Buying in Singapore

Things to consider before buying creaky old properties

December 20, 2016
Old properties can bring great benefits, but also have big risks as well

Old properties can bring great benefits, but also have big risks as well

A few months ago, we mentioned the benefits of buying newly launched properties. Now however, we’re going to look at the flip side of it. Buying old properties and “doing them up” is an old practice employed by investors, but it takes some experience to deal with potential downsides. Here’s what you need to look out for:

  1. If the lease is running out, there may be cash-flow considerations

If the lease on a property has run down, you may have difficulties getting the full Loan-to-Value (LTV) from the bank.

For example, the maximum LTV on a property loan (the maximum amount the bank will lend you) is usually 80 percent of the valuation or purchase price, whichever is lower. So for a home that is $1 million, you would get a maximum of $800,000. However, if the bank decides the remaining lease is too short, the LTV may drop to 60 percent or below.

So consider this: say you are buying a creaky old apartment, a 1,500 square foot unit that is being sold for just $650,000. That’s quite a steal, but because of the 60 percent LTV however, you would have to fork out a hefty down-payment of $260,000.

In addition, the amount you can withdraw from CPF to pay for older properties might be lower.

So while old properties may be value for money, you have to consider more than just the overall price. You need to work out whether you will have cashflow issues, given the higher downpayment.

  1. Maintenance is an issue if the management council has given up

If you are buying an old condo, it is important to check if the management council has kept up. In some of the older properties, the management council is no longer “on the ball,” as the property is old and they are resigned to letting things fall apart.

Most of us would already expect renovation costs – it’s part and parcel of buying old places. But remember that you can only renovate your own unit. You have no control over the maintenance of the pool, gym, clubhouse, and other amenities. If the management is content to let the swimming pool turn into a swamp, and leave broken equipment in the gym, it can be a turnoff to potential tenants (or yourself as an owner occupier).

On a related note, be sure to check the maintenance fees. Older condos can be more expensive to maintain, as more things are breaking down.

  1. Check for lead paint

If you are buying a condo that was completed before the mid 1980s, we suggest you get a 3M LeadCheck to inspect the paint.

Lead paint is almost unheard of these days, as it’s toxic and poses especial health risks to young children and the elderly. It was common in housing built between the 1950s and 1980s however, when lead paint was considered superior because it dried faster. If the unit is slathered in lead paint, you may need to factor in the cost of stripping and repainting.

(Note: no matter how much money you make on the property, it will not be sufficient to purchase new lungs).

  1. For old units with wood flooring, check for mushrooms and wood rot

Look under mats and carpets, which are often used to hide wood rot. Also, beware of any unusual mix of tones and shade in the wood flooring (this suggests some of the wood has recently been replaced).

Because wood is porous, it can become a breeding ground for bacteria and fungi. One of the things to watch for in Singapore is mushrooms. Our humid climate is ideal for fungi, and mushrooms growing on the floorboards or doorframe are not an uncommon issue. In fact, even the owner of a new BTO flat has reported it.

If you have this problem, you cannot just pluck away the fungi. They will grow back very quickly, and the problem can spread to other rooms in the house. You will have to get a contractor to rip up the floorboards or affected door frames, and replace them completely. For a 1,400 square foot apartment, we have seen the cost reach five digit figures (although it varies on a case by case basis).

Factor this into the cost before you buy.

  1. If you are buying an old landed property, check if internet access will be a problem

We believe that, by now, most condos are able to get broadband or cable services whatever their age. For some old non-landed properties however, the required set-up points may not be available. You will usually have to use SingTel’s existing underground pipe.

Of course, the cost to install a set-up point – along with the temporary inconvenience of any drilling – is probably a minor cost concern. It is about $480, at last check. But if you are looking to rent out the place immediately, or want to move in right away and can’t do without internet access, it is a factor to consider.

  1. You have a limited time to re-coup your investment

If you are buying an older property to rent it out, you have a limited time to re-coup your investment. In the interest of playing it safe, look up the historical rental rates for the area, and apply a haircut of 30 percent. For example, if the historical rental rate is $3,700 in the neighbourhood, assume you will be getting $2,590 a month.

For our aforementioned $650,000 unit, it would take roughly eight years to break even with the $260,000 down payment. Ideally, later repayments should be more than covered by the rental income. It’s always best to be pessimistic with regard to expected rental income (and remember that rental rates will be lower because your unit is older, and will fall further with age).

It is best to speak to a qualified wealth manager / financial advisor, for the relevant investment advice here. While your property agent can contribute some insight, check with a financial professional to see if an old property is a suitable asset.

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