There are various methods of making money from property investment. Some focus on capital gains, others on long-term rental yield. Below are some of the potential property investment strategy/options (non-exhaustive) that I have come across over the past few years for property investment in Singapore.
Strategy 1: Focus On Buying More Than One Property
You would need to own more than one property to be able to “lock-in” the gain from your property investment sale, otherwise, you will only be “selling high and buying high” where your gains from your only property would be used to purchase another property. Lionel Yeo has written a good summary on this point.
Given the high capital commitment required for property investment, it may be advisable to focus on the career to enhance employment income in the initial years and to maintain a high savings rate so that one is able to purchase a home to stay and to purchase additional property(ies) for investments.
The first property purchase for own-stay should ideally to sustainable from a personal finance perspective as it would be considered a “rental expense” and not an outright investment. One should look at properties that based on an ideal debt-servicing ratio (“DSCR”) of less than 30%. For example, if a household earns $6,500 a month, the price of the first home should be less than $500,000, so that a mortgage loan at 80% loan-to-value with an interest cost of 2.6% for HDB loan or 4% for a bank loan (assume the historical normal of 4% for conservative calculation instead of the current low interest rate environment of less than 2% interest for a mortgage loan), the monthly mortgage will be $1,800-1,900, making it less than 30% of the household income.
Based on the current 60% DSCR cap by the Monetary Authority of Singapore which looks at the debt servicing across all interest-paying debt ranging from mortgage to car loan to credit card loans, it may be prudent to minimize the mortgage in your existing home so that you have the “cash firepower” to take on additional bank debt for 2nd property purchase for investment. Given the current “softening” of the property market in Singapore, the investor may then be able to capitalize over the next years to acquire potential “value buy” investment opportunities that may arise.
Strategy 2: Buy One Property, Exit For Profit and Rent Thereafter
I have met friends who have adopted these strategy. Similar to taking money off the table during “profit taking” of stock investments, they sold their existing home for a good profit around 2013 (in upwards of millions of dollars of profit) and started to rent. The intention is to “lock in the profit” from their sole property, and wait for the opportune moment in market distress to enter the property market again.
The downside to this strategy is that there are others who held the view that property prices would drop massively in late 2000s after the run-up in prices and sold their property to rent, only to see the market continue to run upwards for the next 4+ years. They ended up paying 4+ years of rent and missed out on the property rally post the global financial crisis. This is similar to the message that we learned in the stock market, where you acquired stocks which you think are “value investments”, only to realize that the stock market may be “wrong” longer than you are “right”, and that the prices failed to move in the directions that you thought it would for many years.
Strategy 3: Buy a HDB, Fulfill the HDB Minimum Occupancy Period, and then Invest in Private Property
One of the perculiar point of the current regulations in Singapore is that you are not allowed to purchase a HDB if you already own a private property (and would need to sell the private property within 6 months of acquiring a HDB). However, you will be able to purchase a private property if you have already fulfilled your required HDB minimum occupancy period. One couple friend of mine did just that, they bought a new HDB a few years’ back and fulfilled the minimum occupancy period, and has now purchased a landed private property to stay in whilst renting out the HDB for a rental yield of more than 6%, significantly higher than the average 2-4% rental yield that you can achieve from private properties at today’s pricing.
Regulations may be amended continuously, but for now, it certainly makes monetary sense for some of the investors who already own a HDB to take advantage of the better rental yields of the HDB for long-term passive rental income.
Welcome your thoughts!