenue Authority of Singapore (IRAS) website, non-owner-occupied residential properties have higher tax rates.
If your goal is short-term property investment (e.g., buying during development and selling upon completion), you need to understand the details of the Seller’s Stamp Duty (SSD), which imposes a high tax if you sell the property within three years of purchase.
Furthermore, you must understand the tax deductions you can claim, such as maintenance fees for rental units, utility costs, and the interest on your property loan.
Without knowing these specifics, you cannot accurately calculate the potential return on investment for the property.
As a Property Investor, You Must Be Good at “Reading” Properties
You need to be able to instantly judge the property investment potential of a specific unit or development based on multiple variables.
For example, is it close to an MRT station, and is the MRT the most important mode of transport, because if most buyers drive, the distance to the MRT station is irrelevant. If the property is near a mall, will this mall affect its rentability? If the mall has no anchor tenants, will it become a ghost town, thereby reducing the rentability and investment value of surrounding properties?
For certain units, you need to be able to spot potential flaws or issues. For instance, the living room faces the sun and turns into a “microwave,” or if the renovation is poor, it could be because the reputable developer subcontracted the project to a cheap subcontractor.
If you think the previous problems are hard to solve, you’ll find it even trickier when dealing with properties that haven’t been built yet.
This information can’t be obtained from textbooks or property seminars; it comes from practical experience. If you’re fortunate enough to have some background, such as being a contractor or a real estate agent yourself, you might have an advantage.
But even so, you must be prepared to make assessment errors, which could cost you some money.
The Ultimate Secret to Property Investment? Arrange Your Finances in Advance to Cope with Potential Mistakes
At some point in your investment journey, the probability of you making some kind of mistake is close to 100%. Even Warren Buffett makes the wrong choice occasionally. Real estate is one of the most stable assets, but that doesn’t mean you can’t go wrong.
So be financially prepared. Don’t invest in property like you’re gambling on a slot machine, betting your last S$2 from your pocket. Make sure you already have a stable source of income and won’t be in financial trouble if things go wrong.
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