
Anything related to property investment has always invoked a sense of passion amongst Singaporeans. It’s no wonder when the homeownership rate stands at around 87.9% as of 2020. However, it begs the question if there is any value to renting a property in a country with such high ownership rates.
Most Singaporeans will generally argue that it’s better to own and stay in their property whether it’s a private property or an HDB flat, if they are qualified to, as opposed to renting. Owning our property allows us to renovate the home the way we want to and have a place that we can raise our family in.
Whereas when we rent a home, we only occupy the place for a temporary period, subject to the landlord’s terms and conditions, with apprehension about the future rental rate, whether the landlord will grant an extension of what happens when there is a change of ownership.
Despite these inconveniences, we should not immediately judge that renting is inferior to owning our own studio condominium.
Though the decision on whether to buy or rent is based on a multitude of individual factors, we will discuss some of the pros and cons of renting a studio condominium apartment versus buying it.
Read Also: Is It Worth Renting And Waiting For Your BTO Or Paying The Higher Prices For A Resale Flat Now?
Advantages Of Renting A Studio Condominium Apartment
Pros 1: You Can Get A Feel For The Location And Development before Committing For The Long Haul
Some of us, when growing up, would have preferred to have stayed in a particular part of Singapore. However, for various reasons, we may not have had the chance to do so.
Renting a studio condominium apartment allows one to venture to other towns in Singapore without the worry of having long-term regrets. For example, we may covet a property in prime district 9. However, only when we live there will we be able to understand the inconveniences during the morning and evening peak hours that need to be put up with and the accessibility to other amenities that may not be an issue in a heartland town.
Furthermore, it also allows one to get a feel for the liveability of the development with regard to the working relationship of the MCST committee and the maintenance of the common facilities. Some condominiums may have hidden issues that may not be apparent at the onset of purchase but will surface as you live there.
By renting, it gives one a chance to experience living in a different neighbourhood or development without having to make long-term financial commitments yet.
Pros 2: Save On The Upfront Costs That Is Required For Buying
Buying a private property requires a high cash outlay in the form of a minimum 25% downpayment, related taxes, and legal fees. Besides the downpayment, you will also need to pay for the cost of renovation and furniture. However, as a renter, there are no upfront costs aside from the initial rental deposit.
For example, a studio condominium apartment that costs $700,000 would require an upfront cash outlay of about $230,600. The breakdown of these costs includes the following:
– 25% Downpayment: $175,000
– Stamp duty: $15,600
– Renovation and Furniture costs: est $40,000
In contrast, the renter only needs to set aside one month’s worth of rent as a deposit for a one-year rental contract. For a studio condominium apartment, the rental can typically range between $2,000 to $3,000.
Theoretically, if the renter can achieve an investment return of at least 10% annually based on the same upfront cost of buying a property, then the cost of rental can be covered and the renter can practically stay for free.
Pro 3: Greater Flexibility And Mobility
According to the URA, the minimum rental commitment for private residential properties is three months. This gives the renter both flexibility and mobility to switch locations either within Singapore or overseas without being encumbered.
A renter has little to no commitment to the upkeep of the property or the development and can easily switch to another studio apartment with better or newer facilities if they want. The homeowner, on the other hand, will be saddled with a higher maintenance cost just to maintain the property’s condition as the property ages.
Furthermore, with the remote mode of working style gaining mass acceptance, it will be easier as a renter to seek such job opportunities and be a traveling nomad than as a homeowner.
Renting also gives the renter more flexibility and allows them to better react to the changing work demands by relocating to different parts of the island should the work demands change.
Disadvantages Of Renting A Studio Condominium Apartment
Con 1: Time in the market beats timing the market
This adage of “it’s not about timing the market but time in the market” holds true not just for the US stock market but for our local property market as well.
Factors such as population and economic growth, coupled with land scarcity, have propelled the Singapore property market on an upward trajectory over the past 40 years, according to URA’s Private Residential Property Price Index.
Potential homeowners who chose to rent as they waited to catch the bottom of the property cycle, may have been better off buying a private property at fair value and holding it over the past 5 years compared to renting.
Based on URA’s 4Qtr 2021 – Rental Index of Private Residential Properties, the index has generally remained flat from the 1st Qtr 2017 to the 4th Qtr 2020. Rents started climbing higher in 2021 due to the COVID-19 restrictions on cross-border travel. It resulted in a surge in rental demand from predominately Malaysians working in Singapore.
Annex 1: Rental Index of Private Residential Properties
Source: URA
However, if we were to look at the Property Price Index below, we can see that property prices have generally been on an overall uptrend since 2017.
Annex 2: Property Price Index of Private Residential Properties
Source: URA
Hence, renting a property as a means to time the property market may not always be an effective strategy.
Con 2: Rent Money Is lost Without Any Residual Value
Proponents of homeownership would point to how buying a property is akin to a forced savings plan. As can be seen from the amortisation chart below, the monthly instalments will add to the equity or principal amount of the home over time as a lesser portion of the instalment goes towards the payment of interest.
Annex 3: Amortisation Chart
Blue Line – Principal Amount; Black Line – Loan Balance; Grey Line – Interest Payment
If we were to take a loan amount of $525,000 starting from February 2022 for a 25-year period at a fixed 2% mortgage rate, it works out to around $2,226 in monthly payments.
The above amortisation chart shows that a large portion of the principal payment (indicated by the blue line) at the start goes towards the payment of the interest (indicated by the grey line). However, over time, the lines are separated, and from the year Feb 2036, a larger portion of the principal payment goes towards the repayment of the loan balance (indicated by the black line).
A homeowner and a renter could be paying roughly the same amount each month, either to the bank or to the landlord, respectively. However, as we can see from the amortisation chart above, a homeowner would have a higher paid-up home equity than the remaining loan after just 10 years, whereas a renter would have only contributed towards the cost of homeownership for the landlord.
Con 3: Requires A Full Cash Outlay As Not Able To Use CPF Funds To Pay Rent
All Singaporeans and Singapore permanent residents are entitled to receive CPF contributions if they are in an employer-employee relationship. For employees under the age of 55 years old, their total CPF contribution rate is 37%.
For someone under the age of 35 years old, this will translate to a contribution of around 23% or $1,380.18to the Ordinary Account (OA) if one were to earn $6,000 a month. The funds in our CPF OA can be used for a home purchase or a home loan. However, it cannot be used to pay rent.
As such, homeowners have greater flexibility in the use of their cash or CPF to pay for their home as opposed to a renter.
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