Is property investing in Singapore all that profitable, and how can the average investor get started?
Singapore’s strong property market has earned it a reputation as a good investment sector, attracting no lack of investors and speculators looking to profit from the vibrant market conditions.
While continued reports of million-dollar HDB flats continue to fan the mania, is property really the holy grail of investing it’s been made out to be?
What are some of the pitfalls and hidden costs of property investing in Singapore? And how much capital would the average investor need to get started?
Let’s find out.
- Ways you could make money from properties
- Hidden costs of property investment
- Property ownership rules
- How much capital do you need?
- How to spot a winning property
3 ways to make money from property
When it comes to making money from property investments in Singapore, there are generally three methods to choose. Of these, two are active (i.e. require you to be hands-on and engaged) and require high capital. The remaining method is comparatively much more hands-off and passive, and also arguably more affordable.
Method 1: Buy and sell (aka ‘flipping’)
Perhaps the method that most easily springs to mind when we hear the term ‘property investment’, buying-and-selling or ‘flipping’ properties is one way to profit from property.
In this method, you’ll buy a property, maybe make some improvements, then turn around and sell it at a higher price for a profit. The defining characteristic here is speed; you’ll want to sell your property as soon as possible, in order to limit the risk to your capital.
However, this method relies on capital appreciation, which is something that you may not always be able to control.
There are also other pitfalls to consider, such as:
- Making too many improvements and pricing yourself out of the market
- Unexpected problems requiring costly repairs
- Lack of demand
Method 2: Buy and rent
In the buy-and-rent method of property investing, you’re basically moving into the role of a landlord – with all of its advantages and issues (see below).
Unlike in property flipping, the strategy here is long-term. Your aim is to hold the property, renting it out for income. In order to turn a profit, your rental income has to be higher than your mortgage payments (plus the amortised costs of any renovations or repairs).
The situation can improve dramatically once your property is all paid up; at that point, any rental income you collect is pure profit. However, depending on how long it takes you to pay up your mortgage, your rent amount may also be affected.
As with property flipping, there are pitfalls. For one, you may not be able to find suitable tenants. For another, your margins may be razor thin, easily jeopardised should replacements or repairs become necessary.
Method 3: Invest in REITs
If you want to invest in property without having to deal with all the hassle first-hand, you could turn to REITs (or real estate investment trusts).
They work like any other unit trusts or mutual funds, in that your money is pooled together with other investors, and used to invest in properties in Singapore or around the world.
Different REITs deal in different types of properties, such as residential, office, retail, hospitality, or any mix in between. You’ll need to pay a fee for the REIT to be managed professionally. For an even more hassle-free investment experience, some robo-advisors such as Syfe offer REITs-based portfolios.
(For the rest of the article, we will be focusing on the two active methods of property investing.)
Hidden costs of being a landlord
Since we’re on the subject, let’s take the opportunity to clear up some common misconceptions about being a landlord.
The traditional, romanticised view is that of being a towkay (or ‘boss’) who goes around collecting money from all their tenants. Well, while you certainly get to do that as a landlord, there are also many issues you have to deal with.
True story: When I was 12, my family was invited to move in with my uncle and auntie. My parents decided to rent out our 3-room HDB flat for extra income. We eventually settled on a single male expat working in Singapore, and he would be the only one staying in our flat.
Pretty soon, we started getting concerned calls from old neighbours, which quickly led to my parents politely informing the tenant to leave, as the neighbours had enough of his late night, window-side exhibitionism.
If the odds are against you, you get a problematic tenant – a real problem. Sure, not every case is as dramatic, but landlords do have to deal with damage to property, furnishings and equipment due to carelessness or neglect.
A bad tenant may also flout house rules, cause annoyance to neighbours, sublet your property without authorisation, or even indulge in illegal activities behind your back.
As any homeowner will know, properties require constant upkeep. Pipes and taps leak, furniture gets worn out, equipment breaks down, walls turn dull, bathrooms get gross… the list goes on.
Landlords are responsible for the proper maintenance and upkeep of the property, and are obliged to address any issues raised by the tenant. So if the washing machine breaks down, or the aircon gets choked, or the fridge is faulty, you’ll have to pay for repairs and replacements.
And if you want to preserve your beautiful marble countertop and floors, you’d better be prepared to pay for a professional cleaning crew to come in regularly, instead of trusting your tenant to wipe everything down after deep-frying chicken for dinner. Same thing for your new, expensive aircon.
On a more serious note, if your tenant suffers loss or injury while staying in your property – say, if a fire breaks out due to faulty wiring – you could be liable for damages.
Despite their best efforts, tenants may leave behind stains or damage to your walls, flooring and furniture. If these are extensive, you’ll need to make replacements or repairs before showing your unit to prospective new tenants.
While the rental deposit may go to cover some of these, your tenant may challenge your decision to deduct their deposit. This could lead to a difficult or stressful encounter.
Before you rent out your property, or in between tenants, you may need to do a round of repairs and renovation to make it attractive. Depending on the condition of the unit, this could range from a simple repainting to a full-scale renovation and purchase of new furniture.
Then, if you’re having problems finding suitable tenants, you’ll need to hire a realtor and pay their fees (typically half a month’s rent for every year of tenancy) once they get a tenant for you.
When your tenants leave, you’ll have to return the deposit you collected (typically two months, plus one month for every year of tenancy).
Meanwhile, your mortgage payments go on in the background, month after month.
All these wouldn’t be that much of an issue, but for the fact that your rental income may only just barely cover the mortgage, which means you may end up having to dip into your own funds!
Instead of being the whip-cracking ringmaster, a landlord is more like the circus clown, having to juggle multiple financial commitments just to keep the show going.
