Are 2-bedroom units a good investment?

PHOTO: Stackedhomes

Over the past couple of years, two bedroom units have almost become the default choice among investors. The rationale is simple: big enough to accommodate a roommate or small families, but still at a low enough quantum, these are among the fastest sellers at any launch.

Well, since we’ve already done a study on one bedroom units, it was about time to look at its bigger neighbour. So, are two bedroom units a good investment? And if so, which districts have seen the best yields or gains? Here’s a rundown of what you could expect:

How did we get the data below?

The data below is based on recorded URA transactions.

We have kept the comparison to condos built from 2010 onward, because the definition of a “two-bedder” is quite different before that (e.g., in the 1990’s, even 1,000+ sq. ft. units were sometimes categorized as two-bedders). Executive Condominiums (ECs) were excluded.

We have also kept to units that are from 600 to 850 sq. ft. Developers can be quite loose with what defines a two-bedder. For example, some might be willing to market an 800 sq. ft. unit as a three-bedder.

As much as we’d like to have a perfect data set, there will be some stragglers that we have not accounted for.

For rental data, we looked at the time period between January to end-July 2021.

We rounded down the unit size, and matched it to the lower range of the rental data (e.g., a 650 sq. ft. unit is rounded down to 600 sq. ft., and matched to the 600 – 700 sq. ft. rental data of the development).

Common sales pitches and theories surrounding 2 bedroom units

PHOTO: Stackedhomes

It’s common advice for landlords to buy two bedroom units if they can, rather than one-bedders.

The rationale is that two bedrooms can accommodate a wider pool of tenants. For example, it allows for a tenant to take on a roommate to split the costs, which can sometimes make it more affordable than a one-bedder.

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Likewise, some of the bigger two-bedders (700 sq. ft. or more) can accommodate a couple plus a young child, whereas a one-bedder is quite restrictive.

In terms of resale gains, the same logic applies. It’s assumed that the only buyers interested in one-bedders are other investors (who may prefer new launches with developer discounts). As such, a two bedroom unit could draw more prospective buyers.

While two-bedders have a higher price psf on average, they tend to have a lower overall quantum. This should – on paper – result in superior rental yields compared to their family-sized counterparts.

Here’s how the theories bear up:

What is the typical gross rental yield you can expect?

The gross rental yield is ((annual rental income / total cost of unit) x 100)

Size range Yield
600 – 699 sqft 3.15 per cent
700 – 799 sqft 2.98 per cent
800 – 850 sqft 2.98 per cent
Grand total 3.04 per cent

Unsurprisingly, the smallest units have the highest yield, as they also have the lowest quantum. However, it’s interesting to note that between 700 to 850 sq. ft., there appears to be little difference in terms of gross yield.

This suggests buyers can consider larger units, if the options are 700 sq. ft. or over; the bigger units tend to have higher rentability and are easier to resell, but don’t appear to have a drag on the yield.

Overall, we found that two bedroom units are on the high end of the typical residential condo yields today (the average, across the board, is between two to three per cent).

However, contrary to some sales pitches, they do not match their shoebox counterparts, which can have gross yields of between four to five per cent.

What are the returns you can expect, based on unit size?

Size category No. of breakeven No. of losses Average per cent loss Average quantum loss No. of profitable Average per cent profit Average quantum profit Total tnx Proportion gains
600 – 699 sqft 24 337 -7.4 per cent -$78,592.8 1031 10.8 per cent $88,140.6 1392 74.1 per cent
700 – 799 sqft 15 237 -6.2 per cent -$74,379.2 1240 11.8 per cent $99,021.4 1492 83.1 per cent
800 – 850 sqft Five 104 -7.6 per cent -$94,540.0 390 9.5 per cent $94,824.0 499 78.2 per cent

Source: URA

Across all sizes, there were more profitable than unprofitable transactions. However, units that were in the 700+ sq. ft. range saw the highest ratio of profitable to unprofitable transactions.

Units in the 700+ sq. ft. range also saw the lowest losses on average (down six per cent for unprofitable transactions), and the highest gains (up 11 per cent for profitable transactions).

That being said, do note that transaction volumes play a part. For the largest units of 800 to 850 sq. ft., there were fewer overall transactions; so this could make them come off looking worse.

What returns can you expect, based on district?

District No. of breakeven No. of losses Average per cent loss Average quantum loss No. of profitable Average per cent profit Average quantum profit
One   14 -10.2 per cent -$176,950 Nine Eight per cent $122,869
Two   23 -Eight per cent -$120,443 35 6.6 per cent $85,014
Three Two 15 -4.8 per cent -$60,119 95 12.9 per cent $151,099
Four One 16 -6.6 per cent -$97,405 19 6.6 per cent $87,879
Five Four 25 -7.9 per cent -$93,243 62 9.7 per cent $88,494
Seven   Seven -6.9 per cent -$93,837 20 10.9 per cent $136,604
Eight   18 -12.3 per cent -$119,783 Nine Nine per cent $73,354
Nine Five 42 -12.8 per cent -$199,388 16 9.1 per cent $110,823
10   29 -8 per cent -$111,546 57 8.5 per cent $88,872
11 One 24 -10.4 per cent -$140,764 18 Seven per cent $72,854
12 Five 44 -7.1 per cent -$69,741 162 9.3 per cent $88,950
13 One 16 -7.4 per cent -$89,025 84 10.3 per cent $107,746
14 Three 28 -6.3 per cent -$55,977 144 10.5 per cent $88,234
15 Three 52 -7 per cent -$75,015 132 9.4 per cent $98,683
16   35 -8.5 per cent -$82,014 111 8.7 per cent $72,718
17   22 -3.8 per cent -$29,266 131 9.3 per cent $61,201
18   32 -5.9 per cent -$50,322 307 14.1 per cent $100,349
19 11 86 -4.2 per cent -$40,031 578 11.4 per cent $93,356
20 One Six -6.7 per cent -$77,087 120 15.8 per cent $157,045
21 Four Eight -Seven per cent -$63,961 Seven 6.4 per cent $61,099
22   Four -2.8 per cent -$28,250 45 9.6p er cent $96,405
23 Three 87 -5.7 per cent -$54,734 159 8.3 per cent $68,998
25   25 -Five per cent -$35,602 67 Eight per cent $48,717
26         Six 3.5 per cent $29,167
27   13 -5.8 per cent -$45,679 129 12.4 per cent $88,404
28   Seven -8.1 per cent -$67,262 139 14.5 per cent $100,955

