Questions to ask yourself before investing in property

What is it like to buy your very first own property? Are you considering to buy a new private condominium in Bishan or Housing Development Board unit (HDB) in Clementi? Many would ask themselves this before setting their foot to unlock their life milestone. Here’s the answer, buying your first property is like getting married, a major commitment that requires whole lot of money and strap up your belt because you will be riding through this phase like a roller coaster, full of ups and downs. Now, perhaps you want to talk about doing it second time as a form of investment. That doesn’t make it any easier and here is what you need to consider before becoming a property investor. Here are some questions to ask yourself if you have the ability or capability to be a property investor.

1. As a property investor, are you able to pay off your current home loan? 

Let’s put aside issues like sky-high taxes or vacancies cost, and look at something very basic; your Loan to Value (LTV) ratio. The LTV ratio is how much you can borrow from bank to finance your property. The ideal LTV rate is 80 per cent, which is the usual maximum, meaning that the bank will loan you up to 80 per cent of the property price or valuation (whichever is lower).

However, if you have an outstanding home loan, like additional outstanding mortgage, your maximum LTV drops to 60 per cent. So until you have fully paid off your first mortgage, for the time being, you may consider looking into investing some Real Estate Investment Trusts (REITs) if you want the investment exposure.

2. Do you have a huge savings fund?
If you are landlord, you can’t always rely on your rental income to cover all of your costs. You will need to have sufficient savings to continuously service the loan that can still support you through the down periods. Even as a last resort, which is to sell off the house, it is impossible for you to call your agent today and have it sold by end of the day. It’s not a fast consuming goods, it will take a couple of months to find a buyer and get a decent price.

Your savings fund should include your property loans for at least six months, home repairs, maintenance fees and others. You will need to work out these combined costs of all these for half a year and have a large enough monetary buffer stashed aside before you begin your journey as landlord.

3. How many research and study is enough?
The more the better, you will need to learn calculate your rental yields, study the historical price movements around the area, well-informed on the Urban Redevelopment Authority’s (URA) master plan. However, by the time you hear the property hot spot, it’s too late as the properties’ prices rise before the media report about it. By then, there is no point in going through the news’ property section or attending seminars. You will need to roll up your sleeves and get down to the ground, spending time looking up and down for that hidden gem.

Though property investment may seem easier than said but it is often a prelude to losing a lot of money. It also pays to bear in mind that due to liquidity and high amounts of capital involved, mistakes committed in the property market can be more punishing.

4. How many ways to identify which property is bought and sold?
Often property properties will have to use different methods to get their financing they need. In certain situations, you may be better off setting up a company and handling your property assets through it. You may need to use asset backed loans, which you use a stock portfolio or other properties you own as collateral. You may want to learn how property auctions work which you can get a better deal at a mortgagee sale. We are not saying you have to know all this stuff, but it could make a difference when you are out there navigating the choppy waters.

5. Are you ready to handle all taxes and fees?
On Additional Buyers Stamp Duty (ABSD), Singapore citizens pay an additional seven per cent of the property price, when buying the second property. For third property, citizens pay an additional 10 per cent of the property price. As for Singapore permanent residents (SPR), there is ABSD of 10 per cent on the second and subsequent properties.

If there’s ABSD, there’s Seller Stamp Duty (SSD) too, a hefty tax imposed if you sell property within three years of buying it. You can go here to check out on the SSD.

In addition, you will need to know how the tax rates work out on your property investment. Non-owner occupied residential properties have a higher tax rate. On top of that, you will need to know the tax deductions you can claim like maintenance fees, utility bills and the interest rate on your property loan.

If you are not very clear with these specifics, you cannot accurately work out the potential return from your property asset.

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