Whether you’re purchasing or renovating your dream home, this thought must have crossed your mind: What profit will you make should you ever decide to sell or rent out my current house?
And if you do decide to put your home on the market, how soon can you cash in on it?
Content
- Property Investment for Beginners: 6 Things to consider
- Is this property worth buying? 3 Ways to know
- How to use first home as investment?
- Use first home as investment: 4 Risks involved
- Investing in property: Can I use CPF?
- How I upgraded from HDB to landed property
Property Investment for Beginners: 6 Things to consider about your current house
Property and rental experts share what makes your house (and renovation) a good investment.
1. Location, Location, Location
When you consider the resale value of your home, “location” is extremely important – after all, the idea is to buy an apartment, flat or house that will appeal to a large number of potential future home-buyers.
Most property buyers or investors consider (buying) existing popular residential locations as they are seen as mature, established and “proven” markets, says Ong Teck Hui, national director of Research & Consultancy at Jones Lang LaSalle Real Estate (Singapore).
He shares examples like Bukit Timah and East Coast as prime areas with “proximity to good schools, shops, eating places, recreational facilities, clubs and other amenities, which are factors that draw buyers to them”.
Location is really the thing to look for when buying a place for living in or for investment, agrees Maureen Li, general manager at Abiel Corporate Housing, a company that rents out furnished apartments or houses to individuals or corporations as an alternative to traditional hotels or serviced apartments.
Where a property is bought for living in, Li says certain attributes take priority, such as being close to the children’s school or to other family members. However, this may result in a “decision that isn’t entirely investment-focused”.
The investment property sector, on the other hand, has a captive market with the expatriates or foreigners who take up residence in Singapore, she adds. Residences that are in close proximity to transportation (less than a 10-minute walk from an MRT station) and also to amenities such shopping malls and the central business district (CBD) – five to six MRT stops is an ideal gauge – do exceptionally well in terms of rental yield as well as resale demand and value.
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2. Target Growth Areas
Seeing the bigger picture might help, too. Ong explains that “growth” areas present opportunities, as their eventual maturity would lead to favourable capital appreciation.” He cites the north-east region as an example of an area that shaped up, with the growth of Sengkang and Punggol new towns, as well as Seletar Aerospace Park.
“The government has been releasing more land in the north-east for residential development, and we [saw] many new condominiums springing up. Landed housing estates such as Seletar Hills have also profited from that region’s growth,” he adds.
Furthermore, the creation of various clusters such as Tampines and Jurong West, for example, will greatly ease the concentration of development in some of the other areas, he adds. And if you have an idea of what the land-use URA blueprint is like, you’d be better placed to know what you can afford, to carry on with the lifestyle you choose.
In short, where you should put your money will depend on your lifestyle needs, says Willi Ching, senior marketing director at Huttons Real Estate Group. “I have clients in Tuas who don’t see the need to live near the city centre.”
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3. Connectivity
Good transportation network coverage is a big plus, says Ching, adding that “three letters, M-R-T, increase the attractiveness of a particular area”.
As part of the Land Transport Masterplan 2013’s theme of providing commuters with more connections to the places where they live, work and play, the Land Transport Authority (LTA) will be adding more rail lines and extending others – all with the intention of improving the connectivity, accessibility and coverage of Singapore’s rail network.
“This plan will mean that, in the future, 80 per cent of the population will be within 10 minutes’ reach of an MRT station,” Ching adds.
On that note and referring to the Government’s land sales programme, Ong says that most of the sites recently released are in the suburbs, with a few that are “more advantageously located near MRT stations and amenities”.
He adds that these sites always command a price premium of 10 to 20 per cent over mediocre locations, and tend to sell more easily and command better rentals, too. Some recent examples of projects (and their proximity to MRT stations) include Eco (Tanah Merah MRT station), Echelon (Redhill station) and Kovan Regency (Kovan station).
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4. Size Matters
With an expanding train network covering most of the island, perhaps investing in a property further away from the city area – where you can get something cheaper and bigger – might be deemed a “better buy”?
That’s all up in the air, it seems. “Unless an expat (being the majority of the rental market) works at Changi Business Park or in Jurong, his general preference is to be close to his working place, that is, more often than not, in the vicinity of the CBD,” says Li. A point to note is that the profile of the expatriate who comes to Singapore has changed in recent years – from a family unit to singles and couples.
