Property Tips
Is it worth renting out your investment property when your monthly rent collected is lower than monthly loan installment
On surface, it will seem to be a very bad situation to be in, if one is not collecting monthly rent of more than what one is paying for every month for loan installments.
However, this may not be necessary a losing investment as loan installment is not entirely an expense as it comprises of loan principal and interest.
Let’s use an example to illustrate this.
Project name: Icon at Tanjong Pagar
Unit type and size: 581 sqft, one bedroom unit
Purchase price: $1.05mil
Expected conservative monthly rent: $3000
Assuming one is taking 80% loan, at 2% interest rate, 25 years loan tenure
Monthly installment: $3600 (round up to nearest hundred)
(Monthly loan interest is $1400/mth conservatively as this interest amount will get lower as the loan amount gets lesser every month)
Question:
Rent collected: $3000 is less than the monthly loan installment of $3600. Is this investment property a liability or an asset to the property owner?
Let’s crunch some numbers and do some assessments! Monthly expenses if you rent out this unit:
1) Loan interest: $1,400
2) Maintenance fees:$250
3) Rental income tax: $200 (depends on individual’s tax bracket)
4) Property tax: $200
5) Others: $200 (eg., repairs, furnishing, vacancy periods when the unit is not able to
rent out)
Sub total: $2,250
Monthly gain: $3,000 (rent collected) less $2,250: $750
Yearly gain: 12 months times $750: $9,000
Although, there’s a need to top up every month to service the installment and other expenses, this property is still able to give a positive return to the property owner as the monthly rent collected is more than enough to cover the monthly expenses.
Pros and Cons of Owning a Dual Key Unit
In recent years, many of the new condominium launches are coming up with dual key concept units. So what is a dual key unit?
In a very simple way to put it across, it is a unit that comprises of two separate layout units that share a common foyer and/or entrance in a single property title, through which all occupants enter.
It enables one space to be shared by two separate parties.
The advantages of having a dual key are such:
1) It allows the owner to stay in one part of the dual key unit and at the same time able to rent out the other part, and yet owner is still able to enjoy his/her own privacy. By doing so, the rental income will be able to help pay off part or all of the monthly mortgage loan instalment.
2) It’s good for multi generational family. It allows the owner to stay in one part of the dual key unit and the extended family to stay in the adjoining unit, and yet owner is still able to enjoy his/her own privacy.
3) rental yield is higher as compared to a same size normal conventional unit.
For example, let’s compare a dual key of 800 sqft that comprises of a studio unit and a one bedroom unit with a 800 sqft two bedrooms unit in Flamingo Valley Condominium in Siglap.
The studio unit can rent out at $1,500/month and the one bedroom unit can rent out at $1,800/month.
That’s a total of $3,300/month.
However for the two bedrooms unit, average monthly rent is $2,500-$2,800/month. So clearly, the dual key unit has a much higher rental yield for this instance. However, for dual key units, they come with their setbacks as well.
1) It caters to a very niche market and hence next time when it comes to reselling again, number of buyers looking for a dual key unit is not as many as the number of buyers looking for a normal two or three bedrooms unit.
2) If you have rented out both the units inside the dual key unit, it will pose a huge challenge when it comes to showing the whole dual key unit to potential buyers, as it requires lots of coordination to ensure that both tenants are home at the same time for the viewing to happen.
3) Disputes management between tenants. It is no doubt that both tenants will have their own individual private unit to stay. However some of the potential differences between the two tenants include cluttering of the common foyer, noise level (because these two units are just beside each other), electricity and water usage (they will share the utilities bill every month).
Landlord has to come out with some guidelines to ensure that both tenants live in harmony, otherwise this can pose a huge hassle every month for the landlord just to manage the two tenants.
Every property comes with its upside and downside as well. Always weigh both the pros and cons before jumping into the investment and always think of the exit plan too.
