Written By: Maelyn Lagman
Property investment is a more secure, long term investment compared to other types of investments, such as the volatile stock market, which is more speculative. And although it is harder now for property investors to make a profit, with all the restrictions and cooling measures imposed by the government, investing in property remains to be favoured in Singapore.
But property investments require certain factors to be considered. So, before you sign your name on your next property, we encourage you to ask yourself these five questions:
1. Am I eligible to buy?
If you are buying another HDB flat, eligibility is a key starting point. If you live in a new or resale HDB flat, or an Executive Condominium (EC), you cannot buy a second property until you’ve fulfilled the five-year Minimum Occupancy Period (MOP). This means you are required to stay in your home for the duration of those five years before you can purchase your next or second property.
2. What type of property am I looking for?
The type of property you intend to buy will greatly determine the next steps you’ll need to take. Public residential properties include:
- HDB - from a two-room flexi to an executive flat
- Design, Build, and Sell Scheme (DBSS) flats
- Housing and Urban Development Corporation (HUDC)
- Executive Condominiums (ECs)
- Meanwhile, private residential properties include:
- Conservation houses
- Town, cluster, or semi-detached houses
- Good Class Bungalows (GCBs)
Considerations before buying a second HDB flat
If you’re a Singaporean who owns an HDB flat or EC, you need to check if your flat is within the Ethnic Integration Policy (EIP) and Singapore Permanent Resident (PR) quota.
If you are a PR, you are required to sell your property within six months after receiving the keys to your second HDB flat.
3. What are key factors to consider when choosing the right property?
Whether you’re buying a second property as an investment or to live in it, you need to consider these four factors:
Where your property is located will greatly determine the type of tenants you’ll attract. If it’s located in the Central Business District (CBD), you’ll attract more expats looking to rent near their workplaces. For owner-occupiers, the location of your second property will determine your lifestyle and community. Purchasing a home in Orchard means you’re closer to the hustle and bustle of the city, which can mean a faster pace of living. Out in the heartlands, you’re surrounded by a majority of family units in a community where the pace of living is slower.
2. Surrounding developments
What are the amenities within the vicinity of your second property? Are there transportation networks nearby? These factors can also determine the type of tenants you’ll attract.
As an owner-occupier, you also need to determine if the surrounding amenities fulfil your domestic needs. Are there supermarkets close to home or, if the second property is for your elderly parents, hospitals and clinics? If you have children, the schools nearby can also make or break your decision.
3. Upcoming developments
It’s always a good idea to check the Urban Redevelopment Authority (URA) to see if they have any upcoming plans for the area your second property is located in.
A good example is URA’s plan to transform Jurong East into Singapore’s second Central Business District (CBD). From the cluster of malls housing major retail chains to the Kuala Lumpur-Singapore High Speed Railway, we can expect a bigger rush of property buyers in the Jurong area.
4. Rental Rate
Like other investments, you’ll need to figure out the potential rental yield and capital appreciations, as well as the estimated return on investment.
You can also check the average rental rates in an area over time (about five to ten years), to determine how well the rental rates perform as the years go by. If the rates are falling, your second property may not fare any better.
A general rule of thumb here is that the rental rate covers, or even exceeds, the monthly loan repayments for the property you just sold.
4. If it’s an investment, is it the right time to buy?
Despite the current economic crisis, the Business Times reported a rise in the investment sales activity for the third quarter of 2020, signaling a recovery in investors’ sentiment. In the first nine months of 2020, investors injected about $1.2 billion into the property investment sales market. Though lower than the amount of investments accumulated last year, it’s more than the $9.2 billion accumulated for the whole year of 2009, when the city-state emerged from the global financial crisis in 2008.
Singaporeans bought about 81% of private apartments sold last quarter (higher than in 2009, as well), expressing that they view Singapore real estate “as a safe bet”.
However, with any investment, there are risks involved. Expats are leaving the country as the government enforces tighter foreign curbs, driving a decline in the country’s population since 2003, pushing rents lower.
Don’t forget about the Total Debt Servicing Ratio (TDSR)
If you’re planning on buying a second property as an investment, and considering getting a home loan, you need to remember the TDSR, which ensures borrowers are not overleveraged on debts. It is a standard that applies to home loans in Singapore, granted by financial institutions.
- Should You Borrow More? Total Debt Servicing Ratio and Your Housing Loan
- Mortgage 101: What is Total Debt Servicing Ratio (TDSR)?
5. Can I afford a second property?
Finally, you need to work out the costs involved in buying a second property to find out if you are financially equipped to do so.
Unlike your first home purchase, which only requires a 5% cash down payment, your second property requires a 25% cash down of your home valuation limit, which is determined by the current property value or purchase price (whichever is lower).
Loan-to-value (LTV) Ratio
For your first home loan, the LTV limit is 75 to 90%, depending on whether you took out a bank or HDB loan. For your second home purchase, and if you still have an existing home loan, the LTV is 50% for a 30-year loan tenure. If it extends after 30 years or reaches your 65th birthday, the LTV limit drops to 30%.
Additional Buyers’ Stamp Duty (ABSD)
For Singapore Citizens, the ABSD for a second property is 12% of the purchase price or value, whichever is higher. For Permanent Residents, it’s 15%, and 20% for foreigners.
The ABSD should be paid within 14 days of signing the purchase and sale agreement. If signed overseas, it’s 30 days.
If you’re buying a second home as owner-occupier, you will fall under the same progressive tax scheme you were in when you bought your first home. If you’re renting the property, you will have to pay a 10% tax on the annual value of your second property.
In conclusion, you need to be financially prudent when buying your second home in Singapore, as it is capital-intensive. If you miscalculate any part of your home purchase, you might be in for some financial trouble. As such, we recommend you determine a clear plan with a financial planner to help you with potential blind spots.