There’s a widespread belief in Singapore that you can’t go wrong with an investment in property. The limited land area in the country, increasing affluence, and the continuing love affair between Singaporeans and real estate will ensure that property prices continue to move upwards.
Here’s how real estate investments are supposed to work. You invest a big chunk of your savings and borrow the rest to buy an investment property. The rent that you receive pays for your mortgage. At the end of 20 or 25 years, you have a high-value asset that has practically paid for itself.
But is it really that simple?
Of course, it isn’t. There are many things that could go wrong. Let’s see what these are how you can keep risks to a minimum when you buy your investment property.
1. Will your rental income be enough to pay the monthly instalment on your loan?
One of the biggest attractions about investing in real estate is that it entitles you to a rental cheque every month. This provides a regular source of income that can be used to repay the loan that you have taken to purchase the property.
However, there are various expenses involved when you invest in real estate. These include:
Property tax – this is a progressive tax that increases from 10% of the residential property’s annual value to 20%.
How is the annual value calculated? It is the estimated gross rent of the property for one year. Remember that the figure is arrived at by determining the market rental for similar properties and does not depend on the actual rent that you receive.
Income tax – you have to pay income tax on your rental income. The tax rate can be as high as 22%. So be prepared to part with a big chunk of your rent to the taxman. However, the rules do provide certain concessions. For example, the interest on your housing loan, the property tax that you pay, and some other expenses could be reduced from your rent to compute your taxable income.
Unfortunately, property tax and income tax are not the only charges that property owners have to bear. You would also have to pay property agent fees, insurance expenses, and maintenance costs.
2. Living with illiquidity
When you are making an investment, one of your primary concerns would be liquidity. How soon can you gain access to your money if you need it?
A term deposit with a bank is highly liquid. If there an emergency and you need funds quickly, you can make a withdrawal almost immediately. Stocks and bonds are liquid too.
But property is another story altogether.
It could take weeks or months to sell the real estate that you own. Another disadvantage is that the transaction costs are high. You have to contend with fees payable to the property agent who finds you a buyer, legal fees, and a bank penalty for repaying your loan early. You may also have to bear Seller’s Stamp Duty (SSD) if your sale is made within a specific period.
3. Getting your timing right
It’s important to remember that you make your money when you buy property and not when you sell. That seems counterintuitive, but it’s true.
While real estate prices in Singapore have risen over the years, the increase hasn’t been consistent. Look at this graph of private residential property prices that is prepared using government data.
Private Residential Property Price Index
Source – Singapore government data
That’s anything but a straight line. So, it’s crucial that you make your purchase at the right time. If you buy when the market is at its peak and sell at its trough, you are likely to lose money.
What’s the solution? One way out is to be willing to stay invested for the long term. After all, the overall trend in property prices is positive. But you may have to be willing to wait for many years to see prices appreciate.
4. Should you invest in a residential property or a commercial property?
Commercial properties usually provide a higher return than residential real estate. As a rule of thumb, you could expect a return of 2-3% for a residential property. A commercial unit could give you 4% or more.
Another difference between the two is that their rentals show greater variation. A comparison of the Rental index of private rental properties and the Rental index of office space in Central region issued by the Urban Redevelopment Authority illustrates this difference.
Source – Urban Redevelopment Authority
So, if you are willing to stomach lower rentals when the market changes, commercial property investments may be a preferable option.
There are other considerations as well. As a commercial property owner, you would be expected to play a bigger role in managing the office you own. Residential tenants usually have fewer requirements and are less demanding.
5. Selecting an investment property
This is probably the most crucial factor that you have to consider. Buying property is a long-term commitment. The choice that you make will play a key role in determining the success of your investment.
Here are some points that you need to bear in mind:
⇨ Location, location, location – those are the three most important factors in choosing an investment property. If it is a residential unit, is it close to the MRT? Are there schools nearby? Commercial real estate should be located in a busy area.
⇨ Age of the property – how many years does the lease have to expire? A recent report in Bloomberg points out that HDB home price increases are tapering off as lease periods approach their end.
Comparison of private home prices and HDB home prices
Source – Bloomberg
Make your choice carefully. You don’t want to face a situation of seeing a decline in prices after you finalise the purchase.
⇨ The condition of the property – is the unit that you are buying well maintained? Or will you have to spend a substantial amount on renovating it?
When you are choosing a property, it is advisable to use the services of a reputed agency like OrangeTee. The help and advice that you get can make the difference between a successful investment and one that provides a poor return.
The bottom line
Property investment is one of the best ways to create long-term wealth. But you should do your research before you commit your funds. Don’t be in a hurry to close the deal. After all, you will probably hold the property for many years, maybe even decades. Take your time and arrive at a decision only after you have considered every possible factor.