Are you fresh out of college, just got your first paycheck and wondering how people actually invest in a property, what are the pointers they usually look out for? Read this article to find out more, if investing is for you and what are some considerations that you should have when it’s finally your turn to expand and diversify your property portfolio.
So without further ado, let’s dive right into the first factor of the day.
Firstly, why do people choose to invest in properties? If you have heard of the term flip and sell, then you are gearing towards the right direction. Flipping refers to purchasing an asset with a short holding period with the intent of selling it for a quick profit rather than holding on for long-term appreciation. However, such a route is often risky and given the context of Singapore, such moves often lead to the speculation of the housing market, which is relatively regulated by the government to prevent such an impulse and detrimental surge in housing prices.
And as for risk-averse individuals, when it comes to investing in residential properties, you would definitely be more interested in the rental yield of your unit, how much can you rig in on a monthly basis as a side income (or rather as a way of helping you with the monthly down payment) while waiting for the capital appreciation of your investment property before selling it off at the next best price. So, the intake and output for this investment property is important to keep track of.
Let us quickly define how to calculate the gross rental yield.
Gross rental yield: take for example $3,000 for your monthly rental income, times 12 for a year’s worth, which will then amount up to $36,000. Thereafter, you take $36,000 divided by your purchase price of the property itself and you will get the gross rental yield.
But as an investor, there are some costs associated with collecting monthly rental income.
25% down payment, BSD, legal fees, just some of the cost of initial acquisition.
Running costs over the years of ownership would include that of:
Maintenance fees, property taxes, cost of repairs, agency fees.
As for maintenance fees, they will be factored into the consideration of your monthly rental income. Say you collect $3,000 per month once again, with the maintenance fee of $300 per month, your gross rental yield will be deducted accordingly.
Non-Owner Occupied Property tax rates are levied at 10% of your property Annual Value (AV) which is determined by IRAS actually. So as an investor, you will have to pay that annual property tax should you be renting out your property. On top of all the above listed costs, there is also agency fees that you pay a broker for helping you secure a tenant for your property to consider.
These are just some of the costs that will have to be added on to your rental yield, which needs to be factored and deducted from your gross rental yield. But should you then be scared away by the figure should it turn out to be negative?
Vacancy Rates
Vacancy rates. This is defined as the average period whereby your property may potentially be left vacant due to the absence of a tenant or when you are in the midst of changing tenants. This vacancy rate will vary from property to property. An example of this would be – say you have had a tenant for your unit for 2 years, and the tenant has decided to make his way home instead of continuing his stay here in Singapore. His leave would imply that you would need to find a new tenant, to put your property back on the property portals. So this period after the tenant leaves and you having to find a new tenant to fill up the unit would be known as the vacancy period, where we would calculate the vacancy rate of the unit.
Some units tend to have higher vacancy rates due to many tangible factors such as location, amenities and more. During this vacancy period, you would then need to set aside funds to pay for the monthly mortgage instalment – hence the longer the vacancy, the higher your potential loss of rental income. Hence, other than the overall rental yield, the vacancy period is also another key factor to consider when approaching a property rental strategy.
This is then why rental transaction volume matters. Before deciding on an investment property, you have to make sure that the amount of transaction of rental done within the development that you are buying into and its surrounding projects’ units are at a healthy rate and not one that is completely stale without many tenanted units. Also, you may want to compare it with the neighbouring projects, to calculate the average vacancy rate in that region such that you will be able to get a better estimate of it for your own unit should you decide upon it.
Is it good to then have neighbouring projects with low vacancy rates? The answer is no. Think about it this way. If there are competitive units or projects around you, this means that you probably all have the same set of amenities and services that is servicing that area. Tenants would have more options than just your unit alone and that would vastly affect your own vacancy rates, and you may even see the increase in vacancy rates.
Grapevine Effect
In Real Estate, we often have the term Grapevine, widely used by agents as a figurative term for explaining word of mouth among tenants. So what this means is that given the word of mouth among tenants, if they are satisfied with their stay at their unit, they would most probably recommend their neighbourhood to the rest of their fellow expatriates when more come to set up base here in Singapore. This is why we see certain towns being more densely populated with a certain ethnicity.. Demographics and the grapevine effect thus affects the vacancy rates and also whether or not the rental rates are healthy or not.
