With property prices dipping south in recent months, you might be tempted to buy a second property. Whether you are buying it for investment purposes or as a vacation home, there are many considerations to be taken into account before you make the final purchase, and commit a huge chunk of savings into it.
Below are 3 key questions you should ask yourself before you take the plunge:
1. What do I intend to do with the second property?
We agree it is a buyer’s market now, however, just because something is “on sale” does not mean you need to buy it. Therefore, you need to ask yourself this: what do I intend to do with the second property? Do you want to rent it out to earn passive income or use it as a vacation home?
If you intend to buy it solely for investment purposes, you will need to be more selective with your choice of location and property size to suit the needs of potential tenants in that particular area. For example, if there are more families with children renting properties in East Coast area than singles, your chances of renting out your property in the area will be greatly increased if you were to buy a larger apartment that can accommodate a family of four instead of a shoebox unit.
Likewise, if you plan to buy a foreign property as a vacation home, do you also intend to rent it out while you are away? If so, how do you intend to manage the property remotely? To make things more convenient for you, you may want to consider engaging a local professional property manager to manage the property for you. Of course, this will mean additional cost on your side which will lead us to the next key question.
2. Have I done a thorough research and calculated all the cost involved?
Never buy a property on impulse unless you have zero intention to make money out of it. Always do your research on the properties you are interested in before making a decision. Besides considering the property’s tenure and sales price, design layout, location and amenities, it is also important to find out what are some of the upcoming developments in the vicinity as it will have a direct effect on your rental yield.
For Singaporeans who are buying a second residential property locally, do bear in mind that you will need to pay an Additional Buyer’s Stamp Duty (ABSD) of 7% of the sales price of the second property, on top of the existing Buyer’s Stamp Duty (BSD). In other words, to purchase a private apartment priced at S$1 million, you will need to pay S$24,600 for BSD* and another S$70,000 for ABSD. This will add up to a total of S$94,600, excluding another S$3,000 to S$5,000 in legal and other miscellaneous fees.
Though you can use CPF to pay for both the ABSD and BSD (provided there is sufficient amount in your CPF account), you still have to make an upfront cash payment prior to the amount being reimbursed from your CPF account to your bank account. Hence, you will need to set aside a minimum 10% of the property sales price in cash for this besides your downpayment.
More is at risk if you are looking to buy a property overseas, hence, you should exercise due diligence before committing to purchase one either directly from the foreign developer or through an estate agent. Always do your research on the financial strength and reputation of the developer and the location of your preferred property. Is your neighbourhood safe and is the region prone to natural disasters? Most importantly, check for “hidden costs” such as home insurance fees, legal fees, stamp duty, property tax for foreigners and currency conversion rates (when remitting your rental gain or when you sell off your property), so as to have a clearer picture of your true investment cost.
Given the complexity of tax considerations (different tax rules may apply for a home that is used solely for personal use compared to one that you rent out), your best bet will be to seek legal advice before buying any property overseas. This way, you can be absolutely certain of any restrictions imposed on foreigners and the regulatory framework involved in the purchase.
As mentioned earlier, if you need to engage property manager to help manage and rent out your property overseas, you should also buffer in an estimated 20% to 30% of your rental income for their profession services.
3. Can I truly afford it?
Owing multiple properties can be a savvy investment but it is also a massive financial burden that should not be taken lightly.
Under the current banking regulation in Singapore, if you still have outstanding loan from your first property, you can only borrow up to 50% of the purchase price or market valuation (whichever is lower) of your second property, provided the loan tenure does not exceed 30 years and that the sum of loan tenure and age of borrower at the time of applying does not extend beyond retirement age of 65 years. This will also be subjected to the Total Debt Servicing Ratio (TDSR) framework.
In addition, you need to pay the first 25% strictly by cash, while you can choose to pay either by cash or CPF for the next 25%. In short, you will need to pay a minimum upfront cash payment of S$250,000 for a property priced at S$1 million. Furthermore, you can only use your CPF to make payment after you have set aside S$77,500, which is half of the prevailing CPF minimum sum in your CPF Ordinary Account and Special Account (the other half can be in the form of a pledge from a property purchased with CPF savings).
Therefore, unless you have plenty of spare cash at hand, buying a second property when you still have outstanding housing loan from your first house, will definitely bite off a huge chunk from your savings.
This is not all. Most buyers choose to rent out their second property to offset the mortgage, which means you will need to charge at least as much as your monthly housing loan payment. However, if your monthly payment is higher than the going rate for rental homes in your area, in your attempt to cut losses and rent it out soon, you may end up having to pay part of the mortgage yourself. This will be another additional cost to you.
In a worst case scenario where you fail to rent out the property even after you lower the rent, will you still be able to pay the monthly mortgage on your own for at least one to two years? These are some serious questions you need to ask yourself before you take the plunge and commit to another property.
To avoid disappointment, always consult a banker to do a loan assessment before you make any purchase. This will also help you to determine the kind of rental yield you require to offset your monthly payment, mapping a clear direction for your property hunting.
With wise financial planning and a good acumen for property investment, owning a second or even more property can still be easily achieved, without tearing a big hole in your pockets.