On the flip side, while recent property developments have been yielding shoebox-sized units, Li says there are expats who seek older condo units that are more spacious, well-maintained, and with decent facilities; more importantly, these older units represent better value in terms of rent.
“However, this only works if the landlord is agreeable to investing in cosmetic renovation to the interior of the unit,” she says, pointing out that in many instances, “the investment relative to the returns that one can get is very small”.
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5. Renovate to fetch a better price?
Ching shares billionaire real estate entrepreneur Donald Trump’s sentiment: “You don’t necessarily need the best location. What you need is the best deal.”
He says, “I will not pay a premium (to buy a place) that’s been done up by others because to me, tastes and preferences are very subjective.”
That built-in aquarium-feature wall in the dining room or revolving shoe closet in the master bedroom may sound like a good idea to you – and only you. Potential buyers may see it as a costly burden, as they would prefer to hack it down.
Ching adds: “If I’m buying my own residence, with a view to eventually selling it, all the more someone else’s renovation isn’t important.”
The “savings” you enjoy as a buyer can go towards the interior decor that you want. And if the property is to be rented out, Ching feels that simple furnishing is adequate as “some tenants prefer to have their own furniture”.
6. Buy to sell, but renovate for yourself
“Many people are emotional when it comes to buying a property. They must feel good about it and cannot imagine if things were changed around, such as removing a wall to create more space,” Ching says. His encounters with potential home buyers has led to this observation:
“They like to compare and will think that ‘there might be a better one elsewhere!’ They should trust their instincts,” he says. If most of the variables are right, then buy it first and slowly put time into getting it to what you envision it to be, he advises.
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Is this property worth buying? 3 Ways to know
What makes such a piece of property worth purchasing? Realtor Justin Quek of OrangeTee & Tie tells us how to define one based on the “3F” property investment theory:
As a real estate professional since 2006, perhaps the most common question posed to me over the years is, “Can you find me a good property, please?”
We are privileged in Singapore to have a wide range of residential offerings in both the public and private new sales and secondary markets. In combination with education and exposure to an era of data overload, this creates a double-edged sword for many.
Analysis paralysis may set in or we end up making decisions that be less optimal.
This is why The Straits Times article on a poll conducted in mid-2019 mentioned that Singaporeans spend more time on property searches than reading bedtime stories or even speaking to their parents.
When you ask a realtor to recommend a good property, you may be presented with a wide range of options. How does one make any sense of this simple, essential question that has enormous ambiguity and subjectivity to it?
Ultimately, it is only possible for a buyer to distinguish a good property by defining what a good property means to you.
Here is a simple three-step framework to help you discover the best property for you:
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Finances: You should be able to afford the property
A good property can only be as good as the buyer’s affordability to purchase and willingness to hold on to the property for some time. This comprises your:
- equity (cash and CPF) as your down payment
- size of the bank loan you can secure from a bank (that acts as a major stakeholder of the property until you’ve paid it off)
This is critical not just upfront as a purchase, but also as a long-term consideration during the repayment period. There have been cases where prospective buyers start shopping for a good property before affirming how much they can afford to part with.
Having the bank on your side before you even venture out is critical, especially in Singapore, where strict policies such as the Total Debt Servicing Ratio (TDSR) govern our borrowing capabilities.
It is vital to settle your finances before approaching the market as your current personal finances may have particular dynamics that may affect your borrowing ability.
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Get an In-Principal Approval for bank loan before you start shopping
Obtaining an IPA (In-Principal Approval) by speaking with a mortgage banker or broker is the best way to go about this process. Combining this borrowing power with the cash and CPF you possess will give you clarity and, more importantly, confidence to select a good property based on what you can realistically afford.
Beyond affordability, finances also set the context and intention to buy a property, especially for the investor. A 58-year-old who can only obtain a mortgage for seven years may find that investing in Reits may provide a stronger return on equity than buying physical real estate without the optimal leverage component.
This may again differ if he or she is looking for legacy planning without leverage and looking at a much longer investment period. And if that is the case, property may be an optimal option. Ensuring you have clarity on your intentions and tenure of investment provides you with the context to make financial sense out of your purchase.
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Function: What does this house mean to you?
A good property can mean very different things to different people. As we live in a mostly privileged world, a good property can mean very different things to different people.
To an investor, a property like this may represent a location with the potential for a strong exit strategy or a stable yield generation.
