We’ve previously mentioned the benefits of buying newly launched properties. Now we’re going to look at the flip side of it. Buying old properties on the cheap and “doing them up” is an old practice employed by property investors, but it takes some experience to deal with potential downsides. Here’s what you need to look out for:
If the lease is running out, there may be cash flow considerations
If you’re intending to invest in a leasehold property and the remaining lease is below 60 years, you may have difficulties getting the full Loan-to-Value (LTV) from the bank when taking a housing loan.
According to the LTV limit, the maximum amount a bank can lend you for a second property is 55% of the valuation or purchase price, whichever is lower. So for a home that is $1 million, you would get a maximum of $550,000. However, if the bank decides the remaining lease is too short, the maximum loan percentage of the purchase price you can get can drop to 50% 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 50% LTV however, you would have to fork out a hefty down-payment of $325,000 or more. We haven’t even mentioned the stamp duties you need to pay as a buyer.
And chances are, if the loan quantum the bank is willing to grant you is lower, CPF may impose further roadblocks if you intend to use your CPF-OA funds to pay for your property. This could mean a cash outlay of 30% or more of the purchase price.
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’ll have cash flow issues, given the higher downpayment.
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 through wear and tear.
Most of us would already expect renovation costs as 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.
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).
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 door frame are not an uncommon issue.
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 figures (although it varies on a case-by-case basis).
Factor this into the cost before you buy.
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.
Of course, the cost to install a set-up point — along with the temporary inconvenience of any drilling — is probably a minor cost concern. 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.
You have a limited time to re-coup your investment
If you are buying an older leasehold 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%. 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.
A change in zoning could make or break your investment
Older residential apartments might’ve be built in areas that have seen a big transformation through the years. In Singapore, the Urban Redevelopment Authority is in charge of rezoning these areas if necessary. This might occur anytime, case-in-point being the rezoning of existing residential/institutional land parcels in Geylang to commercial sites in 2015.
Decisions such as these can impact the property buyer in the long-term, and can be for better or worse. In Geylang’s case, existing residential owners may benefit from being able to collectively sell their units to commercial property developers down the road (land for commercial purposes typically has higher land value than residential land). In any case, buyers must be familiar the the URA Master Plan, especially when intending to buy an older property.
Another thing to note is if the old property is close to many similar properties or unused land parcels, the risk of asset depreciation could be higher. Authorities may choose to earmark unused land for new residential projects, which will in turn affect the value of the older property, likely for the worse. Having too many similar older properties in the same area also means greater competition when it comes to attempting to sell your investment in an en bloc down the line.
Have you bought an older property? Share your experience with us in the comments section or on our Facebook community page.
If you found this article helpful, 99.co recommends Why it pays to be involved in your condo’s management council and 5 fatal mistakes Singaporeans make when upgrading to a condo
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