Property investment ranks as a popular choice for many Singaporeans when investing their money. One of the reasons is that it allows investors to invest in long-term leases without having to worry about short-term market fluctuations, as they will not lose any money if they do not sell the property. Aside from rental income, investors also can reap the benefits of capital appreciation over the course of their investment. In addition, the lack of a capital gains tax when disposing the property also reduces the cost of ownership, making Singapore an ideal destination for property investments.
New Measures to Cool Property Investment
Singapore’s government finally announced another round of cooling measures in December 2021 after considerable increases in property prices.
|New Singapore property cooling measures
|Description of new cooling measures from 16 Dec 2021
|Higher Additional Buyer Stamp Duty (ABSD)
|Raised for Singapore citizens and PRs buying second and subsequent property and raised for all foreigners and entities
|Tighter Total Debt Servicing Ratio (TDSR) threshold
|Lowered from 60% to 55%
|Lower Loan to Value (LTV) limit
|Lowered from 90% to 85% for HDB loans
In this article, we will speak to three Mortgage Experts from PropertyGuru Finance namely Ethan Ng, Ben Goh, and Apple Tan as we discuss some smart property investment concepts to help you plan your property investment journey.
2 Ways to Invest in Singapore’s Real Estate
Capital Appreciation and Passive Income From a Property
Investing in a property is a great way to gain capital appreciation and passive income. This is especially true when the level of inflation is high, as property prices tend to move in tandem with inflation and offer a nice profit when the owner finally sells the property. As such, property investment can be considered as one of the best hedges against inflation, making it an ideal asset class when interest rates are low.
Passive income of a property can be calculated by tracking the rental of a property investment using either gross rental yield or net rental yield.
Gross rental yield, can be calculated using the formula below:
Gross rental yield = Annual gross rental income from property / Property total value
If you own a $500,000 property, and charge $2,500 for rent monthly, your gross rental yield would be 6% [($2,500 x 12) / $500,000 x 100%].
Net rental yield, on the other hand, encompasses all additional expenses incurred while the tenant is living in the property (e.g. taxes and bills) and is calculated with the formula:
Net rental yield = Annual net rental from property / Property total value
Real Estate Investment Trusts (REITs)
REITs are companies that operate and own real estates (e.g. shopping malls and office spaces) to yield both passive income and capital appreciation. Instead of investing directly into a property, the investor invests his money into the company operating the REIT. The advantages of investing in REITs include capital gains from its property portfolio, dividends from the REIT, lower investment capital, and not needing to manage the tenant. However, there are disadvantages too, such as less control and decision making over how the investments are used.
Buying a Second Property in Singapore
If your preference is to own a physical property either for capital appreciation or collecting passive income, you may wish to take note of these changes.
When investing in a second property, you should always consider the new cooling measures like the ABSD increase and TDSR limit. This is because since the latest cooling measures came into effect, the ABSD has been increased to 17% for Singaporeans buying their second property and 25% for subsequent purchases. At the same time, buyers would need to comply with the lower TDSR limit of 55% when applying for a mortgage to finance the purchase. Together, these factors will translate to a higher upfront downpayment and reported income to get the home loan approved.
A Smart Guide to Property Ownership
Expert advice: If you’re considering buying an investment property but are turned off by the 17% ABSD, there are some "cheaper" options out there that you may wish to consider.
Single Borrower Scheme
This scheme entails a couple buying a property under one owner and taking up the home loan in single name. This frees up their spouse to purchase another property, which is a way to own multiple properties within the household. So if you plan to buy another property in the near future, you may wish to add only one party as the owner for your current home.
Apple mentions that if you’re intending to take up this scheme, “you and your spouse shouldn’t be listed as co-owners when purchasing your first home”. So, if both of you are buying an HDB flat, you should list your spouse as an occupier instead. This will allow them to purchase a private property as a first-time homebuyer and be spared from paying the hefty ABSD (or pay 5% if they’re a Permanent Resident).
However, keep in mind that your spouse will still be required to fulfil the 5-year Minimum Occupation Period (MOP) as an ‘occupier’ of the HDB flat or EC before purchasing another private property. Also, not being listed as an owner would mean that your spouse’s Central Provident Fund Ordinary Account (CPFOA) savings cannot be used for downpaying the current home. In addition, their income would also be excluded from calculating the 30% Mortgage Service Ratio (MSR) or 55% TDSR limit when applying for the mortgage.
You may consider decoupling if both of you have already purchased a home, but the ABSD discourages you from buying a second one now. This is when co-owner of the property transfers their share of the house to the other party. Simply put, it involves the removal of one owner through a “buy out” method, where the exiting party will be considered a first-time home buyer after the transaction.
As Ethan shares, decoupling is “generally applicable to only private properties”, and “most suited for couples who wish to own multiple properties”. After the decoupling process, the exiting party can proceed to purchase another private property. And as Apple mentions, the best part is that the “outgoing party will not be subjected to ABSD and eligible for a higher loan quantum without the second housing loan limit on their next purchase”.
However, the three advisors also caution that the existing property would have to be purchased as tenants-in-common, meaning both owners would own a specific share in the property. Furthermore, they will need sufficient cash and CPF savings to pay the fees, including BSD, and return the exiting party’s CPFOA, including accrued interest, unless there is written consent from the CPF board to waive the refund should they wish to decouple.
Tenants-In-Common: 99/1 Split, or 1% Ownership
According to Ben, this method will likely benefit people who "plan to decouple in the near future".
This is a form of property ownership structure where the owners’ shares are spelt out in percentages and determined at the point of property purchase. There are certain disadvantages to this structure, such as when a divorce happens, one party will still own 99% of the house even if both have been paying equal shares, which could complicate matters. Also, if an owner dies, the other party does not immediately inherit the whole house but only retains their respective percentage. According to Ben, this method will likely benefit people who “plan to decouple in the near future”.
Since decoupling requires the buyer to pay a BSD on the property’s purchase price, having a 99/1 Split, or 1% ownership for the seller, means that the BSD is now calculated based on 1% of the property value. So instead of paying BSD on 50% of the property valuation, assuming it’s owned 50/50, it is now calculated only on 1% of the valuation or sales price, whichever is higher!
Invest Smart, Invest Right
There are indeed certain ways to make smart moves in property investments, but it is also wise to be cautious and make sure that you get it right at the beginning. This is to avoid unpleasant situations where things do not go as planned, and it can get difficult to unwind sometimes. Furthermore, like Apple, Ethan, and Ben mention, while many property buyers “may be aware of the different schemes, they may not fully understand how it works or whether it is suitable for them.” Thus, these “tips” should be executed with caution.
When done correctly, investing in a Singapore property can be very lucrative, as seen in some landowners with rental income streams. Having a passive income certainly helps sustain a property investment while waiting for the opportune time to sell it.
If you’re looking for a new home loan to purchase a new property, you can always get in touch with our friendly Mortgage Experts from PropertyGuru Finance for a friendly chat anytime!Chat with us on Whatsapp Fill up an online form
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