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Should You Buy An Investment Property In Singapore For Rental?

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Property investment in Singapore has proved quite lucrative for investors and homebuyers. The prices for private and public housing have increased remarkably in the past. In fact, on certain occasions, the government had to step in and impose cooling measures to ensure home affordability for Singapore citizens.

With the implementation of restrictions and cooling measures like the Additional Buyers’ Stamp Duties (ABSD) and Total Debt Servicing Ratio (TDSR), purchasing property has become more expensive than before. Fortunately, there are other ways to invest in property than just buying and selling. In Singapore, you can earn a decent sum of passive income through renting alone.

In this article, we will find out whether you should purchase an investment property to capitalise on soaring rental prices in Singapore. So, let’s start!

How can you make money from property in Singapore?

Buying a property in Singapore is a popular way to grow your money. There are two ways you can make money out of your investment property:

Capital appreciation. The price or value of your property grows over time, which means you can sell the property and enjoy capital gains. Be sure to factor in things that encourage better capital appreciation when buying a property, such as infrastructure improvements or upcoming MRT stations.

Rental income. Your property can provide you with a steady stream of rental income that is largely passive. Remember: the higher the rental yield, the better the return on your investment, even before you sell your property.

To calculate, simply add up all the rental income earned in a year and convert it into a percentage of your property value. Many homebuyers use the rental money received to pay the instalments of their current home loan.

Is buying a rental property in Singapore a good investment?

With housing rents rising at a record pace, the Singapore residential property market is hotter than ever. Rents of private residential landed and non-landed properties have been increasing from the start of 2022 and continued to climb up in the third quarter of 2023. According to property experts, this trend is expected to continue in the short term.

While tenants are feeling the heat of the red-hot rental segment and digging deeper into their pockets to fork out higher rents, aspiring landlords are also struggling to make their way into the Singapore property market thanks to rising property prices and high interest rates.

What are the reasons behind the rental surge in Singapore?

In today’s red-hot rental segment in Singapore, largely due to the COVID-19-related construction delays of new condos and HDB flats, landlords are already anticipating further interest rate hikes and thus not open to negotiating any terms due to which renters have to overbid on places they really want.

Many newly married couples had to rent a place while waiting for their matrimonial homes to be completed. A lot of HDB upgraders sold their HDB flats and are now renting for the time being instead of paying the additional buyer’s stamp duty (ABSD) fee.

The rental surge in 2022 could partially be attributed to the arrival of more ex-pats and strong demands for rental housing from various segments amid a tight supply in the market.

Other reasons pushing up home rents in Singapore include the return of foreign employees as well as individuals renting larger private apartments to have more space and privacy amid the new hybrid work arrangements.

Rents for HDB flats were not spared either. According to the SRX Rental Index, HDB rents have hit record highs in Q3 2023 and climbed 7.5% QoQ. In the first nine months of 2022, HDB rents surged 20.9%.

Things to consider when buying an investment property in Singapore

When looking to purchase an investment property to rent out, here are some things you must consider.

  • Potential rental yield

We must consider the potential rental yield when looking to invest in property to earn a side income. Your potential rental yield takes your potential rent as well as the cost of acquiring a new property into account. It allows you to decide where to buy.

As per Singapore URA statistics, rental prices jumped across all housing categories, including landed private residential properties (by 10.9%) and non-landed private properties (by 8.3%).

Note that the rental prices of non-landed properties have also gone up in the Rest of Central Region (RCR, by 9.6%), the Outside Central Region (OCR, by 8.8%) and the Core Central Region (CCR, by 7.0%). Interestingly, the sweet spot is in the OCR where houses are relatively more affordable, but the rents still grew by a competitive 8.8%.

  • Private property prices

If not more, property prices are as resilient and relentless as rental prices. Since the URA Sale Price Index has been consistently rising for two consecutive years, housing rents are also trending upwards. The cost of buying a home would vary depending on the property location and property type you are looking to buy.

  • Loan-to-Value (LTV) limit

The next important thing you must bear in mind is that if you are still servicing your first home loan and decide to take up a second home loan to finance your investment property, the LTV limit will be much smaller.

The LTV for your second home loan will drop to 45% as opposed to 75% for your first home loan. This means you will have to pay 55% as a downpayment. For example, for a $920,000 3-bedroom condo or apartment in the OCR, you will have to pay $506,000 as a downpayment – sometimes the same amount as the cost of an HDB flat!

  • Additional costs (on top of the property price)

Don’t forget to factor in other costs like home insurance, legal fees, valuation fees, maintenance fees, agent commissions, Buyer Stamp Duty (BSD), and potentially, ABSD. These costs, when added up, can significantly impact your total purchase price of the property. Note that the ABSD fee comes into the picture only when you are purchasing second (and subsequent) properties.

Is it smart to buy an investment property while renting?

Does the idea of living in a rental unit and simultaneously buying an investment property sound good to you? Well, some property investors think it is.

