The housing market offers a lot of opportunities for many investors as it can provide steady and strong passive income throughout the years. It is rather likely that you know of an individual who has a few properties that yield a tens of thousands a year.
In this article, we share the reasons why people have the propensity to invest in real estate and some of the reasons why we tend to avoid investing in that asset class.
Am I even eligible to invest in properties?
Many investors believe that investing in properties is a rich man’s game. While this is true to a certain extent as the amount of starting capital does matter, you’d be surprised at how little you need to invest in a property in Singapore.
Unlike Hong Kong’s property market where prices are ridiculously expensive, the Singapore government’s grip on the domestic market is relatively tight. Recently, we have all witnessed how the government used a sledgehammer on the frothy property market. The market responded as intended, reducing the likelihood of any bubble forming.
For a sense of how expensive the Hong Kong property market is, have a look at how small and expensive this property is.
Yes, $500,000 for a small apartment the size of a car and that was two years ago. The situation is even crazier now.
This is, of course, different in Singapore. We will first go through with you what to expect while making your first investment and what you should be taking note of.
First, know your preference.
New launch or resale. Bear in mind that newer condominiums tend to be smaller than their HDB counterparts. Resale condos are larger on average but of course, it is older.
Area. Core central regions provide greater convenience and are naturally more expensive. If you like to prioritize space over convenience for a given capital, you should be considering a property slight further out from the central region.
Once you have chosen a condo, you can take the property off the market by paying an option fee of one percent of the previously agreed price. This marks the first upfront cash that is required on your end.
Within a month, you must be able to pay a second option fee of four percent. Failure to do so will result in the forfeiture of your first option fee.
After which, a further down payment of 15% (on your first property) and 45% (on your second property) is required. Your bank will be loaning the rest to you.
Note: both option fees must be paid in cash, while down payment can be paid using cash and CPF funds.
The above table shows the maximum loan you can take relative to the value of the property.
Furthermore, there is also the Total Debt Servicing Ratio (TDSR). This restriction only allows you to spend up to 60% of your monthly income to repay debts. If you are purchasing an Executive Condominium (EC), this figure is reduced to 30% of your monthly income. The loan tenure and repayment amount are ultimately dependent on the value of your purchase, your income and your age.
Apart from the mortgage, you have to take note of miscellaneous fees like Buyer’s Stamp Duty (BSD), legal and agent fees.
After all these are settled, you are ready to receive your keys to your first investment!
Here, depending on the initial purpose of the house, you can, of course, choose to live in it or rent it out. Be sure to work out the numbers and not be swayed by your emotions!
Now that you know that owning a property investment is possible, we will briefly go through with you the pros and cons of owning a property.
- Stable returns. Real estate prices in Singapore and most other countries have generally been heading north. As long as population increases and supply increases at a slower rate, your price will tend to go higher in the middle to long run. The Singapore property price index has a more than 4.0% CAGR since 1993, not accounting for the rental you receive yearly.
- Less volatile than the equity market. Not everyone is suitable to invest in the stock market like it or not. Given that the prices of properties take much longer to adjust, you have plenty of time to cool your head when euphoria takes over.
- Rental income. The property market provides you with a stable passive income which can be reinvested to compound your wealth. The overall rental yield has been between 2% to 3%.
- Easily understood. Unlike many obscure companies producing alien products, the property market can be understood by anyone. If you approach investing in the property market from a value perspective, you are definitely going to do well in the long run.
- Huge amount of capital. Especially if you are at a young age, coming up with a huge sum of money may be extremely difficult. There may be unforeseen circumstances where you may have liquidity needs.
- Dangers of leverage. While borrowing from the bank does indeed boost your return by a lot, if the market goes against you, it can magnify your losses too. If you are not able to service your loans during the bad times, you may be forced by the bank to liquidate your property at a huge loss.
- High ongoing costs and management. The fees don’t just stop there. If you bought a condo, you will have to pay recurring fees to the management for maintenance and other services. You may also need to personally upkeep your investment by checking for damages quarterly. It is sometimes not easy to deal with tenants too. Investors tend to only see the gross rental yield that they are getting without actually factoring in such other cost into their calculations.
- Single-digit Annualized Growth rates. Given recent cooling measures by the Government, one would notice that the Singapore Government takes a highly interventionist role when it comes to our local residential property market. The Government has constantly stated that a residential property in Singapore is something for people to buy for own stay rather than for investment. Hence, one would notice the many cooling measures implemented to deter people from speculating the home prices upwards. In light of this, and that Singapore is already quite developed, the home prices growth rates is usually in the range of Singapore’s GDP growth rate of 2-3%.
Through this article, we believe you have gained a good sense of what it takes to invest in a property in Singapore and the pros and cons associated with it. With careful thought and simple calculations, you will know if investing in property is for you!