Buying your first property is a lot like getting married. It’s a major commitment, requires a whole lot of money, and you must be prepared to ride out the ups and downs of the journey. And if that isn’t enough, now you want to talk about doing it a second time as a form of investment? Well that doesn’t make it any easier (you can ask anyone who has been married twice). Here’s what you’ll need to consider before becoming a property investor:
You should be able to pay off your current home loan, before you even think about being a property investor
Unless you gargle with bird’s nest in the morning, forget about buying a second property if you can’t pay off your existing mortgage.
Let’s put aside issues like the sky-high taxes or cost of vacancies, and look at something very basic: your Loan to Value (LTV) ratio. The LTV ratio is how much you can borrow from the bank, to buy your property. An LTV ratio of 80 per cent, which is usual maximum, means the bank will loan you up to 80 per cent of the property price or valuation (whichever is lower).
Now, while the usual maximum is 80 per cent, this changes if you have an outstanding home loan. If you have one outstanding mortgage, for example, the maximum LTV drops to 60 per cent.
So let’s say you want to buy a second property for investment, which costs $1.4 million. You still haven’t paid the home loan on your current house. The LTV is 60 per cent, so the bank will lend you $840,000.
That leaves you with a remaining down payment of $560,000. Yeah, why don’t you just go reach in your back pocket for that.
Even if you do have that amount of money, it’s questionable if you want to plonk all of it down on one property. If it leaves you with no money to invest in anything else, that’s called a one-way, unhedged bet; a total lack of diversification. It’s the kind of thing that gives your financial planner a stroke.
So until you’ve fully paid off your first mortgage, maybe hold off on being a property investor. Buy some Real Estate Investment Trusts (REITs) maybe, if you want exposure to property investments.
You need to have a huge savings fund as a property investor
As a landlord, you can’t always count on rental income to cover all your costs. For example, say you buy an investment property, that provides rental income of $4,000 a month. The loan repayments on the property are just $3,200 a month.
Well done, you make $800 a month, and you have an appreciating asset. But what happens if the rental market slumps (like it has now), and your rental income slides to $2,500 a month? Even worse, what if you can’t find a tenant for two to three months, and your property stays vacant?
Besides the rental market softening, remember that interest rates on home loans change as well. You need to be prepared if the monthly repayments suddenly shoot up, thus eating into rental income and capital gains.
You need to have sufficient savings to continue servicing the loan, and tide you through the down periods. Even if you want to use the last resort, which is to sell off the house, you can’t just call your agent and have it sold by this evening, like it’s a stock. It will take a couple of months to find a buyer, and get a decent price.
This means your savings fund should be able to service the property loans for at least six months, if something goes wrong. On top of that, the fund has to cover the cost of any emergency home repairs, like burst pipes, fires in the kitchen, and tenants who choose to be idiots.
Oh, and don’t forget, you’ll need to pay maintenance fees and higher taxes while all that’s going on.
You need to work out the combined cost of all these for half a year, and have a large enough monetary buffer stashed aside before you start playing landlord.
As a property investor, you need to do a lot of homework
Want to be a property investor? Then school’s in. You need to learn to work out rental yields, check the historical price movements in the area, and be well-informed on the Urban Redevelopment Authority’s (URA) master plan.
Often, by the time you hear about a property hotspot, it’s far too late – the prices of the properties have to rise first, before the media can report about it. So just spending all your waking hours poring through the property section of the Straits Times, or attending seminars, is not going to cut it.
You really need to do a lot of legwork, and spend time looking up and down the country for that hidden gem before anyone else finds it. Sometimes this can be counterintuitive; we wrote before about how run-down Geylang properties with expiring leases may be untapped sources of potential.
Property investing may seem easier than, say, trading in the stock market; but thinking of any form of investment as “easy” is often a prelude to losing a lot of money. It pays to bear in mind that due to the illiquidity and high amounts of capital involved, mistakes in the property market can be much more punishing.
Ideally, you should learn more about the various ways in which property is bought and sold
Many times, property investors will have to use other methods to get the financing they need.
For example, you may be better off setting up a company, and then handling your property assets through it (when you borrow to buy a house, you then have the option of using a business loan instead of a mortgage).
You may need to use asset backed loans, in which you use a stock portfolio, or other properties you own as collateral.
You may also want to learn about how property auctions work, so you can get a better deal at a mortgagee sale.
We’re not saying you have to know all this stuff, but it really helps. Put it this way: you don’t need to be an Olympic level swimmer to head out to sea, but it could make a real difference when you’re out there navigating choppy waters.
You had best be ready to handle all the taxes and fees
Of immediate concern is the Additional Buyers Stamp Duty (ABSD). Remember that Singapore citizens pay an additional seven per cent of the property price, when buying the second property. For the third property, citizens pay an additional 10 per cent of the property price.
For Singapore Permanent Residents, there is ABSD of 10 per cent on the second and subsequent properties.
In addition, you need to know how to work out the tax rates on your property. Non-owner-occupied residential properties have a higher tax rate, as you can see on this website.
If your goal is to make short term property investments (such as buying while it’s still in development, and then selling when it’s complete), you need to know the details of the Sellers Stamp Duty (SSD) – there’s a hefty tax imposed if you sell the property within three years of buying it.
In addition, you must know about the tax deductions you can claim, such as maintenance fees for tenanted units, utility bills, and the interest rate on your property loan.
Without knowing these specifics, you can’t accurately work out the potential return from a property asset.
As a property investor, you have to be good at “reading” a property
You have to be able to look at a specific unit or development, and immediately pick up on its potential based on several variables.
For example, is it close to an MRT station, and does that even matter (if most of the buyers probably drive, it could be irrelevant)? If it’s close to a mall, does that mall impact its rentability, or does the lack of an anchor tenant in the mall render it useless as an amenity?
With regards to specific units, you have to be able to spot potential flaws, such as a living room that turns into a microwave oven due to its facing; or poor finishings that suggest an otherwise reputable developer is using a cheap subcontractor.
And if you think all of this is hard to figure out, wait till you deal with under-development property which hasn’t even been built.
This really can’t be picked up from a textbook or property seminar; it has to come from experience. If you’re lucky enough to have some background – such as if you’re a contractor or real estate agent – you may have an advantage. But even then, you must be prepared to be wrong in your assessment.
The ultimate tip? Be financially prepared to deal with potential screw-ups
The likelihood that you’ll make some kind of mistake, at some point when investing, approaches 100 per cent. Even Warren Buffet makes the occasional poor choice. Property is one of the most reliable asset classes, but that doesn’t mean you can’t go wrong.
So be financially prepared. Don’t approach property investments like you’re approaching a jackpot machine, and relying on the last $2 in your pocket. Ensure you already have stable income streams, and won’t be financially ruined if something goes wrong.
Buying your first home or investment property? We’re here to help. Find out how to make your property purchase safe as, well, houses. Our panel of experts are ready to answer your questions, and provide clarity on any property issues.
Consult them at Property Investing for Non-Millionaires, on 25th May 2019, at the HDB Hub Auditorium (Toa Payoh). Tickets are just $20, and early birds get a 50 per cent discount.