Investment Buying Tips
Buying Property for Investment
Congratulations! You have worked hard and now you have enough for subsequent properties. You are now one step closer to being financially free! (or You are already enjoying the financial freedom? ) To buy property for investment, one must understand that it is very different from buying for own stay. The consideration here should be just for investment return and not for living preference. Don’t try to get the best of both worlds. You will end up feeling miserable!
1. Budget Again, knowing your budget is key. There are more loan restrictions for subsequent properties especially if you still have another property loan. For example, the maximum you can borrow for a second property (assuming if you still have an existing property loan) is only 50% of the property value. In this case, assuming that the bank is willing to lend to you $1.5 mil based on your income but you only have $500,000 cash + cpf, your maximum budget for the 2nd property will only be $1 mil instead of $2 mil! (You can only borrow 50%, hence you need to folk out $500,000 cash + cpf which is all you have!) Hence, for certain scenario, it may make sense to pay off the 1st loan to maximize your budget. Based on the above example, assuming that the remaining loan for the 1st property is $200,000. You should pay off first and after doing so, you can borrow 80% for your second property. You will be able to buy a $1.5 mil property in this case as you only need to fork out 20% cash and cpf (which equals to the remaining $300,000 that you have after paying off the 1st loan)
2. Investment Objective Before your start scouting for your investment property, is good to ask yourself what is the objective for this investment. Generally, it would be one of the following:
a. Capital Gain
b. Rental Yield
Doing this exercise is important as different properties has different capabilities in meeting these objectives! Of course, most of us want both. At the very least, you should try to prioritise else you will have a miserable time making the investment decision!
3. Spotting Properties for Capital Gain There are mainly 3 reasons why you can get capital gain from your property investment.
a. Undervalued properties – Capital gain can arise when you buy the property at undervalued price. It is always possible to buy good properties at undervalued price! Of course need to do more homework for it
One method to find undervalued properties is to compare projects in the same area. For example, comparing average psf price for all the projects in District 4. Very often, there are significant price disparity between the projects. We take a look at the cheaper properties and try to see any reason for the lower price. Don’t be surprise that sometimes there are not reasons for it!
The other method is to compare projects with the same status. For example, District 9 and Sentosa properties which have the same luxury status. Theoretically speaking, they should be about the same price as well. Again, we can compare the price to look for price disparity!
b. Growth Potential in the Vicinity – Capital gain will also arises when future demand for the property increase, and the increase could be due to developments of the vicinity. For example, the Jurong area is slated to be a satellite CBD. When that happens, more people may choose to stay near that area and hence property prices are likely to increase!
c. Limited Supply – The third reason for capital gain is limited supply. There are some properties with certain elements which cannot be easily replicated, and hence supply of such properties are limited. Landed properties are good example. It is very likely that the supply of landed properties will reduce going forward given Singapore land scarce condition. Another example is properties with have the Singapore River view. All the land parcel besides Singapore River are already taken up! You cannot have new properties in the future that have the Singapore River view!
4. Spotting Properties for Rental Yield Investment for rental yield is straight forward as you will be dealing with actual facts. It is possible to calculate the rental yield for all the properties and we can just choose those that are attractive! However, one thing to note is that we shouldn’t just base our decision on the rental yield. What is even more important is that we have to make sure it can rent out in the first place! A very good example is this: it is likely for a property in Woodland to fetch higher rental yield than a property in River Valley. But based on the number of transactions for these 2 areas, the probability of renting your apartment out in Woodland is so much lower! Click here to find out the number of rental transactions in the different district! Click here to find our recommendation for properties with Capital Gain potential and Rental Yield!
Buying property for investment
If you are buying an additional property for investment, you may want to plan for the following:
- Total Debt Servicing Ratio (TDSR)
- Additional Buyers Stamp Duty (ABSD)
- Seller Stamp Duty
Total Debt Servicing Ratio (TDSR)
When planning for your next property purchase, do take note of the TDSR requirement:
- Property loans extended to borrowers cannot exceed a TDSR of 60%.
- Financial institutes must use a medium-term interest rate of 3.5% when assessing the borrower’s mortgage application.
- Financial institutes must discount variable income of borrowers by 30%. (Variable income includes commission and bonuses).
- Other debts such as car loans, credit card debts and personal loans etc, will be taken into consideration when calculating their total debt.
Do take note of the various Loan To Value Ratio when you are taking a loan from the financial institutions.
Additional Buyers Stamp Duty (ABSD)
On top of the buyer stamp duty, you will have to pay the Additional Buyer Stamp Duty (ABSD) if you are purchasing more than one residential property in Singapore. The rates for the ABSD are:
|Citizenship||ABSD rate on 1st purchase||ABSD rate on 2nd purchase||ABSD rate on 3rd and subsequent purchase|
|Foreigners and non-individuals||
In view of the ABSD, some couples may decide to do decoupling for their current property. However, it is important to understand the procedure, costs and future legal implications if the decoupling process is to be carried out.
Seller Stamp Duty (SSD)
The new SSD rates imposed on residential properties which are acquired (or purchased) on or after 14 January 2011 and disposed of (or sold) within 4 years of acquisition, as follows :
- Holding period of 1 year : 16% of price or market value, whichever is higher
- Holding period of 2 years : 12% of price or market value, whichever is higher
- Holding period of 3 years : 8% of price or market value, whichever is higher
- Holding period of 4 years : 4% of price or market value, whichever is higher
Minimum Occupation Period (MOP):
If you are purchasing a private property and holding on to your HDB flat, do ensure that you have fulfilled the MOP before you sell your flat. You can check this with HDB.