To a family man, a good home can mean being close to his children’s school or his parents’ house as well as having enough space to accommodate all of his family members. So it is highly subjective.
Figure out your priorities & lifestyle
To begin looking at properties, start with some introspection to decide on the priorities for this purchase. There are two basic factors: lifestyle and financial status, which is the second step to finding a good property. The lifestyle factor alone covers everything from connectivity and community to even the size of the development.
Capital appreciation, yield, tenure of investments and so on tend to become simplified in the financial function. The clarity of your intent and interests gives you the ability to make better-informed decisions. Many of us wish to pursue perfection in our dream homes and want to get the best of everything. However, resources are often a constraint.
Choosing the best property for you is about making the best use of your prioritised functions from the financials you have set aside for this purpose.
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Forces: Red hot or soft property market?
Just as we are all built differently, the built environment also has complex market dynamics.
Market forces are not just the considerations of explicit data points such as average selling price or past transactions. They also include more implicit details that only a seasoned investor or veteran realtor will be able to spot.
Differences and complexities can be anywhere, from knowing the difference between boutique and mega-developments to integrated developments and stand-alone residential sites. And then there are the more granular details like an older property’s Sinking Fund or even a demographic mix of the development.
When you start wanting to know everything, this may be opening a Pandora’s box, but after going through the first two factors of finance and function, you can choose the necessary data sets that you require based on what you have prioritised.
An example of a few market forces I examine myself when looking at an investment property is the:
- demographic make-up of the other homeowners
- volume of sales transactions
- rental trends
Market forces can be followed so easily today in this digital age or through a savvy realtor hooked up to the latest tech databases. Insight and intelligence of such forces in the markets give us more confidence in choosing a better property. Even the trends on the ground may be at the fingertips of a seasoned investor or realtor. For example, a popular priority for some buyers today is the fixation on freehold properties. – Justin Quek
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How to Use My First Home As Investment?
Let’s start by defining what we’re talking about – how does the typical Singaporean use their first property as a pure investment asset?
Move back to your parents’, rent our your house
The simplest way to do this is to buy a private property, but not move into it. Instead, you continue to live with your parents, while renting out your private property. Ideally, the rental income from your property will more than cover the mortgage repayments – and when you sell the property in five to 10 years, you will profit as the property has appreciated.
Wait for your house price to appreciate
Another way to treat your first home as an investment is to still live in it, but simply hope that you’ve picked a property that will appreciate. An example of this is choosing to buy in a non-mature estate, where many amenities (shopping centres, train stations, hawker centres, etc.) have not yet been built. This is based on the theory that, as these amenities are built up, the property value will rise.
Hope for en bloc sale
Finally, some daring speculators will even buy an aging development (one with 40 years or less left on the lease) as their first property, all the while speculating that an en-bloc sale will leave them richer.
Using First Home As Investment: 4 Risks to consider
There are, however, many risks to this profit-driven approach. Let’s look at some of the main risks, in treating your first property as an investment:
- The rental income may be lower than expected
- The property may not appreciate as well as expected
- If you decide to settle down, you may not have a home of your own
- If buying an old property, don’t assume an en-bloc will happen
Rental may be lower than your home loan
You cannot assume that the rental income will suffice to cover the mortgage repayments. If you would be unable to handle the mortgage without the rental income, you’re quite likely overleveraged.
For example, say you took out a loan for $700,000, at 1.8 per cent interest with a 25-year loan tenure several years ago. The monthly repayment amount would be $2,899 per month. You assume that the rental income will be $3,300 per month, thus profiting you $401 a month.
However, a few years in, the rental market softens. Soon, the rental income falls to a mere $2,500 per month. On some months, there is no rental income at all, which leaves you to pay the entire mortgage.
What will you do when your “investment” starts to cost you $399 to $2,899 per month? This may interfere with your ability to save or invest – and if you have dependents, such as parents or siblings to look after – the added cost can be devastating.
You may think you can just sell off the house at this point, but that’s easier said than done. It can take months to sell a house, and you will need to pay the agent a commission of around two per cent (selling an $800,000 unit would cost you $16,000).
Also, when the rental market is weak, the property prices might be low as well. You may rush to sell the house, and find that you’re making a loss. This disastrous “investment” could set you back financially, by several years.
