Real estate investing in Singapore using an investment property is a good way of growing your assets. Firstly, it can provide you with a steady stream of rental income that is largely passive. Secondly, you can sell the property for a profit when the value of the property rises.
Investing in real estate is something to bear in mind as you accumulate wealth, and is definitely something to consider even if you’re still relatively young and have not worked for very long.
To help you with your foray into real estate investing, this article seeks to answer the following questions: What are the costs involved in real estate investing in Singapore? What are the key things you should look out for when choosing an investment property? What type of yields and profits can you expect from real estate investing?
1. Types of Property for Real Estate Investing in Singapore
Housing Development Board (HDB) Flat
An HDB flat is part of the public housing scheme in Singapore. The purpose of the scheme is to ensure that Singaporeans have a place to stay, rather than as a way of speculating on or trading properties. Nonetheless, you can still rent out your HDB flat to earn money for real estate investing if you meet the necessary conditions.
Here are the requirements that you, as the HDB flat owner, have to meet:
- You must be a Singapore Citizen and not a Singapore Permanent Resident (PR)
- You must have occupied your flat for at least five years
- The rental period must be between six months and three years
- The maximum number of occupants (including the flat owner) depends on the size of your flat. For instance, a 1-room flat allows for 4 occupants whereas a 5-room flat allows for 6 occupants.
- You must comply with the Non-Citizen Rent Out Quota. This means that you cannot rent out your flat to foreigners and Singapore PRs (excluding Malaysians) if your neighbourhood and/or block for your HDB flat has reached the Non-Citizen Rent Out Quota. In such a case, you can only rent your property to Singaporeans and Malaysians.
- You must obtain specific approval from HDB to rent out your whole flat or your bedrooms only. Renting out bedrooms only is only available to HDB flats which are 3-rooms or bigger. If you do decide to rent out your bedrooms only, the flat owner has to live in the flat with the tenants during the rental period.
Private Property: Condominium or Landed
Minimum rental period
With the current regulations by the Singapore government, the minimum rental period for private homes is three months. Therefore, short-term leases on websites such as Airbnb are not allowed under the property regulations. The reason for this is to ensure that the amenity and living environment of the residential property is not unduly affected by letting activities. While understandable, this makes real estate investing in Singapore tougher.
However, some landlords have tried to get around this rule by including a no-penalty early termination clause in their rental contract. Therefore, even though the rental contract states on paper that the tenancy is for three months, the tenant can stay for a shorter period by terminating the tenancy at no additional cost.
Nevertheless, it is not advisable to use this method to circumvent the regulations. There is a significant risk that the authorities may find that you have breached the regulations. In fact, under the Planning Act, first-time offenders may incur a fine of up to S$200,000. Therefore, it is recommended that you should err on the side of caution and find long-term tenants for your investment property. If need be, a real estate agent can be hired to facilitate this process.
With regards to private property, the occupancy cap is six unrelated tenants. This means that at any given time, a maximum of six unrelated individuals can reside in the investment property. Thus, even if you have a spacious landed property that can accommodate more than six people, you would still be limited by this rule. This is unlike HDB flats, where maximum occupancy rates are pegged to the number of bedrooms of the flat.
2. Prices of Investment Properties
Prices of properties differ according to the region. As a general rule, properties in the central area would command higher prices. Hence, properties in Orchard and Bukit Timah would be costlier to purchase. Other locations also containing relatively expensive properties include Bukit Merah, Queenstown and Bishan.
On the other hand, buyers with a lower budget can look to areas such as Woodlands, Yishun and Punggol where properties are typically cheaper.
3. Costs and Expenses of Real Estate Investing in Singapore
There are costs you have to factor in when you purchase an investment property for real estate investing in Singapore. Without understanding these costs, you may even end up losing money on your real estate investment.
Real estate investing entails some renovation costs. If you are buying a property, you would have to pay for some renovation to be done on the property. This is to equip the property with basic amenities and to make it liveable for tenants.
Renovation costs may include the costs of painting the walls as well as installing flooring and other furnishings.
Your renovation costs would also likely be higher if you are purchasing an older property. This is because there is likely to be more wear and tear as well as physical damage to various parts of the property over the years.
On average, you can expect to pay S$50,000 to S$100,000 for renovation, depending on what kind of renovation work you undertake and the type of materials and furniture you purchase.
Real Estate Agent Fee
As a buyer looking to invest in real estate, you may want to hire a real estate agent to source and select for properties. In this regard, real estate agents may charge a fee of 1% or higher of the property value. In some cases, the buyer’s real estate agent does not charge the buyer any fee. Instead, the buyer’s real estate agent would get a cut of the seller’s real estate agent commission.
In any case, the need for a real estate agent for the buyer is less pronounced in the local context. This is given that there are several property listing websites providing a wide range of properties for buyers to choose from.
Real estate investing in Singapore incurs certain fees for a landlord. As the landlord, you would likely have to pay an agent to source for tenants.
The agent fee may vary according to the property price and the length of the tenancy. For instance, a real estate investment property with a longer tenancy would command a higher commission from the landlord.
Generally, the amount of commission would be pegged to half a month to two months of rental.
When you actually want to sell your property, you would also likely need the services of a real estate agent as well. This real estate agent would help you to search for buyers, conduct property viewings for the prospective buyers and to market the property.
Conventionally, sellers would have to fork out around 2 to 4% of the property price as commission to the real estate agent. However, the real estate agent fee is not fixed and it ultimately depends on the negotiation between the parties.