Retire Early and Comfortably Through Property Investing When You Are Young
In my last ten over years of real estate career, I had seen so many young adults who had just started out in their career, splurge on luxurious depreciating items and neglect planning financially for themselves. This can prove to be very costly to most as they are missing out on the advantages of compounding interest through investments and leveraging on longer property loan tenure when they are young.
When you buy a property at age 30 years old, you will be able to go for full loan tenure of 30 years, and keep your monthly installment low and hence there will be more positive cashflow monthly (or at least less negative monthly cashflow).
On the contrary, if you are at age 45 years old, your loan tenure will be capped at 20 years and your monthly installments will be a lot higher and you may not be able to go for as much loan as you desired.
Through proper and prudent property investments, one can make good use of the power of leveraging through mortgage loans.
For example, if you buy a $1m property, and you take a 80% loan, your downpayment is only 20% at $200,000.
So if the property appreciates by 20%, and hence the value becomes $1.2m, your returns before expenses is not just 20% but will be 100% instead (200k/200k times 100%: 100%)! And not forgetting the monthly rent you will collect, that adds up to your returns further!
The question now is that, can an average income earner be able to own a property at a young age? Well, I had seen so many successful examples over the last many years!
For illustrations sake, let’s look at a young adult at an age 28 years old earning $5,000/month. Assuming he manages to save $3,000/month. That will translates to $36,000 per year. He aims to buy an investment property at age 35 years old. Hence in seven years time, he will be able save up to $252,000, which is sufficient to place a downpayment for a $1m property. And if he has pay increment over the next few years from age of 28 years old, he would be able to save more.
Let’s assume that if along the way, he has more monthly commitments (eg., getting married, medical expenses etc.), and can only save $2000/month. Hence, by age of 35 years old, he will be only to save up to $168,000. It is still possible to accumulate more than $200,000 in savings by age of 35 years old by setting aside monies into very safe investment/savings vehicles through endowment plans or even SG bonds (up to 2.5-3% average yearly returns).
So what’s next when I have enough monies to invest in a good investment property? Time to act on it!
Let’s look at one example.
Project name: Icon at Tanjong Pagar
Unit type and size: 581 sqft, one bedroom unit Purchase price: $1.05mil
Expected conservative monthly rent: $3000 (average rent is between $3,200 to $3,500 per monthly)
Assuming one is taking 80% loan, at 2% interest rate, 30 years loan tenure
Monthly installment: $3200 (round up to nearest hundred)
(Monthly loan interest is $1400/mth conservatively as this interest amount will get lower as the loan amount gets lesser every month)
Question:
Rent collected: $3000 is less than the monthly loan installment of $3200. Is this a lousy buy or is this worth considering?
Let’s crunch some numbers and do some assessments!
Buying expenses when you first bought this unit:
1) Stamp duty: $28,000 (round up)
2) Legal fees: $3,000
3) Others: $2,000
Sub total (a): $33,000
Monthly expenses if you rent out this unit:
1) Loan interest: $1,400
2) Maintenance fees:$150
3) Rental income tax: $100 (depends on individual’s tax bracket)
4) Property tax: $200
5) Others: $200 (eg., repairs, furnishing, vacancy periods when the unit is not able to
rent out)
Sub total (b): $2,050
Monthly gain: $3,000 (rent collected) less $2,050: $950
Yearly gain: 12 months times $950: $11,400 (c)
Monthly cashflow: $3,000 rent less (items 2-5 for monthly expenses: $650) less $3,200 instalment:
($850)
Selling expenses assuming selling at price of $1,200,000 five years later (based on a mere 3% year on year price appreciation):
1) Agent commission: $26,000 (assuming 2% of selling price plus gst and round up)
2) Legal fees: $3,000
3) Others: $1,000
Sub total (d): $30,000
Total gain:
$1,200,000 (selling price) less $1,050,000 (purchase price) plus yearly gain of $11,400 (c) times 5 years less buying expenses $33,000 (a) less selling expenses $30,000 (d) : $144,000
Initial downpayment:
20% of $1,050,000: $210,000
Percentage gain on initial invested capital: $144,000/$210,000 times 100%: 68.5%
Yearly percentage gain on initial invested capital:
68.5%/5 years: 13.7%
For the above scenario, he has to ensure that he has enough savings for the negative cashflow every month of $850.