Not all properties appreciate steadily
What makes a good investment? Let’s consider the simplest way to determine this: by using straightforward Return On Investment (ROI).
Let’s say you buy in a non-mature area, where private properties are a little cheaper. Let’s also say you are an owner-occupier; you live on the actual property without renting it out.
The total price of your property is $700,000, inclusive of all the stamp duties and relevant renovation works; this is quite cheap for a full-suite condo.
You hold on to the property for 10 years. During this time, you bear with inconveniences such as lack of a train station, or the lack of malls and markets. Finally, after 10 years, you decide to sell.
Unfortunately, property prices are in a slump at the time. Your house has appreciated, but just to around $800,000. Your ROI is:
(sale price) – (purchase price) / purchase price x 100
This means it’s ($800,000 – $700,000) / $700,000 x 100 = 14.2 per cent
Is this a good ROI? In truth, given the amount of time you waited (10 years), this is a terrible figure. It means there’s an averaged out return of just (14.2 / 10) = 1.4 per cent per annum.
If you had just left the money in, say, your CPF, you would have gotten 2.5 per cent per annum; and that would have been guaranteed. Even a simple endowment policy can provide returns of around three to four per cent per annum.
But at least you haven’t lost money, right?
Wrong. The rate of inflation in Singapore is around three per cent per annum, and your investment has not kept up with that. And this is after you’ve put up with various inconveniences for a whole decade.
You may not have a place to settle down
You may have plans to hold on to your investment property for five years or 10 years, but life still carries on in the meantime. What happens if you meet your soul mate, and want to get married?
If you want to move into your investment property, you will lose any rental income from it. This means you’ll have to bear the full cost of the mortgage on your own. Also, if your investment property is small – such as a shoebox unit you rented out to single expatriates – it may be impossible to raise your family there.
(Do note that you cannot apply for an HDB flat, if you own a private property).
These conditions could force you to sell off your investment, even if the property market is in a downturn. Either that, or you and your partner will have to wait several years before you can sell and get a home of your own.
En-bloc doesn’t always happen
The most dangerous thing you can do is assume an en-bloc will happen. There is no guarantee that this will happen, even if a developer is offering a high price.
You must consider that the emotions of other owners play a part. The development may be home to many retirees, who have no desire to move at this stage in their life. The community living there may also be close knit, and may refuse to budge even in the face of high sales proceeds.
There is also another risk to consider: the en-bloc may occur sooner than expected. If an en-bloc sale occurs within three years of you buying the property, you are still liable to pay the Sellers Stamp Duty (SSD). This is 12 per cent of the property sale price on the first year, eight per cent on the second year, and four per cent on the third year. Note that this applies even if you vote against the en-bloc sale.
So, should I use my first home as investment?
Not at all. It can sometimes be viable to treat your first property as an investment. However, it’s highly advisable that you meet you certain criteria first. These are:
Don’t sink every penny into the property.
Make sure you have other assets in your portfolio, such as equities, bonds, unit trusts, etc. The property should only constitute one part of your long-term investment portfolio.
If you can’t afford to invest in anything else after buying the one property, you should rethink your decision. You are putting too many eggs in one basket, by making a one-way, unhedged bet on the property value.
You are certain you won’t need a home of your own, while your investment is ongoing. If you need to move into the property, or you need to sell it off because you’re settling down, that could derail all your investment plans.
You are not at the total mercy of the rental market. If you cannot afford the property without rental income, you cannot afford the property at all. Never buy if you are totally dependent on the state of the rental market, just to make your mortgage repayments.
This being said, our recommendation to first time property buyers is to look for a home first. It’s safer to start playing landlord later, when your first home is secure, and you can start to consider a second property.
However, if you have high income or a different lifestyle (e.g. you are a committed lifelong single), you can speak to a financial advisor or wealth manager on whether to dive straight into property investment.
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Investing in Property in Singapore: Can I use CPF?
Yes, you can use your CPF Ordinary Account money to buy a condo or private property for investment.
Bank Loan Downpayment
When you apply for a bank home loan for your condo or private property, you’re required to pay a 25 per cent down payment. Of this 25 per cent:
- 5% must be paid in cash
- 20% can be paid in CPF
Bank Loan Monthly Repayments
Afterwards, you will be able to continue using your CPF Ordinary Account savings to pay for your condo or private property’s monthly repayments. There are, however, withdrawal limits based on your CPF savings.
