Let's start by defining what we're talking about - how does the typical Singaporean use their first property as a pure investment asset?
The simplest way to do this is to buy a private property, but not move into it. Instead, you continue to live with your parents, while renting out your private property. Ideally, the rental income from your property will more than cover the mortgage repayments - and when you sell the property in five to 10 years, you will profit as the property has appreciated.
Another way to treat your first home as an investment is to still live in it, but simply hope that you've picked a property that will appreciate. An example of this is choosing to buy in a non-mature estate, where many amenities (shopping centres, train stations, hawker centres, etc.) have not yet been built. This is based on the theory that, as these amenities are built up, the property value will rise.
Finally, some daring speculators will even buy an aging development (one with 40 years or less left on the lease) as their first property, all the while speculating that an en-bloc sale will leave them richer.
There are, however, many risks to this profit-driven approach.
HOW ARE SINGAPOREANS USING THEIR FIRST PROPERTY AS AN INVESTMENT?
Let's look at some of the main risks, in treating your first property as an investment:
- The rental income may be lower than expected
- The property may not appreciate as well as expected
- If you decide to settle down, you may not have a home of your own
- If buying an old property, don't assume an en-bloc will happen
THE RENTAL INCOME MAY BE LOWER THAN EXPECTED
You cannot assume that the rental income will suffice to cover the mortgage repayments. If you would be unable to handle the mortgage without the rental income, you're quite likely overleveraged.
For example, say you take out a loan for S$700,000, at 1.8 per cent per annum, with a 25-year loan tenure. The monthly repayment amount is S$2,899 per month (it can sometimes be lower; visit SingSaver to find the lowest mortgage rates on the market). You assume that the rental income will be S$3,300 per month, thus generating S$401 a month.
However, a few years in, the rental market softens. Soon, the rental income falls to a mere S$2,500 per month. On some months, there is no rental income at all, which leaves you to pay the entire mortgage.
What will you do when your "investment" starts to cost you S$399 to S$2,899 per month? This may interfere with your ability to save or invest - and if you have dependents, such as parents or siblings to look after - the added cost can be devastating.
You may think you can just sell off the house at this point, but that's easier said than done. It can take months to sell a house, and you will need to pay the agent a commission of around two per cent (selling an S$800,000 unit would cost you S$16,000).
Also, when the rental market is weak, the property prices might be low as well. You may rush to sell the house, and find that you're making a loss. This disastrous "investment" could set you back financially, by several years.
THE PROPERTY MAY NOT APPRECIATE AS WELL AS EXPECTED
What makes a good investment? Let's consider the simplest way to determine this: by using straightforward Return On Investment (ROI).
Let's say you buy in a non-mature area, where private properties are a little cheaper. Let's also say you are an owner-occupier; you live on the actual property without renting it out.
The total price of your property is S$700,000, inclusive of all the stamp duties and relevant renovation works; this is quite cheap for a full-suite condo.
You hold on to the property for 10 years. During this time, you bear with inconveniences such as lack of a train station, or the lack of malls and markets. Finally, after 10 years, you decide to sell.
Unfortunately, property prices are in a slump at the time. Your house has appreciated, but just to around S$800,000. Your ROI is:
(sale price) - (purchase price) / purchase price x 100
This means it's (S$800,000 - S$700,000) / S$700,000 x 100 = 14.2 per cent
Is this a good ROI? In truth, given the amount of time you waited (10 years), this is a terrible figure. It means there's an averaged out return of just (14.2 / 10) = 1.4 per cent per annum.
If you had just left the money in, say, your CPF, you would have gotten 2.5 per cent per annum; and that would have been guaranteed. Even a simple endowment policy can provide returns of around three to four per cent per annum.
But at least you haven't lost money, right?