At age of 40 years when he liquidates his property, he will have $210,000 of principal and $144,000 of earnings: $354,000, which is sufficient to place a down payment for another property of $1.5-$1.7m.
Imagine that he sells off the second property again, he may be able to reap off even more profits, which may allow him to enjoy an earlier retirement very comfortably.
Of course, every investment comes with risk. As long as one does his due diligence and had set aside enough reserves to hold on to the property, property investing can be proven to be highly rewarding.
The Most Powerful Stress Test To Determine Good Investment Property Buys
There are so many indicators/stress tests for an investor to use before choosing the right investment property to buy. And there’s no common indicator that can be used for ALL investment properties. It will be largely depending on the type of investment property one is looking at (eg., commercial, industrial, landed properties, condominiums in CBD areas versus condominiums in heartland areas etc.) and also the objective of the investor (eg. Cashflow, capital appreciation, rental yield, capital preservation etc.)
One useful indicator is as follows:
Let’s use an example to illustrate how this indicator can be used.
Project name: Icon at Tanjong Pagar
Unit type and size: 581 sqft, one bedroom unit
Purchase price: $1.05mil
Expected conservative monthly rent: $3000 (average rent is between $3,200 to $3,500 per monthly)
Assuming one is taking 80% loan, at 2% interest rate, 25 years loan tenure
Monthly instalment: $3600 (round up to nearest hundred)
(Monthly loan interest is $1400/mth conservatively as this interest amount will get lower as the loan amount gets lesser every month)
Question:
Rent collected: $3000 is less than the monthly loan instalment of $3600. Is this a lousy buy or is this worth considering?
Let’s crunch some numbers and do some assessments!
Buying expenses when you first bought this unit:
1) Stamp duty: $28,000 (round up)
2) Legal fees: $3,000
3) Others: $2,000
Sub total (a): $33,000
Monthly expenses if you rent out this unit:
1) Loan interest: $1,400
2) Maintenance fees:$250
3) Rental income tax: $200 (depends on individual’s tax bracket)
4) Property tax: $200
5) Others: $200 (eg., repairs, furnishing, vacancy periods when the unit is not able to
rent out)
Sub total (b): $2,250
Monthly gain: $3,000 (rent collected) less $2,250: $750
Yearly gain: 12 months times $750: $9,000 (c)
Monthly cashflow: $3,000 less (items 2-5 for monthly expenses: $850) less $3,600 installment:
($1,450)
Selling expenses assuming selling at price of $1,100,000 five years later (based on a mere $50,000 price appreciation):
1) Agent commission: $25,000 (assuming 2% of selling price plus gst and round up)
2) Legal fees: $3,000
3) Others: $2,000
Sub total (d): $30,000
Total gain:
$1,100,000 (selling price) less $1,050,000 (purchase price) plus yearly gain of $9,000 (c) times 5 years less buying expenses $33,000 (a) less selling expenses $30,000 (d) : $32,000
Initial downpayment:
20% of $1,050,000: $210,000
Percentage gain on initial invested capital: $32,000/$210,000 times 100%: 15.2%
Yearly percentage gain on initial invested capital:
15.2%/5 years: 3.04%
Breakeven price of this property if one is to sell on the fifth year: [yearly gain of $9,000 (c) times 5 years less buying expenses $33,000 (a) less selling expenses $30,000 (d): ($18,000)] + $1,050,000 (purchase price): $1,068,000
Breakeven year of this property if one is to sell at same price: [Buying expenses $33,000 (a) plus selling expenses $30,000 (d): $63,000] / Yearly gain: $9,000 (c): 7th year
Summary and analysis of this investment (just on rental yield perspective):
1) If one see more upside in this area, meaning there are many catalysts for growth (eg., Keppel area redeveloping, CBD area, proximity to MRT, high rental demand, high investors’ interests etc.), appreciating by more than $50,000 in 5 years’ time or longer would be highly possible. Do look at the historical prices too. If historically, the price of Icon unit has hit much higher than the entry price, then there may be a chance that it may hit that price again.