Source: URA

As you move further from the prime region, gains generally outweigh losses

Within the Core Central Region (CCR), there are districts where losses outweigh gains (Districts one, nine, and 11).

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Toward the Rest of Central Region (RCR), gains and losses can be very close.

In District four (HarbourFront and Sentosa), for example, the average gains and losses are both exactly 6.6 per cent.

However moving closer toward the fringe regions, you can see that RCR districts such as District 14 (Paya Lebar, Geylang) show gains that significantly outweigh losses.

Also, District 20 (Thomson, Bishan) stands out the most, with the highest gains at 15.8 per cent, compared to average losses of just 6.7 per cent.

In the Outside of Central Region (OCR) however, average losses hover at about six to seven percent, while average gains often reach nine per cent. District 18 (Tampines), for example, has average gains of 14.1 per cent, with average losses of just 5.9 per cent.

Why are the prime districts seemingly worse off?

Districts with more unprofitable transactions mostly came from the CCR. These were Districts one (Marina, Raffles), nine (Orchard), and 11 (Newton, Bukit Timah).

This is likely due to high premiums in these areas, where many of the developments are also freehold – this would place them at prices 15 to 20 per cent higher than leasehold counterparts. As the developments only date back to 2010, this can be insufficient time for the benefits of freehold status to really show, in the resale price (more on this below).

It could also come down to the foreign demand in these prime areas, where the past few years have not been as popular as before.

That said, CCR districts are not alone in producing more unprofitable transactions. District eight (Little India, Farrer Park) has also seen more losers than winners, and District 21 (Clementi, Upper Bukit Timah) narrowly falls into this group, with one more losing than winning transaction.

Should you pick a leasehold or freehold two-bedder?

Tenure No. of breakeven No. of losses Average per cent loss Average quantum loss No. of profitable Average per cent profit Average quantum profit
Freehold 18 260 -8.2 per cent -$98,337 416 8.7 per cent $84,333
Leasehold (60-yr)*   Six -6.3 per cent -$47,953 Three 8.3 per cent $55,573
Leasehold (900+ years) Two 23 -5.9 per cent -$57,209 46 7.2 per cent $61,072
Leasehold (99-yr/103-yr) 24 389 -6.3 per cent -$68,738 2196 11.6 per cent $96,804
Grand Total 44 678 -Seven per cent -$79,545 2661 11.0 per cent $94,190

*This is down to The Hillier, which you can consider to be an outlier

As is generally the case with a 10-year time frame, we tend to see leasehold properties outperforming freehold ones. This may be different as the condos get significantly older, at which point freehold properties will not be faced with financing issues, but leasehold properties will.

(Freehold properties may sometimes also be more attractive in en-bloc terms, as developers won’t have to top up the lease).

As an aside, remember that tenants often don’t care about the remaining lease. A cheap unit with fewer years remaining can still generate comparable rental income, to others in the area. This translates to potentially higher rental yields, for older leasehold developments.

In any case, it’s clear that investors looking at periods of five to 10 years should mainly focus on leasehold options. The premium for 999-year leases, or freehold status, isn’t well justified unless you’re looking much further down the road.

How long should you keep your two-bedder?

Holding period No. of breakeven No. of losses Average per cent loss Average quantum loss No. of profitable Average per cent profit Average quantum profit Total tnx Proportion gains
< Three years 28 32 -8.4 per cent -$99,937 82 8.6 per cent $79,954 142 57.7 per cent
Three – Five years Five 140 -7.1 per cent -$78,081 914 12.6 per cent $108,990 1059 86.3 per cent
More than five years) 11 506 -6.9 per cent -$78,657 1665 10.3 per cent $86,768 2182 76.3 per cent

Those who sell within the first three years are more likely to take a hit, and see lower gains. This will come as no surprise, as many of these are also urgent sales (perhaps from some kind of crisis).

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Interestingly, those who sold within three to five years saw the highest proportion of gains.

We’re not sure why; some realtors we asked surmised that, if any units were sold in 2018 or just after, gains may have been lower due to harsher cooling measures.

This seems reasonable, although there isn’t a conclusive way to prove it.

Overall, we can say most two bedroom units have performed “as advertised”, with one reservation: it’s a stretch to call the rental yield “almost the same” or “close” to shoebox units, which average around four to five per cent.

Nonetheless, with the preference swinging toward larger units, and their still affordable quantum, a two-bedder is a good starting point for new investors. The key seems to be lower quantum, leasehold units, in high rentability RCR and OCR areas.

This article was first published in Stackedhomes.