This article was first published by 99.co
So you want to buy a second property, and make money off it. That’s a grand aspiration; but if you want it to be more than a dream, you have to know the actual numbers. Think of property investment as starting up a business. You need to make sure you’re sufficiently capitalised before getting into the game.
Three different estimates
In our examples, we use three different estimates, because we don’t know the exact kind of property market you might want to enter. The cost to start investing in a small shoebox unit, for example, is far less than if you want to start by buying a District 9 luxury condo.
For all intents and purposes, we will assume that you are taking a second loan for your second property.
Bear in mind that these numbers are estimates, only meant to give you a general idea of the sum needed.
What you need to prepare for
Regardless of the type of property you’ll invest in, the list of preparations is quite similar. You will need to prepare for:
- Down payment
- BSD and ABSD
- Initial renovation costs
- Emergency renovation fund
- Agent fees
- Mortgage repayments and fund
- Maintenance and tax fees
The maximum Loan to Value (LTV) ratio for a second housing loan, if the tenure is 30 years or less, is 50 percent. For the third and subsequent loan, the maximum LTV is 40 percent.
Note: The LTV is based on the number of home loans that you have, not the number of homes. If you are using a guarantor, also note that as of 2013, guarantors must now be listed as co-owners.
Of the remaining 50 percent, at least 25 percent of the payment must be in cash. The rest can come from your CPF Ordinary Account (CPF OA). For example:
For a shoebox unit valued at $750,000, the lowest down payment is $375,000. Of this amount, you must be able to pay $187,500 in cash. The rest can be paid with our CPF OA (or a combination of cash and CPF OA funds).
For a typical condo valued at $1.2 million, the lowest down payment would be $600,000. The minimum cash down would be $300,000.
For a luxury condo valued at $5.5 million, the lowest down payment would be $2.75 million. The minimum cash down would be $1.375 million.
In addition to this, there is legal paperwork involved. We will assume conveyancing fees are around $2,200.
2. BSD and ABSD
Whether or not you are a Singapore citizen, you will have to pay ABSD on properties beyond your first. Citizens pay seven percent ABSD on their second property, and 10 percent ABSD on their third property.
Permanent residents pay 10 percent ABSD on all properties beyond their first.
For citizens, our sample shoebox incurs an ABSD of $52,500. Our sample condo would incur an ABSD of $84,000, and our luxury condo would incur an ABSD of $385,000.
For calculations on the Basic Stamp Duty (BSD), please visit the Inland Revenue Authority of Singapore (IRAS) website. We have calculated the BSD for out sample properties as follows:
For the shoebox, BSD is around$17,100. For the condo, the BSD is around $30,600. For the luxury condo, BSD is around $159,600.
3. Initial renovation costs
Initial renovation costs tend to be in the $30,000 range. Why? This is because most renovation loans are capped at $30,000, or six months of your income. Most contractors or interior designers will work with this amount.
However, we will push the $30,000 by another 20 percent, as most renovations (and the subsequent furnishings) tend to exceed the budget by this margin. We will thus count the renovation costs for the shoebox and the condo to be at around $36,000.
You might be asking why the shoebox (500 square feet or less) costs as much to renovate as the typical condo (which we would place at around 1,400 square feet). In our experience, shoebox units tend to have more complex design features to raise their appeal.
For example, many shoebox units implement features such as walk-in wardrobes despite their small size, in order to wow tenants and up the potential rental income. Fitting these in a small space means expensive design work, which tends to offset the savings from having less floor space to tile, fewer wall surfaces to paint, etc.
With regard to the luxury condo however, we would place the renovation cost at around $100,000. This is being conservative; we know of penthouse units that have cost upwards of $1 million in renovation and furnishings alone.
4. Emergency renovation fund
As a landlord, always keep an emergency renovation fund of around $10,000.
This is to ensure you can immediately repair damage such as spoiled air-conditioners, kitchen damage from small fires, shattered bay windows, etc. Minimise your costs by not having to take out expensive loans to fix these, on short notice.
5. Agent fees
If you are using a property agent to find a tenant, prepare to pay one month’s rent for securing a tenant with a two-year lease. If the tenant has a one-year lease, the commission is usually half a month. You can read about this more in detail here.
If you want to skip the agent, we strongly recommend you do so only when finding the next tenant. Consider the various tasks that agents handle, from the negotiations to paperwork. Observe how they market your property, and how they persuade and convince potential tenants. Ask questions. Next time, you can try to do it yourself.
We will assume a rental rate of $3,000 a month for the shoebox apartment, and a rental rate of $4,000 a month for the condo. For the luxury condo, we will assume a rental rate of $15,000 per month.
6. Home insurance
If you are a landlord, you cannot rely on just basic fire insurance. You will want to be compensated if your tenant completely wrecks the house. Also, note that basic fire insurance doesn’t cover third party damage – if a fire in your unit damages a neighbour’s goods, you might be liable for it.
Most comprehensive home insurance packages are around $240 a year (the good ones, that also include things like personal accident insurance as part of the bundle).
We will assume a similar rate for all our sample properties.
7. Mortgage repayments and 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), this ensures you will have greater holding 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 percent per annum.
For the shoebox, monthly repayments are around $1,553, which means a fund size of $9,318. For the regular condo, monthly repayments are around $2,485, which means a fund size of $14,910. For the luxury condo, monthly repayments are about $11,390, which means a fund size of $68,340.
8. Maintenance and tax fees
We will estimate maintenance fees for the shoebox to be around $200 per month, and maintenance fees for the condo to be at $300 per month. For the luxury condo, maintenance fees might be around $450.
Property taxes are based on the Annual Value (AV) of the property, which is the rental income per year. Taxes are progressive, and rise along with the AV. For more details, see the (IRAS) home page.
We have worked out the taxes for our sample properties. For the shoebox, taxes are around $3,730 per annum. For the condo, taxes are $5,234 per annum. The taxes on the luxury condo are around $30,080 per annum.
Total costs to get started:
To start investing with the shoebox, you will need an initial sum of around $505,918 (inclusive of CPF usage and the first agent’s commission). Monthly costs are around $2,083, inclusive of taxes, maintenance fees, insurance, and all the others.
To start investing with the condo, you will need an initial sum of around $781,510. Monthly costs are around $3,241.
To start investing with the luxury condo, you will need an initial sum of around $2.1 million. Monthly costs are around $14,366.
Not all property investments will entail the same costs. They can vary significantly, even between units in the same block. Be thorough in searching for your options. You can browse some of the best valued listings on 99.co.
99.co hopes to help people discover the best ways to find houses, condominiums, apartments and HDBs for sales and rent in Singapore.
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