5 Risks To Think About Before Investing In Property

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Being a property investor comes with risks; newbies would do well to heed these ones.

Many Singaporeans dream of being property investors, and generating passive income from a second or third house. However, there are some risks you need to consider. Work out the following and speak to a qualified wealth manager, before you make the leap.

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A Cash-generating Property Can Still Lose Money

Overeager investors like to tout the “cash-generating” value of property. However, it’s not as simple as many of them make it out to be. Even if your property is being rented out, and generating cash, you need to compare it to the risk-free rate (your CPF). For example:

Say you buy a property to rent out, and get S$48,000 per annum. However, the total cost of the property, after costs like the Additional Buyers Stamp Duty (ABSD) and maintenance fees, comes to S$2 million. This would mean a yield of:

(48000 / 2000000) x 100 = 2.4 per cent

The risk-free rate (the most secure, guaranteed interest rate you can get) is the CPF interest rate, which is 2.5 per cent per annum. You’re actually taking a bigger risk than just leaving money in your CPF (the rental income can fall, for example), and being paid less for it.

If you invest in a property, at least aim to beat the CPF rate – otherwise, you’re better off just making voluntary top-ups. Simply “generating cash” is not enough.

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Buying A Property For Investment Can Interfere With Your Future Plans

Say you buy a small property when you’re 25 years old, and rent it out while you live with your parents. You may think this is a financially clever move, but don’t congratulate yourself yet.

What happens if, five years down the road at age 30, you meet the right one and want to get married? You can’t buy an HDB flat because you own a private property, and you certainly can’t raise your family in small, 500 square foot rental property.

This will force you to sell, at which point you need to hope that (a) the market is not undergoing a downturn, forcing you to sell at a loss, (b) you would have more than recouped the cost via rental income and capital appreciation, in five short years.

It’s seldom worth the risk.

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Rental Income Is Not Guaranteed

At around two per cent interest per annum, the typical 25 year loan for a S$1.4 – S$1.6 million property will easily exceed S$3,000 a month.

What happens if you can only get S$2,500 a month from your tenants, or even worse, if you go an entire month without a tenant? S$3,000+ is three-quarters of the average Singaporean’s monthly income.

If the situation carries on for a prolonged period – such as a year – you might find yourself out-of-pocket, and desperate to sell.

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Old Properties Can Be Challenging to Upkeep

One common strategy is to buy old properties (with 30 years or less on the lease), and then try to rent them out. This is because the old properties have a low quantum (low overall cost), but can still be rented out for income (the length of the remaining lease is irrelevant to tenants).

This can indeed result in high rental yields. However, consider the potential drawbacks: when a property is over 60 year old, maintenance costs become much higher. Pipes corrode and burst, there are no installation points for internet access, mold settles in, and wooden surfaces rot.

Revamping an old property, to make it rentable, can cost a small fortune. What becomes of your rental yield (see point 1) if the cost of renovations ends up costing over S$50,000, and the monthly maintenance is well over S$600?

Unless you’re an expert (a seasoned property investor, an interior architect, a contractor, etc.), think twice before buying an old property. You may be underestimating the amount of work it needs.

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You Can Lose Money In An En-bloc

Some landlords have another reason for picking old properties: they figure there’s a chance of an en-bloc sale, and they’ll make a lot of money from it. Even if the rental income is low, the high bid from developers will surely make up for it.

Well sometimes, the opposite happens. Consider what happens if you spend S$50,000 to renovate an old property, and you are holding on to it for the second year. Suddenly the en-bloc happens (80 per cent of the residents vote “Yes”), and you’re forced to sell.

Two things will happen. First, you’re forced to pay the Sellers Stamp Duty (SSD) of eight per cent of the property value, as you’re selling on the second year. (Before you ask, yes, you have to pay SSD for selling even if it’s an en bloc and against your will).

Second, you’ll have to hope that the rental income you’ve collected so far, and the eventual sale price, make up for the renovations and initial property cost.

Alternatively, the property may simply never be sold in an en bloc. Perhaps some residents are very attached to the place, and want to stay till the end. Or perhaps developers decide it’s not worth the price you’re all asking.

If that turns out to be the case, and rental income isn’t good, then you’ve just sunk your money into a pit. You won’t be able to resell that old property easily, while still making up your cost.

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Ryan
By Ryan Ong
Ryan has been writing about finance for the last 10 years. He also has his fingers in a lot of other pies, having written for publications such as Men’s Health, Her World, Esquire, and Yahoo! Finance.