To check how much CPF you can use to pay for your private property, you’ll have to visit CPF’s website, login via SingPass, and check your limits under the CPF Housing Scheme section.
![67145-nahar-azmi-family-1024x683-1 School teacher Norharyati Hassan and Nahar Azmi Abdul Majid with their children (from left) Sarah Nahar Azmi, 14; Zahra Nahar Azmi, eight; Faris Nahar Azmi, 19, and Nadhrah Nahar Azmi, 17. Mr Nahar bought their terrace house in Opera Estate in 2009 for about $1.25 million. ST PHOTO: FELINE LIM](https://sonadecor.com/wp-content/uploads/2024/01/67145-nahar-azmi-family-1024x683-1.jpg)
How I upgraded from HDB to landed property
Mr Nahar Azmi Abdul Majid, 52, and his wife, Madam Norharyati Hassan, 50, who are both school teachers, had no idea that they would one day live in a landed property. But with careful financial planning, the couple, with four children, upgraded from their five-room HDB flat to a terrace house in 2009. The house was worth about $2.5 million in 2017, double its original price tag of $1.25 million.
A financially prudent family
It helped that the couple were brought up by financially prudent parents. They are disciplined in their spending and save zealously.
In 2003, a colleague who was moving to Australia asked if they wanted to buy his condominium. Back then, the family was living in a five-room flat in Bedok which they had bought in 1998 for $376,000.
Expecting their third child and worried about over-committing themselves financially, the couple met financial adviser Alfred Chia for the first time that year. Mr Chia is now CEO of financial advisory firm SingCapital.
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Know your financial standing
After going through a comprehensive fact-find to determine their financial position, Mr Chia advised the couple to refrain from buying their friend’s home. He explained that the added financial strain of the larger mortgage would crimp the lifestyle they enjoyed and they would need to cut back on their yearly trips abroad.
During the meeting, Mr Chia discussed options such as endowment plans for the couple’s children, Central Provident Fund investments for themselves, and insurance to secure a more comfortable life for their children should anything happen to the couple.
He also recommended unit trusts as an investment vehicle. They managed to invest in the right cycle, allowing them to enjoy a gain of more than 100 per cent over three years. This set the foundation for their landed property purchase later on.
![67146-nahar-2-1024x651-1 When Mr Nahar decided to buy a bigger home for his growing family, he spent a year researching property sites and transactions to compare prices, locations and affordability of various homes. ST FILE PHOTO](https://sonadecor.com/wp-content/uploads/2024/01/67146-nahar-2-1024x651-1.jpg)
Do your research
As the family grew bigger, the couple began to look for private apartments with four bedrooms. Mr Nahar recalled spending a year – almost daily – checking out PropertyGuru, iProperty, Urban Redevelopment Authority’s latest transactions and STProperty to compare prices, locations and affordability of various homes.
He finally decided on a freehold 2.5-storey terrace house in Opera Estate and bought it in 2009 for about $1.25 million. It has a land area of 1,393 sq ft and a built-up area of 2,500 sq ft.
Mr Nahar said: “It was very tedious and time-consuming but it made me understand the market better and what to look out for. The house was already built up and it had the requisite number of rooms and bathrooms. It is close to main roads and amenities and yet far enough to be quiet.
“It was priced at almost the very bottom of the market. After we bought it, prices of private homes skyrocketed.”
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Pay off home loan ASAP
The couple sold their Bedok flat for $505,000, and took an 80 per cent housing loan or about $1 million for their new home. In 2017, they were left with $750,000 outstanding loan balance.
After the couple decided on the property purchase, paying off the loan before retirement age, and protection on the loan and property became their financial priorities.
They took up mortgage insurance – which would pay off the loan if death or total permanent disability struck – and home contents insurance, which insures the property against fire, water damage and third party liability.
It turned out to be a prudent move as the family was affected by floods in 2010. The financial damage was more than $40,000. It was fortunately covered by insurance.
The couple have benefited from low mortgage interest rates for the last eight years. On top of their monthly mortgage repayments, they diligently saved their bonuses and salary increments to pay down the loan faster via partial loan repayments.
“They are on target to fulfil their various financial goals with their existing savings and investment plan. While they have no plans to cash out from their property, the strong appreciation of the property value gives them more options to fulfil their financial goals.”
Part of this article first appeared on Singsaver., The Straits Times.