Becoming a landlord in Singapore isn't as easy as owning property. Be ready for the following costs.
Property is often regarded as the crown jewel of investing in Singapore. Ask the average Singaporean, and they’ll tell you this asset can do no wrong.
So it’s not surprising that a flat is the first big-ticket purchase many of us aim for. But if you’re buying to become a landlord, be sure you’re financially prepared to take on the costs. Here are some things to be aware of.
1. Do Have Enough Holding Power?
This is the most important question for any would-be landlord. You cannot assume that there will always be rental income to cover the cost of the mortgage.
What happens if your monthly loan repayments are S$3,000, but the rental income (remember that the rental market can strengthen or weaken) is only $2,000? Do you have the capacity to service the loan?
Even worse, what if there is a period of vacancy? For example, there may be a month or two of vacancy when you are renovating the house, or when demand is low. Can you then pay the full mortgage amount without distress?
Do not assume you can sell the flat “at any time” and still see a good return. If you cannot service the mortgage and are forced to sell during a downturn, you may end up making a losing investment.
In general, we advise that you have sufficient funds to pay the mortgage for six months, before you buy the house.
2. Are You Prepared for Property Taxes and Maintenance Costs?
You should be prepared to pay additional costs like property taxes and maintenance. Most private condos have a monthly maintenance fee charged by the management committee, for costs such as cleaning the swimming pool or repainting buildings.
Maintenance costs for a condo are determined by your share value. You can check the cost in the Building and Construction Authority (BCA) guide.
Property taxes are progressive, and based on the Annual Value (AV) of your home. The AV is the estimated gross rental income of the property per year (e.g. If the rental income is S$2,000, the AV is S$24,000). The AV is determined by a valuation from the Inland Revenue Authority Service (IRAS).
The first $30,000 in AV has a tax rate of 10%. For every increment of $15,000, the tax rate increases by 2%, to a maximum of 20%.
For example, if your home has an AV of S$48,000 (gross rental income of S$4,000 per month), the tax rate is 14% (S$6,720 per annum, or the equivalent of another $560 per month).
Remember to add these costs to the monthly loan repayments.
3. Do You Understand What is Claimable?
The interest rate on a mortgage loan is tax deductible. Likewise, maintenance costs for the property are tax deductible, as are the property agent’s commissions on the tenants beyond the first.
You can check the list of deductibles at the IRAS website.
As a landlord, you should have a thorough understanding of what you can and cannot claim. If you are uncertain, you can ask a property agent, or query a wealth manager. Being able to make these claims can save significant amounts in taxes.
4. Do You Know How Much to Pay Property Agents for Rentals?
Unless you are a full-time landlord or have been in the property market as a professional, you will probably need an agent. This is to help you find prospective tenants and to vet their background.
As a general rule, the landlord pays one month of rent if the tenant signs a two-year lease. If the tenant signs a one year lease, the landlord pays half of one month’s rent. Note that this happens whenever you find a new tenant.
In short, don’t forget it also costs a substantial sum to find a tenant!
5. Do You Have an Emergency Fund?
Besides having six months of the mortgage saved up, you should have an emergency renovation fund of at least S$10,000. This is to deal with emergency repairs, from a non-functional air-conditioner to burst toilet pipes.
It is also inevitable that you will have to bear renovation costs at least once in five years. You will have to repaint walls, replace cracked floor tiles, or change faucets and showerheads. At minimum, expect to pay at least S$2,000 for such maintenance every five years (that’s assuming nothing breaks). While you can always get a personal instalment loan for renovations, it's best to have cash savings at hand, to avoid interest payments.
Remember that you have an obligation to the tenant, who can terminate the lease if you don’t fulfill your end of the bargain.
It’s Not as Easy as You Expect
On paper, the notion of a tenant who covers the cost of the mortgage is great. It makes owning property seem like an easy investment. In reality, you must be ready for the wide range of fees and taxes that plague every landlord.
If you are not confident about handling this responsibility for 10-15 years, you may want to consider a less stressful investment.
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