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How to determine if a property will make money
Gross rental yield vs Nett rental yield
Assuming you’re adopting the buy-and-rent model of property investment, you’ll want to pay attention to a metric known as the rental yield. You can find this figure in glossy sales brochures and snazzy websites, but you should take it with a pinch of salt.
The ‘advertised’ rental yield likely refers to the gross rental yield, which does not accurately reflect your returns. Instead, you should make an effort to calculate your nett rental yield.
There are many excellent blog articles out there that explain how to do exactly this, but we’ll show you a simple calculation:
|N / C x 100 = Nett rental yield|
Probable rental income – yearly costs – fees and interest = nett rental income (N)
Down payment + stamp duties + renovation + taxes = total cash outlay (C)
|Nett rental income (N)|
– Probable rental income: Expected yearly rental income, based on nearby similar properties.
– Yearly costs: Property maintenance costs, conservancy charges, property tax
– Fees and interest: Property agent’s fee, mortgage interest charges (per year)
|Total cash outlay (C)|
– Down payment for the property
– Stamp duties, such as ABSD
– Renovation costs for the unit
– Expected taxes on rental income
Because the nett rental yield takes into account all your cash outlay, fees, mortgage interest and costs, it provides a more realistic picture of the returns you can expect.
If this figure turns out to be too low, approaches zero, or is even negative, you should carefully re-evaluate whether the property will make for a good investment.
Tips to spot winning investment properties
- Look for nearby amenities. Think schools, sports facilities and park connectors.
- Beware of rising vacancy rates. It may be more difficult to find tenants for your property.
- Look out for signs of gentrification. Expensive hipster cafes and quirky art galleries in an old neighbourhood could herald well-heeled tenants willing to pay high rents.
- Watch for planned major developments. New MRT stations, business hubs and shopping malls could revitalise a sleepy neighbourhood, driving up prices.
- Attend property auctions. Distressed properties are often auctioned off by liquidators – you could snag a valuable property at a low price for instant capital gains.
How to start investing in property
If you haven’t stopped reading by now, you must really want to be a property investor. Let’s carry on!
What you need to know about property ownership rules in Singapore
All aspiring property investors in Singapore should familiarise themselves with some important abbreviations: SSD, ABSD, TDSR and LTV ratio.
|What is it?||How it impacts property investors|
|Seller’s Stamp Duty (SSD)||A duty payable if you sell a residential property within 3 years of buying it.||Within 1 year: 12%* |
More than 1 year and less than 2 years: 8%*
More than 2 years and less than 3 years: 4%*
3 years or more: 0%
*Percentage is higher of market value or selling price.
|Additional Buyer’s Stamp Duty (ABSD)||A duty payable if you wish to buy another residential property while already owning one in Singapore.||For Singaporean buying 2nd residential property: 12%|
For Singaporean buying 3rd and subsequent residential property: 15%
For Singapore PR buying first residential property: 5%
For Singapore PR buying 2nd and subsequent residential property: 15%
Foreigners buying any residential property: 20%
|Total Debt-to-Servicing Ratio (TDSR)||A financial framework that limits your monthly debt repayment to a portion of your gross income.||Your combined debt repayments (including housing loans) must not exceed 60% of your gross monthly income.|
This limits how much you can borrow to pay for your investment properties.
|Loan-to-Value Ratio (LTV ratio)||A financial framework that determines how much housing loan you can borrow. Decreases with number of active mortgages.||LTV is expressed based on the property’s value. |
1st mortgage: 55% or 75% of property value
2nd mortgage: 25% or 45% of property value
3rd mortgage onwards: 15% or 35% of property value
Note: The lower rate applies when the loan tenure exceeds 30 years, or extends beyond the borrower’s age of 65 years.
When investing in property, these four regulations will impact your ability to finance your property transactions.
The SSD and ABSD are both cooling measures introduced specifically to discourage speculative investment, by making it more costly to buy and sell multiple properties.
Meanwhile, the TDSR and LTV ratio are designed to stop Singaporeans from taking on too much debt, ensuring they retain the ability to pay off their financial obligations.
Housing loans are included under these two frameworks, which will impact the ability of property investors to finance their transactions.
How much capital would you need?
Finally, let’s take a look at what is perhaps the most important question of all: How much capital would you really need in order to start investing in property?
To find out, let’s construct an example from some of Singapore’s most affordable condominium projects. We see that Le Regal in Geylang is available for as low as S$600,000^ for a one-bedroom apartment.
Let’s also assume that:
- The buyer is a Singaporean
- The investment property would be their 2nd residential property
- Their first property is fully paid up
- They do not have any outstanding debt
|Property selling price: S$600,000|
|LTV ratio: 75% (since this is the only mortgage)|
|Downpayment: S$168,000 (payable via cash, CPF-OA, or in combination)|
|Agent fee: S$1,000|
|Initial capital: S$184,000|
For a low-priced one-bedroom condominium unit, you can expect to sink in an initial capital of S$184,000. And that’s the best-case scenario.
^Pricing as of 1 April 2021. Source: PropertyGuru
Read these next:
How To Buy A House In Singapore: A Complete Guide (2022)
7 Popular Types Of Investment In Singapore (And Tips To Use Them For Optimal Gains)
Buying A HDB Resale Flat: How To Minimise Cash Over Valuation (COV)
Property Tax, Explained: Annual Value, Tax Rate And How To Make Payment
Guide To Real Estate Investment Trusts (REITs), And Whether You’re Ready For It
By Alevin Chan
An ex-Financial Planner with a curiosity about what makes people tick, Alevin’s mission is to help readers understand the psychology of money. He’s also on an ongoing quest to optimise happiness and enjoyment in his life.