Screw the white picket fence and the golden retriever. The Singaporean dream features a walk-in wardrobe and a second investment property to rent out.
That investment property is going to be your key to a life as a lady/lad of leisure, and you’ll spend your days sipping champagne on Orchard Road without a care in the world. Because renting out a property basically means getting free money, right?
Unfortunately, it’s not that easy. There is quite a bit of effort involved in becoming a landlord, which isn’t quite the same as stretching out your hand to pluck money from the good old tree of wealth. Here’s what you need to know.
The property price isn’t the only cost you’ll have to pay
Just because you’ve saved up enough money for a downpayment doesn’t mean you can afford a second property. Buying a residential property for investment in Singapore is even more expensive than buying your first home, if you can believe that could even be possible.
First of all, you can’t buy HDB property as an investment, so you’ll have to fork out the sum for a condo or house.
Here are some other costs you’ll have to shoulder.
- ABSD – If you’re a Singapore citizen who’s buying your second residential property, you’ll be slapped with ABSD of 7% (10% for PRs). That means when you buy a $1m property, you’ll have to pay an additional $70,000 to IRAS… ouch! If you’re buying your third or subsequent property, you pay 10% (15% for PRs).
- Property tax – Each year, you’ve got to pay to IRAS property tax at non-owner occupied rates, which are significantly higher than the rates you pay on the property you’re living in.
- MCST fees and sinking fund – Your condo is going to charge you for the management and maintenance of the common areas and this can add up to a few hundred bucks each quarter.
- Maintenance – Your new home could well end up becoming higher maintenance than a KTV hostess mistress, especially when you’re not the one living there. If something goes wrong with the air con, you’re going to have to pay for it.
Continuing to pay when you don’t have a tenant
Tenants aren’t going to fall from the sky now that you’re a hotshot landlord.
With the rental market seeing less demand and falling rents, you’ll have to be prepared to put in lots of effort to find an acceptable tenant.
Make sure you can actually afford to make your mortgage repayments together with the property tax, MCST and sinking fund fees in the months when you’re left without a tenant.
Getting and screening tenants
There are two main ways to get a tenant—either by using an agent or advertising on your own.
Appointing an agent means you’ll be paying a commission, but in exchange you won’t have to waste your time meeting potential tenants and showing them around the property.
Advertising on your own can also cost money, and if your methods aren’t effective or all the potential tenants you meet are creeps, you could be in for a wait. You can try anything from taking out a classified ad to advertising on sites like Singapore Expats.
You meet the potential tenants who contact you and size them up to determine whether they’re the sort of person who’ll want to throw regular house parties on your property while also trying to convince them your property has a beautiful view of the neighbouring block.
You might also want to have a lawyer draw up a watertight contract for you, particularly if you don’t have a tenant who’s got samples you can use.
You might be the kind of person who considers vacuuming the floor fun, but we promise you your tenants probably won’t be the same way. Tenants tend to take their liberties with the utilities, and the last thing you want is a tenant who leaves the air conditioning on 24/7 (more common than you think it is).
But throwing the occasional house party is the least of your worries. Tenants who don’t pay up on time not only mean could that you’ll be making your mortgage repayments without help, but also result in your having to chase them and maybe even evict them eventually.
A friend of mine was forced to evict a tenant who didn’t pay his rent for months and infected th property with bedbugs. He ended up tossing the guy’s stuff out into the corridor.
As a landlord, you’re responsible for arranging and paying for repairs that are needed due to wear and tear.
This means that if your tenant pukes into the sink and causes a plumbing disaster, he pays for it, but otherwise regular repairs and maintenance must be fixed by you.
You’ll have to arrange for your repairmen to service and fix the aircon and appliances like the dishwasher and washing machine.
Inspecting your property
Unless you’re renting out your home to Martha Stewart clones, you’re going to want to inspect the property from time to time to make sure it hasn’t been reduced to a complete wreck. When one tenant leaves, you’ll need to revisit your property and clean the place up for the next.
Renting out an investment property is a bit like running a business. Your operating costs and overheads include the interest you pay to the bank on your mortgage.
If you find a mortgage with a lower interest rate and refinance in time, that means you’re actually earning more on your property investment. Scouting around for interest rates is easy with MoneySmart’s Refinancing Wizard.
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Do you plan to buy and rent out a second investment property? Tell us in the comments!