Are 2-bedroom units a good investment?

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

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.