2) On a very conservative approach, if one is satisfied in just getting more than the returns as compared to putting monies in safe vehicles like time deposits (1-2% interest rates on average) or Singapore bonds (2-3% interest rates on average), then this investment would be ideal because even by using the most conservative way of calculating (assuming rent price remain this low throughout, marking up the monthly and the transaction expenses etc.), the yearly returns on the invested capital is already 3.04%.
3) If market price remains stagnant all the way, and the purchaser sells the property on the 7th year at the same entry price, he will not lose money!
4) Always invest only when you have enough spare cash after setting aside monies for your needs. One must be prepared to top up close to $1,500 per month assuming rent remain low at $3,000 per month.
I would consider this unit as a good investment to look into.
For those with bigger budget and/or higher risk appetites who want to invest in something of higher returns, properties like landed properties, conservation houses, condominiums in orchard or even Sentosa may whet their appetites. Assessing these properties will require a different set of indicators. Using rental yield approach will not work because these are capital play vehicles and rental yield will be very low.
Should I stay in my HDB and save towards buying a investment private property or sell my HDB and upgrade to a private property
To a certain extent, I would agree that a private property in a good location with good entry price would have a lot more capital upside as compared to a HDB. After all, HDB has always been meant for own stay purposes and not meant for speculative reasons.
However, one should not plunge immediately to selling one’s HDB just for the sake of wanting to own a private property.
Staying in a HDB can allow one to keep one’s living expenses very low as compared to staying in a private property.
A breakdown of HDB living expenses:
1) Conservancy charges: $30 to $100 per month on average, depending on flat type 2) Property tax: $200 to $400 per year on average, depending on flat type
3) Utilities. Although it varies depending on individual usage, but from observations,
somehow a HDB owner seemed to be paying a lot lesser than a private owner in this
aspect
4) Parking charges. $90/month for surface car park and $120/month for sheltered car
park
For HDB dwellers, from time to time, there are discounts and rebates given to them and that can amount to some savings over time as well. For private property owners, they will be deprived of all these privileges.
A breakdown of condo living expenses:
1) Condo maintenance fees: can be from $300/month to over $1000/month,
depending on condo type and location.
2) Property tax: can be from $1000/year to over $2000/year, depending on condo type
and location.
3) Utilities. Although it varies depending on individual usage, but from observations, I
have always noticed that most of the condo owners seemed to be paying more than
$200/month, and some of them are even paying excess of $500/month.
4) Parking charges. Maintenance fees will include parking charges already.
In one glance, it is clear that the monthly expenses for staying in a condominium is significantly higher than staying in a HDB. Moreover, the private property loan installment every month one has to pay will be a lot higher by extra thousands of dollars every month.
But does that mean that we have to stay in our HDB flat forever?
Not necessarily so!
There will be a few questions to ask yourself first before even making the decision to sell or not.
1) After selling your HDB, would the sale proceeds be adequate for you to buy another condominium for own stay? Or even to buy two private properties (one for own stay and one for investment?)
2) Would you be very comfortable paying the monthly projected expenses and loan instalments if you are really make the move?
3) If you and/or your spouse fail to be employed, would you still be comfortable paying your monthly expenses?
4) Do you have enough cash and CPF reserves for rainy days? For example,
a) at least 12 months of reserve for property expenses
b) unexpected events in the family like medical expenses etc.
c) if buying to rent out, and the rent collected is lower than expected or cannot find
a tenant in the short term?
Of course, living the condo lifestyle or the dream of financial freedom or early retirement is something which many of us yearn to have. However, the most important question is, if things go wrong, are you in a position to take the loss together with your loved ones?
Exercise prudence as always, tread with caution with calculated risks!
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