If you have a similar plan, you must take some property-related decisions before doing so. Decide what type of investment property you want to buy. Whether you will use your investment property as a rental property or a second home, and whether you plan to sell the property in future and when.

If you have the cash or access to an affordable home loan interest rate that meets your financial needs, buying an investment property while renting can be a good idea. A rental property can help build your investment portfolio and earn some passive income while renting a less expensive property.

Take time to engage with a financial advisor and discuss about tax specifications and investment strategies that can help you save money when you want to sell your investment property.

Pros and cons of buying a rental investment property

Investing in properties for rental gains offers significant financial freedom and other benefits. Let’s take a look at the key benefits of investing in rental properties.

Pros of buying a rental investment property

Rising rental prices. With a boost in rental demand from various segments, rental transactions for private homes have gone up by double-digit percentage points. This means landlords can benefit from high rentals for their property. By 2022 end, condo rents have been climbing for 24 months straight and HDB rents for 30 months straight.

Low rental supply means more likelihood of finding tenants easily. Amid a tight supply of rental units in the market, it is easier for landlords to find suitable tenants for the property with little effort. With more options for tenants, there is less risk of ending up with difficult tenants, who can be a source of mental and financial distress otherwise.

Moreover, less supply means more demand. It means you won’t have to face a ‘period of vacancy’ where you have to pay for the cost of renting out your property if you don’t have tenants.

Passive income source. Buying an investment property is a good way to diversify your wealth and add a passive income source with relatively less effort. Some property investors also opt to hire a property manager to make this type of income truly passive but it is usually not necessary if you only own one or two properties.

Using your rental property, you have the potential to earn extra income that you can use to pay your current rent, save, or invest in additional properties.

Positive cash flow. Rental investment generates recurring income, maintaining a cash flow in your account every month. It can be a good way to increase your retirement corpus or have some extra money in your bank account. For example, if you buy an apartment building with multiple tenants as a rental property, you can attain an attractive cash flow.

You’re in charge. Investing in a rental property puts you in charge of pretty much everything. From choosing the kind of property you want to buy and rent out to finding tenants and maintaining the property, you are to decide and manage everything. However, bear in mind that being in charge of rental properties comes with a lot of responsibility.

Cons of buying a rental investment property

Property prices are also high. The heated rental market is accompanied by rising housing prices. Due to the limited supply and high demand, private and HDB resale housing prices have reached all-time highs. Even property owners are required to pay more for property purchases and monthly repayments.

Second (and subsequent) properties are subject to additional ABSD cost. When you acquire an investment property as your second property, you have to bear a new extra cost: ABSD. Singaporeans buying their second property are levied a 17% ABSD fee and 25% on all subsequent property purchases. That is a very significant cost that adds to the total cost in addition to the property price.

Second (and subsequent) mortgages have a lower LTV. If you are looking to take up a second (and subsequent) mortgage from a bank to service your investment property, your LTV limit drops to 45%. Having a lower LTV limit means you will need to fork out large cash or CPF downpayment.

Mortgage rates in 2024 are expected be higher than pre-2022. With high mortgage interest rates, currently in the range of 3.20% to 3.75%, it gets difficult to find competitive mortgage packages.

What to expect from Singapore rental markets in 2024?

The rental market is booming right now, and 2024 is set to be a good year for landlords. With the interest rates expected to be on the higher end, landlords are not inclined to lower prices and see stronger demand with a surge in housing transaction volumes.

For private properties, it looks like the rental demand will continue to exceed property supply, with momentum carrying on from the previous year. The impact of the pandemic-induced shift in behaviours like young adults needing more space or privacy for work-from-home jobs and construction delays has also kept the rental demand strong.

In all probability, landlords will see fewer vacancies in 2022, and tenants may have little choice but to accept higher rental rates.

Rental prices for private non-landed residential properties may still increase by 5% to 10% YoY in 2024, but at a much lower rate compared to the 25% expected in 2023.

Although the government has taken steps to alleviate the lack of supply of new private homes, the effects of their efforts will be seen prominently only after two to three years.

For HDB flats, it is expected to see a slight slowdown as housing rental volumes have declined by 12% in Q4 2023 compared to Q3 2023.

Furthermore, more new launches are expected to come on board in 2024, which will likely lead to a gradual slowdown in the pace of rising rental prices, thus easing the supply crunch in the Singapore property rental market in the upcoming quarters.

However, it is still hard to predict anything in the rental game with absolute certainty. While life has been back to normal (almost!), anything largely impacting the property market can change the whole equation dramatically.

Final Thoughts

If you have decided to buy an investment property, we recommend you get in touch with our team of mortgage experts at Dollarback Mortgage for a free, no-obligation discussion. Our team will assess your finances and give expert advice on whether your next move is feasible in the current financial environment.

Get the best home loan in Singapore across all major banks and compare mortgage rates with the highest rewards.

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