As a landlord, you would have the responsibility for the maintenance of basic items of your property. Typically, the landlord is responsible for replacing the furniture, repainting and conducting repair work on the investment property.
In addition, if your investment property is a condominium, you would have to pay monthly maintenance fees for use of the common facilities. These fees typically range from a few hundred dollars to a thousand dollars. Thus, such expenses would have to be considered when deciding whether or not to purchase a property for real estate investing in Singapore.
Costs of Mortgage for Real Estate Purchase
If you have taken a loan to finance the purchase of your investment property, then you have to consider the costs of a mortgage. This adds on to the total costs of real estate investing in Singapore.
The costs of mortgage refer to the monthly repayments you would have to make to the lender. In order to be profitable, the monthly rental yield from your investment property should be higher than your monthly mortgage repayments. In any other case, you will be making a loss.
4. Cooling Measures for Real Estate Investing in Singapore
The government has put in place several cooling measures to prevent speculative real estate investing in Singapore properties.
Buyer’s Stamp Duty (BSD)
One of these cooling measures is the BSD. You are required to pay BSD upon acquiring property in Singapore. The BSD payable can be determined based on the following table:
Higher of the purchase price or market value BSD payable First S$180,000 1% Next S$180,000 2% Remaining amount 3%
Additional Buyer’s Stamp Duty (ABSD)
You may also have to pay ABSD if you purchase a property. The amount of ABSD, in turn, depends on your residency status and the number of properties you currently own. The ABSD rates and computation are as follows:
Citizenship 1st purchase 2nd purchase 3rd purchase and above Singapore citizen Not applicable 12% (revised) 15% (revised) Singapore Permanent Residents 5% 15% (revised) Foreigners or Non-Individuals 20% (revised)
You should also note that you are not spared from ABSD if you co-own your first property with another person. For instance, if you had previously purchased a matrimonial property jointly with your spouse, a subsequent purchase by either one of you would still incur the relevant ABSD. This is because you have a stake in the jointly owned property and it will be deemed as your first property.
However, you may be entitled to an ABSD refund under specific circumstances. This refund occurs when (1) you and your spouse jointly purchase the second property and (2) you dispose of your first property six months from the date of purchase / TOP / CSC (as applicable) of your second property.
Seller’s Stamp Duty (SSD)
Additionally, you have to consider the SSD you would have to pay upon the sale of your property. The applicable rates of SSD are below:
As can be seen from the table above, the level of SSD payable decreases the longer you hold on to the property. This is the government’s way of discouraging trading and flipping of properties.
For additional details on SSD, you may refer to IRAS website.
5. Rental Yields of Investment Properties
Gross Rental Yield
The gross rental yield of the property is a way of gauging whether the property will make sense as an investment for real estate investing. The gross rental yield of a property can be anywhere from 2 to 5%.
Location is key in determining the rental yield of the investment property. In this regard, a property which is near an MRT, close to the city centre and proximate to certain schools would usually have a higher rental yield.
How do you calculate the gross rental yield of the investment property?
You simply take the annual rent you would collect as a percentage of the price of the investment property. Let’s assume for example that a property has a monthly rent of S$1,000 and a price of S$1,000,000. The gross rental yield would then be:
(S$1,000 X 12 months / S$1,000,000) X 100 = 1.2%
Net Rental Yield
We now know what is gross rental yield. But this then begs the question. What is net rental yield?
Unlike gross rental yield, net rental yield of an investment property takes into account the costs and expenses of the property. For further details, please refer to the items listed above under “Cost and Expenses”.
Estimating the net rental yield of your property would provide a good indicator of your potential rental income. However, this is more difficult to measure. This is because the net rental yield is influenced by a variety of factors that may not be the same every year. For instance, changes in interest rates may affect mortgage payments and thus have an impact on net rental yields.
Where available, the net rental yield should be used together with the gross rental yield to make an investment decision. This is because knowing both the gross and net rental yield makes it easier to assess the viability of your property as a real estate investment. You can more accurately determine how much rental income you will likely earn from the property on a monthly basis.
6. Selling Your Investment Property
You may wonder, “When is the best time to sell my investment property?” From a purely financial perspective, you should try not to sell your property if your SSD is too high. This means that, at the bare minimum, you should be holding on to your property for a couple of years. In the meantime, you should maximise your income by collecting rent for your investment property.
Beyond stamp duty considerations, there is generally no “best time” to sell your property. As long as your property has appreciated in price and is profitable to sell, selling is always on the cards.
7. Taxes for Real Estate Investing in Singapore
All owners of property have to pay property tax in Singapore. However, non-owner occupied properties require a higher level of tax compared to owner-occupied residential properties.
Real estate investing in Singapore thus involves increased taxes. The moment the lease with your tenant starts, your property is deemed to be non-owner occupied. You would then have to pay the higher non-owner occupiers tax rate.
The property tax rates for non-owner occupied residential properties are listed below:
Source: IRAS website
Rental Income tax
Additionally, rental income is also covered under the income tax. Thus, income tax is payable on the rent you receive from your investment property. In this respect, Singapore’s income tax rate follows a progressive system. The tax rate starts at 0% at the lower end of the income spectrum and ends at 22% at the other end.
Real estate investing in Singapore using an investment property is not as tough as it seems. It just takes some time and effort to understand all the considerations. Hopefully, this article has made the process of real estate investing in Singapore clearer. It should be much easier now to choose an investment property and earn money from it. Having said all that, all that’s left is to do your research and get started on your first investment property. With that, happy investing!