Choosing The Right Investment Property To Purchase
When it comes to buying a property, it makes a difference between buying a property for your own occupation compared to buying an investment property. You would take into consideration you and your family’s needs when it comes to buying a home – transportation needs, nearby schools, amenities that you need and probably food options on a daily basis. However, if you are looking to buy an investment property to collect rental income, you will probably make your choice based on the target market you are looking at.
Target tenant market and the cost of the property are two important criteria when choosing the investment property you want to buy. If you are looking to rent out to single expats or Singaporeans, you would want to look at properties nearer to the central region but offer a smaller space that makes the place perfect for 1 person to stay.
On the other hand, if you have the funds to afford to buy a larger property that can cater to a family, you would look out for areas a little further from town that offers a more peaceful surrounding with schools and easy options for daily shopping. Other than these 2 criteria to help you sift out your options, 3 other criteria are listed below to help you narrow your choices:
An investment should only be undertaken if you can afford it. The great thing about property as an investment class is that it is highly leveraged, giving you lots of space to play around with your cashflow and liquidity. A main concern here is however, the debt servicing ratio that you’ll need to fulfil. Assuming that you already own a property and the investment property is the second one, you are only eligible to borrow up to 50% of the purchase price or market valuation of the property, as well as cough out 25% of the downpayment in cash. Taking into consideration that prices of properties here are not cheap, especially for a condominium, it is safe to say you’d need to have at least $250,000 of cash on hand for a property that costs $1 million.
Many property investors rely on their rental income to help them service their monthly repayments. There is thus a need to be cautious about interest rate changes or a lack of tenant occupancy in your plan. Always have some emergency funds or contingency plans if you need to deal with an empty property and service 2 mortgage loans at any one time.
Development Plans around the property
The second point is quite general to all property purchases – the surrounding amenities and future development plans around the property can play a big part in determining the price of your property. Planned transport connectivity such as future MRT stations, commercial and business parks or town development plans can inflate the value of your property. These are also selling points for future tenants. It is thus important to make some research about the future plans of the town you are looking at by referring to the Urban Redevelopment Authority’s Master Plan.
Rental yield and transaction prices of surrounding properties
Investors of property should always look up the rental prices and transaction prices of the surrounding properties to have a gauge of the potential upside and downside of their investment. While past performance may not be predictive of the future, it can give you a good idea as to whether the investment is worth the money and trouble. You can look up past statistics on the URA’s website for past transaction prices and consider a historical analysis of how much gains a similar property would have made in the last 10 years in terms of capital gains.
Average rental prices are easily available on property portals. Having this information can help you do a rough calculation of your predicted rental yield. Remember to take into consideration all the costs involved, including possible renovation, legal fees, property taxes and home insurance. This will help you make a more accurate judgement on your investment decision.