Existing and future tenant pool
Now let’s talk about the existing and future tenant pool. As for the existing tenant pool, it would be good to know already what are the developments that have already been established in the area that you are looking to invest in. Are there famous schools nearby? What are the amenities available? Are there any commercial or industrial nodes? By noting down all these various factors, it can help you make a more informed decision as to how extensive your target rental audience can get.
The issue of schools is one that is constantly on the list for parents who look to enrol their children into renowned institutions. And as per the September 2021 news, there has been an increase in the reserved slots under Phase 2C from 20 to 40 students. Families that are living within the 1-kilometre radius of a particular school will get to enjoy priority consideration for the registration of their children into the institution. This means, if your property is within the 1-kilometre radius of a school (or schools), and a high-demand one at that, then you will be in for a wider range of tenant dynamics, having families and not just singletons or young expatriate couples eyeing your unit.
As for the future tenant pool, the best instrument to utilise would have to look at the master plan by URA. This is the ultimate guide one should always make use of to predict the future tenant pool and audience that your unit can cater to the needs of.
So let’s give an example. Take perhaps the Paya Lebar area. You are thinking about whether or not to invest in a unit over at Park Place Residences, a 99-year leasehold development that is mixed-use in nature with Paya Lebar Square, the commercial node that is linked directly to the Paya Lebar interchange. Surrounded by industrial nodes of Ubi and Eunos, you check almost all the various factors that would contribute to a rather extensive group of potential tenants in the future.
Furthermore, looking at the URA master plan, you will find that the Paya Lebar Air Base will be relocated by 2030, making way for a town that is to be twice the size of Toa Payoh Town. This means more commercial and industrial spaces to be built, which would entice the demand for housing in its immediate vicinity. Would this property development then be a good investment? We highly think so, especially when it comes to long-term investment, as per how all property investments should be.
Why will you have to consider the future tenant pool? Definitely, as an investor, you would be looking to sell off the property once the capital appreciation or growth is deemed suitable and enough for you to move on to the next investment property. Then, it would then be apt to consider future tenant potential for the purpose of changing hands. You would want your property to be attractive in the future for future buyers as well.
Hence, the takeaway for investors is to always look at both current and future set of tenant pools, to determine the attractiveness of the project in discussion before laying down any cheque.
Do the rental numbers make sense to you? Does it make financial sense? Is there potential capital appreciation?
For our second last factor of the day, we will be talking all about numbers. Rental numbers, to be exact. Do they make sense to you? Will you be experiencing potential capital appreciation.You may have heard us mention this term the “disparity effect” in our home tours over and over again. And what is it really and what does it mean for homeowners living in or investing in properties with such an effect?
So in simpler terms, the disparity effect literally measures the disparity in quantum prices (or say PSF prices) of one project against the others in its immediate vicinity. If it is found that the project has a particularly lower PSF pricing or quantum entry price, the development itself experiences the disparity effect. Why would this be advantageous for the owners of units there, you may ask.
If the benchmark is set at a particular price tag and your project is asking for a relatively lower one, this means that as the years go by and as this price benchmark progresses into a higher tier given the new launches that will sprout up, this means that owners of the same units will be able to ask for a higher asking price than before, as they have more “leeway” to proceed given the disparity effect from the market valuation of their project.
Schools and potential future development plans (MOAT analysis)
Lastly, we have the MOAT analysis. In PLB, our economic MOAT analysis refers to a list of factors that would appear on a buyers’ desired list. The more your unit ticks off the checkboxes, the more attractive and the higher potential of appreciation there is in future. This is especially important for investors when they are planning their exit strategy.
Some of the factors would include unblocked views, dual facings, huge square footage for a low PSF price range, an attractive price quantum, tasteful renovation, the location, the amenities, and the project facilities as well. Although preferences differ from buyer to buyer, if your unit is able to cater to a larger target audience pool in future, this creates a more ideal scenario when planning for your Exit Strategy.
Conclusion
In conclusion, as a property investor, there is more than just the price tag attached to it to be considered.
You can always catch our PLB Investors’ Series where this article is repurposed from should you want an audio explanation of the above factors by our very own founder, Melvin Lim. And as always, we are always happy to help, be it in your property journey or investment one. Reach out to us here.
