6 things to consider before considering property investment in Singapore

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. That doesn’t make it any easier (you can ask anyone who has been married twice).

Understanding the market dynamics for property investment in Singapore

Before diving into the property investment pool in Singapore, it’s crucial to grasp the market dynamics. The real estate market here is influenced by a myriad of factors, from government policies and economic trends to the ebb and flow of international investment.

Prospective investors should keep a keen eye on the Property Price Index (PPI) and rental yield trends, which provide valuable insights into the current market conditions. Additionally, staying updated with the latest regulatory changes, such as cooling measures, can help investors make informed decisions.

By understanding these dynamics, you position yourself to identify the right timing and the right type of property to invest in, which is paramount in maximizing your investment returns.

Here’s what you’ll need to consider before even thinking about property investment in Singapore:

1. You should be able to pay off your current home loan before you even think about being a property investor

Unless you gargle with a 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 sky-high taxes or the 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 75% means the bank will loan you up to 75% of the property price or valuation (whichever is lower).

Now, while the usual maximum is 75%, this changes if you have an outstanding home loan. If you have one outstanding mortgage, for example, the maximum LTV drops to 45%.

No outstanding home loans	One outstanding home loan	Two or more outstanding home loans
75% if loan tenure does not exceed 30 years, and does not extend beyond your 65th birthday	45% if loan tenure does not exceed 30 years, and does not extend beyond your 65th birthday	35% if loan tenure does not exceed 30 years, and does not extend beyond your 65th birthday
55% if loan tenure exceeds 30 years*, or extends beyond your 65th birthday	25% if loan tenure exceeds 30 years*, or extends beyond your 65th birthday	15% if loan tenure exceeds 30 years*, or extends beyond your 65th birthday

* 25 years if the property being purchased is an HDB flat.

Example: Let’s say you want to buy a second property for investment, which costs S$1.5 million. You still haven’t paid the home loan on your current house. The LTV is 45%, so the bank will lend you S$675,000.

That leaves you with a remaining downpayment of S$825,000. Yeah, why don’t you just go ahead and pull that amount out of your back pocket?

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 will give 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.

Read this: Are REITs really a smarter pick than property?

2. 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 generates a rental income of S$4,000 a month. The loan repayments on the property are S$3,200 a month.

Well done – you’re in the green of S$800 a month, and you have an appreciating asset.

But what happens if the rental market slumps, and your rental income slides to S$2,500 a month?

Even worse, what if you can’t find a tenant for a couple of 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.

Read this: How to avoid expensive tenancy nightmares

Mortgage fund

Another fund you’ll need to build up is the mortgage repayment fund. A mortgage fund consists of six months of the mortgage repayments, held in reserve for emergencies.

In the event that something goes wrong (e.g. retrenchment or job loss), this ensures you will have to hold power – you can afford to wait longer to sell for a good price or to get a new job to avoid selling altogether.

Holding power is a key determinant of success in property investments.

Some landlords choose to skip the fund, but we advise against it. At the very least, if you cannot afford this right now, save up over time to create it.

We have estimated mortgage repayments for each of our sample properties, on a 25-year loan tenure at 1.8% per annum.

For the condo unit valued at S$1 million, monthly repayments are around S$3,106, which means a fund size of S$18,636.

Use 99.co’s mortgage calculator to find your monthly mortgage amount.

This means your mortgage 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 (which range from S$200 to S$400 a month) and higher taxes while all that’s going on.

Crunch the numbers for the combined cost of all these for half a year, and make sure you have a large enough monetary buffer stashed aside before you start playing landlord.

3. 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.

4. 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.

Read this: 6-step guide to buying a property on 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.

5. 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 17% of the property price when buying the second property. For the third property, citizens pay a whopping 25% of the property price.

For Singapore Permanent Residents, there is an ABSD of 25% on the second property and 30% on the third property.

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 the IRAS website.

If your goal is to make short-term property investments (such as buying while it’s still under 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 your property investment.

6. 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 property investment 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?

Read this: Which areas along the MRT have the highest price increase in Q2 compared to Q1 2021?

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 sun-direction 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.

All of these factors 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, which may cost you money.

Strategic financial planning for aspiring property investors

Financial planning is the cornerstone of successful property investment, especially in a high-stakes market like Singapore. It’s not just about having the capital for an initial investment; it’s about the strategic allocation of resources to ensure liquidity and mitigate risks.

This includes having a clear understanding of your financial health, setting aside a contingency fund to cover unforeseen expenses, and ensuring you have the financial flexibility to respond to market changes.

A well-thought-out financial plan should encompass all potential costs, including mortgage interest rates, maintenance fees, and taxes, while also considering the long-term appreciation potential of the property. By doing so, you not only safeguard your investment but also set the stage for a more robust and profitable investment portfolio.

The ultimate property investment 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%. 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.

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Thinking about entering the property investment market in Singapore? Let us know in the comments below.

If you found this article helpful, 99.co recommends How to get enough money to buy a property in Singapore and Deciding between HDB loan vs bank loan? Here’s a quick reference.