Buying a second property is a tough decision these days, given the added stamp duties. Still, many investment opportunities abound; and a second house is a huge benefit to the next generation. Before you take the big step of buying a second property however, make sure you’re ready:
Make sure you have enough extra cash for the ABSD
For Singapore citizens, the Additional Buyers Stamp Duty (ABSD) applies when purchasing any property beyond your first. This is currently seven per cent of the purchase price or property value (whichever is higher).
Singapore Permanent Residents would already have paid five per cent ABSD on their first property. This is doubled to 10 per cent for their second property.
For foreigners, the usual ABSD rate of 15 per cent applies on all properties they purchase. However, note that some foreigners – such as American citizens – do not pay this ABSD rate due to free trade agreements. Check with your embassy or the Inland Revenue Authority of Singapore (IRAS) for more details.
The ABSD, along with other stamp duties, are to be paid within 14 days of signing the purchase and sale agreement. If the agreement is signed overseas, the stamp duties are payable within 30 days of receiving the relevant documents in Singapore.
You can use your CPF Ordinary Account (CPF OA) to pay for the stamp duties; however, the CPF monies may not be disbursed in time to meet the 14-day requirement. This would require you to pay in cash first, and then be reimbursed from your CPF later.
Can you manage the down payment if you have an outstanding home loan?
The usual Loan-To-Value (LTV) ratio for mortgages is capped at 80 per cent of the property price or value (whichever is lower). This means that, when buying your first home, you were able to make a down payment of just 20 per cent.
If you haven’t finished paying off your first mortgage however, the LTV will be lower when taking a second.
Assuming the loan tenure does not exceed 25 years, and you will not be past the age of 65 when the loan tenure ends, your second mortgage will have an LTV of just 50 per cent. 25 per cent of the property can be paid using a combination of cash or CPF, while an absolute minimum of 25 per cent must be paid in hard cash.
This is a substantial cash outlay, so it may not be a good idea to buy a second house until the first is paid off. Speak to your wealth manager to determine if it’s worth going ahead.
Remember the Minimum Occupancy Period (MOP)
If you are residing in an HDB property, you cannot purchase a second property until you meet the MOP of five years. This applies to both new and resale flats. If you own an Executive Condominium (EC), bear in mind that ECs are only privatised after their 10th year – before that, ECs are still HDB properties, and hence subject to rules like the MOP.
Note that if you already own an HDB flat, you cannot purchase a second one.
Decide if the new property is an investment or a second home
Are you buying the second property as an investment, or as a home (e.g. a house for your children)? This will affect the amount of property tax you pay.
Owner-occupied residential properties have a tax that ranges between zero to 16 per cent of the property’s Annual Value (AV)*. Properties that are rented out have a tax of between 10 to 20 per cent of the AV. You can use this calculator to work out the different tax rates.
*The AV is determined by IRAS, and is based on how much rental income the property could generate per year.
If the second property is an investment, ensure there is a clear plan for the asset
Buying a second property to “make more money” is not a plan. You should work out the potential rental yield and capital appreciation, and determine the probable Return On Investment (ROI). This should then be compared to other investment options, such as bonds or equities to decide whether an additional property asset belongs in your portfolio. If you’re not sure how to do this, consult your wealth manager before acting.
You should have a strategy in place for the second property, considering factors such as:
– How long you will hold on to it (do you aim to sell for a profit after five years, or to hold on to it and collect rent for 30 years?)
– When and how you will cut any losses (if the property becomes a liability due to low rental income, how long will you hold on before selling it off?)
– What sort of capital gains you expect (what’s a “good price” at which you aim to sell the property?)
Again, it can pay to speak with a financial expert for some help. Property decisions are capital-intensive, and any decisions you make can have significant financial consequences. As such, you should always go in with a clear plan and never leave decisions to just “gut feel”.
If the second property is an investment, is now the right time to buy it?
If the second property is meant to be a home, don’t worry too much about this. When your aging parents need to move out of their flat and stay close to you for medical reasons, then do it before the property is bought up.
If the property is an investment however, you should ask the question “why now?” Buying property while the market is at its peak – as some unfortunate people did in 2014 – means you might see little or no capital appreciation.
If you’re counting on rental income to make your investment worthwhile, then you need to look at average rental rates in the area over time (don’t look at a single year, check out the average rental income over a period such as five to 10 years). If the overall rental rates are falling, the investment may not perform as well as you expect.
(You can use the 99.co map to check out rental and resale rates in the general area).
Is it the right type of property for your intentions?
If the second property is meant to collect rental income, then is it right for the prospective tenants you’re targeting? For example, if you buy a shoebox unit on Orchard Road to rent out, your only tenants are likely to be single, affluent expatriates; a shoebox is too small for families, and a unit on Orchard Road is too expensive for the average foreign worker.
The type of property will determine the type of tenant you attract, so make sure there’s a match.
If the second property is a home, do consider whether it fulfills domestic needs. For example, if you are buying a home for your elderly parents, a condo with a long walking distance between the main entry and their block may be a bad idea. It may also be uncomfortable for them if you purchase an exclusive condo, which is far from public transport (high-end condos often assume the residents will drive).
Check the Urban Redevelopment Authority (URA) master plan
Always check the URA master plan for the area. Just because it seems quiet and peaceful now, doesn’t mean it will be in five to 10 years’ time. Your tranquil second home might suddenly be in the middle of Singapore’s next business hub, or next to a suburban mall (which tends to congest the surrounding roads).
Needless to say, URA master plans can also affect the rentability and capital appreciation of the property. A property that’s cheap now might see a big spike in value, when a lifestyle hub springs up around it.
If you are going to have two mortgages, make sure you ramp up your savings fund
Always have an emergency fund, to cope with situations such as retrenchment, or injuries that prevent you from working. You should have sufficient funds to cope with at least six months of mortgage repayments, for both houses, before you go ahead and buy.
Otherwise, an emergency could force you to sell one of the properties in an unfavourable market.
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