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Property investment is prevalent among Singaporeans as a way to build their wealth and generate passive income. Many aspiring landlords are buying a small rental property (typically a 1 & 2 Bedder units) for the purpose of collecting passive income.
All you need is 1/4 of the purchase price plus other fees and the rest of the mortgage will be paid by your tenants from the rental income. Sounds pretty fair right?
Keep in mind that, a property is rather illiquid in comparison to other investment like stocks. For stocks, you can buy and sell instantaneously, whereas you can’t simply do the same to a property.
In light of this, before you decide to buy a rental property, become a landlord and start collecting endless stream of passive income, be sure to weigh these 5 factors:
1. Who & Where Is Your Potential Tenant?
Usually tenants with higher income are the white collar professionals and expatriates, or it can even be international students with rich parent.
Ideally you should purchase a rental property in close proximity to these people to attract the best result.
1.1 Foreigners
According to the statistics from Ministry of Manpower (MOM), the total foreign workforce is approximately at 1.5m as of December 2023.
The numbers are growing steadily over the years, more foreigners coming in would also mean more accommodation needs from these people.
This group of people are unable or rather “deterred” by the 60% ABSD tax when buying a residential home. The only viable option for them is to rent a place from the Singaporean landlord.
Since they account for 25% or a quarter of Singapore’s population, owning a rental property puts you in a win-win position – The tenants get a place to stay, you as the landlord collects passive income.
1.2 Local Families
Some local families also rent for these 2 main reason:
- Transitional needs – Usually a short term one, while waiting for their new home to be ready.
- Near preferred school – Properties around good schools are expensive and highly sought-after, renting is the way to go if you can’t afford to buy one.
Having said that, local families only form a tiny portion of the entire rental market. So if you are serious about getting sustainable passive income from long-term rental, you should be strategic on where to buy your rental property.
2. Potential Issues Arise From Tenants
A good tenant nowadays is hard to come by, if you manage to get one, your life as a landlord is going to be so much easier. In reality, there are plenty of headaches and frustrations await you and in the worst case scenario, they might even get you into legal trouble.
Here are a few commonly-encountered issues coming from a tenant:
2.1 Sub-letting by the tenant
I have seen, frequently, some tenant recruiting other subtenants or co-living strangers to come in behind the landlord’s back.
Unauthorized subletting basically means having zero control over who is occupying your property.
It could lead to overcrowding, exceeding the max occupancy cap set by the authorities and put you into a legal complication if your neighbor decides to report you.
Not to forget, more people living together could also lead to faster wear and tear, resulting in high property deterioration.
Simply put, as a landlord, this is pure nightmare.
2.2 Late/Irregular payment
Everyone loathes the feeling of being owed money and not getting it back.
How would you feel if the tenants are constantly late on payment every other month? They might give excuses or pretends it’s fine as long as they are still “paying”. Or in your worst luck, you might get a notorious tenant who literally refuse to pay up nor move out. (Read More)
Some might argue, we can enter the property, throw all their stuff and belongings out of the unit, simply repossess back our property. Sounds like what we seen on the TV drama but it’s not legally right to do that.
To chase a tenant out, the landlord has to file for eviction order in court and abide to the proper steps given by the court order.
So, be mentally prepared if this ever happen to your rental property.
2.3 Vices & illegal activities in a rental property
Illegal activities like gambling or prostitution often occur in a rental property without the landlord’s knowledge.
If there’s no evidence of complicity or negligence, the landlord may not face criminal charges.
Still, they are expected to have conducted due diligence in tenant selection and to take steps to prevent such activities.
Albeit property seizure is rare unless the owner’s involvement is evident.
Indeed, landlords may totally be unaware of the illegal activities conducted by tenants within the rental property until an issue arises or someone reports it. In such cases, landlords might just feel extremely unfortunate.
2.4 Damages to your rental property
Here are 3 commonly seen damages from my past rental property transactions:
- Fire Damage: Burns or scorch marks from unattended scented candles or cooking.
- Cracked flooring: Heavy and hard object fell onto the tiles and cracked it.
- Broken door-frame: Due to heavy slamming and handle without care.
Well you could probably name more but it just goes to show that these damages will incur extra cost from your pocket.
3. Inevitable Cost FOR A RENTAL PROPERTY
These are some of the fixed expenses that could arise and eat into your rental income whether the unit is rented out or left vacant.
