Why two-bedroom units could be the safest choice for rental income

Have you been looking into property investment, and being a landlord? If so, you have been told approximately five gazillion times at this point, to pick a two-bedroom unit. But have you ever considered why this is the “best size” for renting out a unit? Or what goes into deciding the best size in the first place?

Why a two-bedroom unit is a safe bet for would-be landlords

As always, these are guidelines and not rules; factors such as location, facing, cost, etc. all contribute as well. But all things being equal, two-bedders are a safe bet for the following reasons:

• You get a wider pool of prospective tenants
• Quantum, maintenance costs, and renovations are often at the “sweet spot”
• Resale prospects are slightly better
• It’s more comfortable if it has to be used for owner-occupancy
• May be slightly more affordable to tenants splitting the rent

Reason #1: You get a wider pool of prospective tenants

With one-bedroom units, your prospective tenants are mostly restricted to single working expatriates. This is a group that already has abundant opportunities to rent elsewhere (almost everyone who buys a one-bedroom unit intends to rent it out to them; good luck competing).

You’re also missing out on two important groups:

First, you seldom get to rent out to new couples waiting for their new condo or BTO flat to be put up  (most won’t be willing to squeeze into one bedroom). This is one of the few groups of locals who will rent. Second, small families (e.g. both spouses and one child) are sometimes okay with squeezing into a two-bedroom unit; but a 0ne-bedroom unit rules out families altogether.

Also, tenants who intend to stay longer are often willing to pay a bit more for the extra bedroom. A two-bedder might attract the sort of tenant who’s staying for, say, three to five years; on the other hand, a single-bedroom may result in attracting more tenants who are just looking at six to 12 month leases. The latter are usually less profitable to landlords, due to the cost of always marketing for new tenants.

Reason #2: Quantum, maintenance costs, and renovations are often at the “sweet spot”

So why not a bigger a three or four-bedroom unit? The reason comes to quantum, maintenance costs, and renovations.

Many two-bedroom units in prime regions (where you get the more affluent tenants and high rentability) are at the $2 million mark; The M Condo and Midtown Bay are recent examples. Given average rental rates of about $4,000 to $4,500 for these units in prime regions, landlords can still find decent gross rental yields of around 2.4 per cent.

However, three-bedroom units tend to start from around $3.2 million, and fetch average rent of around $5,400, whereas larger units reach the $4 million+ mark and fetch rental rates of about $6,600. That means they often see gross rental yields of only about 1.9 per cent, compared to their smaller counterparts.

Next, you need to consider that bigger units have higher share value; the higher your unit’s Gross Floor Area (GFA), the more you pay for quarterly maintenance. The difference can be as high as $150 a month even in some mass market condos (it’s even more pronounced in luxury or central region units, where maintenance fees are steeper).

Finally, I don’t need to explain that smaller units are cheaper to renovate and upkeep do I?

Reason #3: Resale prospects are slightly better

Whether they’re lifelong singles, empty-nesters, or young families, few home buyers are looking for single bedroom units.

For example, consider empty-nesters who have just sold off their four-bedroom flat, because the children have all moved out: they might be willing to upgrade to a condo that’s slightly smaller than their old flat; but jumping from five-bedroom to a one-bedroom condo is way too drastic (pool and BBQ pit or not).

The person likely to buy a one-bedroom unit from you is, in all likelihood, an investor looking to rent it out. And while they might still give you a good deal, these sellers tend to drive a harder bargain. They don’t love your unit, they’re more focused on the bottom line.

Reason #4: It’s more comfortable if it has to be used for owner-occupancy

Here’s a typical example: a young Singaporean buys a small condo unit while still living with her parents. She rents out the condo for rental income, to offset the costs.

In about five to seven years, she decides to settle down. Now she can’t get an HDB property, as she already owns a private property; but she also doesn’t feel it’s the right time to sell her condo. What happens next?

Well if it’s a two-bedder, it’s not too big a problem. Such units are still big enough for her and her partner, and maybe their first child too. But if it’s a one-bedroom or studio unit, then things can get a bit uncomfortable.

(New landlords often overlook this issue by the way – do consider what you’ll do in the next few years, if you decide to settle down and don’t have an alternate address).

Reason #5: May be slightly more affordable to tenants splitting the rent

A two-bedroom unit can sometimes be more affordable to a tenant than a one-bedroom unit. For example, the rental for a one-bedroom unit at $2,500 may have to be fully borne by one tenant; but a two-bedroom unit at $4,000 can be split between two tenants, for $2,000 each. This can slightly increase the rentability of the unit.

Also, two is often a comfortable living arrangement for most tenants – many people are willing to share a unit with one other person, but will shy away from staying with three, four, or more unrelated tenants. Some landlords also don’t like arrangements such as a four-room condo being rented out to four separate people (that’s four different tenants you need to deal with and collect from).

As such, two-bedroom may be easier to rent out, and easier on the landlord too.

This doesn’t mean that two-room units are by default the best choice.

Again, it varies significantly based on the development in question. Other factors like location, facing, and price need to be taken into consideration as well.

But as a rule of thumb, two-bedders tend to be the preferred choice for landlords.

Would you pick a two-bedroom unit for investment, versus a one-bedroom? Share your thoughts in the comments below!

If you found this article useful, 99.co recommends How to Hunt for Fire Sale Properties in a Recession (other than auctions) and How To Spot The Best Investment Property

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