3.1 Property tax
When it comes to property tax, it varies drastically depending on the residency status on your unit. (Calculator here)
For example, a 2 bedroom condo with an annual value of $45,000, the property tax will be:
- Owner-Occupied: $1,980
- Non Owner-Occupied: $6,600
If you are staying in it, you pay a relatively low amount whereas by renting out the whole unit or leaving it vacant, you will incur a higher tax.
3.2 Maintenance fee
The MCST fees are contributed by every single owners in the development to maintain the facilities and facades of the building.
How much to pay? It is determined by the share value you hold. Typical smaller units hold a smaller share value, pay a lower fee; vice versa.
Also, the size of your condo could also affects the amount you pay. E.g. Boutique development with lesser units will result in higher MCST fee as there are fewer owners contributing to the fund.
Even if you are not the one enjoying all the fancy facilities, you still have to pay for it being one of the shareholder.
3.3 Monthly installment
As a private property owner, you now no longer enjoy the 2.6% HDB loan rate, but bank loan with higher interest rate. As of writing, some banks are offering a 2 year fixed rate package at 2.95% and 3 month SORA at 3.7%.
Don’t get caught off guard when you find out the monthly installment suddenly doubled or tripled for buying a private rental property.
3.4 Agent fee
Nowadays, tenancy agreement can be downloaded online, the owner can negotiate on the agreed rent and case is sealed. Be sure to understand the whole process and all the clauses within the contract if you decide to do it yourself.
Conversely, if you want to save all the hassles and paper works, engage a professional property agent to handle the entire process for you. Typically, the agent fee is equivalent to 0.5/1 month worth of rental income based on the length of contract.
4. Potential Yield
4.1 Rental yield
How do you calculate the gross rental yield for your rental property? Simply take the annual rental income divided by the property price, for instances:
- Property price – $1,200,000
- Monthly rental income – $4,000
- Gross rental yield = ($4,000 X 12mth)/$1,200,000 = 4%
Generally, a gross rental yield of around 3% to 5% is considered decent in Singapore’s property market. Anything lower than this figure might not be a good investment return.
4.2 Rental Property Market Turbulence
The rental market in Singapore has always been rather stable for the most time until the most defining black swan event, COVID-19 popped out of nowhere, massively shook the entire market place.
Working from home suddenly became a norm to everyone, causing both the resale and rental market to surge rigorously due to a need of home space.
However, things started to change at the last quarter of 2023. Several mega projects reaching TOP, pumping in a substantial number of new rental property into the market. (Link)
With plenty of choices available for rent, competition among landlords intensifies.
Rather than letting the house sit empty, it’s more rational to just lower the asking rent and rent it out quickly to avoid additional costs.
So, as a landlord, you need to be ready to deal with any market turbulences and adapt quickly to protect your investment returns.
4.3 Unit Vacancy
Always be prepared for the unexpected and have that peace of mind. There could be a million reasons that cause your rental property to sit vacant.
- Expatriates finishing their employment and return to their country
- Short-term family-tenants ending the contract and moves out to their new home
- International students completing their studies and hence ending the tenancy.
Whatever the circumstances maybe, this is where the rental income will cease and as the owner, you have to ensure having sufficient cash flow to sustain the monthly mortgage and other costs during the vacancy period.
5. Future Game Plan
Buying a rental property and becoming a landlord can often be labelled as successful among your peers. Yes indeed, it feels great but it is just the beginning, you also need to map out your future game plan for this rental property.
Are you going to rent it out for the first 2 years and move in to stay later? Or perhaps sell it to to buy something else?
What is your ultimate goal?
If your plan is to move in later, it is recommended that you buy a family-sized unit, around 900 to 1000sqft. This decision will come in handy down the road when you and your spouse are ready to have a kid or two. Otherwise, you might feel space-constrained and uncomfortable.
Conversely, if it is the latter, you should work out an exit strategy before the purchase. You do not want to buy something purely for collecting rental income yet hardly have any room for appreciation and difficult to offload later.
6. Conclusion
By now, you should understand and see a bigger picture on buying a rental property to collect passive income. It is not going to be a bed of roses and smooth sailing as a landlord.
Managing a rental property is akin to raising chickens. Just as you nurture chickens with good care, quality feeding, and periodic health checkup to ensure the chicken keep producing eggs healthily and passively for you.
Likewise, maintaining a rental property through diligent upkeep, regular inspection, and addressing tenant concerns promptly can lead to a consistent and reliable stream of passive income in the long run.
Looking to buy a rental property for investment and passive income? I’d be happy to work with you soon.
