You had been saving for years to buy a second property. Then came the cooling measures and it becomes much tougher to achieve that dream. Recently, there have been several seminars that claim to show you how to own two properties, even if you earn only a few thousand dollars a month.
But property expert Avis Wong warns there is no get-rich-quick scheme that can turn you into a multiple-property owner after a $2,000 weekend workshop.
UNLOCK THE PROFIT
One common way is by leveraging your existing property, says Ms Wong, associate marketing director.
“Unlock your profits from your existing property by selling your flat and use the proceeds to upgrade to a condominium and buy a second investment property.”
“This way, you get to keep your savings and use the proceeds from your current property to work for you. Couples who had bought their flats brand new would likely get a higher cash payout.”
Of the two properties you buy, one should be sufficient to meet the family’s needs while the second one should be of investment grade.
If the husband and wife are working and earn a decent income, they can buy the two properties separately, under a single name.
That would allow them to get an 80 per cent loan and avoid paying the Additional Buyer’s Stamp Duty (ABSD) of 7 per cent that Singaporeans must pay for their secondary home purchase, says Ms Wong. Mortgage Servicing Ratio is applicable to executive condo such as Terrace EC and Signature At Yishun.
“Most people make the mistake of buying a residence too big for their needs and an investment property that is too difficult to lease.”
On a cautionary note, Mr Vasu Menon, vice-president of wealth management at OCBC Bank, says sellers have to bear in mind that a mortgage is a long-term commitment as they may not be able to sell their properties easily and, if they sell within four years of purchase, they will incur Seller’s Stamp Duty.
He notes: “There is no easy answer to the question of whether selling a property and using the cash proceeds to buy two more is a good strategy. A lot depends on the outlay for the properties the sellers plan to purchase, the ease of renting the investment property and the rent it can command.”
He adds: “The ability to service the mortgages on the investment property depends on how easy the property can be rented out and the state of the rental market, which seems weak at the present moment.
“Unless you can rent out the investment property easily, you could either end up owning a property that is vacant for long periods or you may have to slash rentals to secure a tenant, especially when the rental market is weak.”
Such fears are not ill-founded, says Ms Wong, but “as long as home owners are realistic and willing to go with the market demands”, she believes the property can be leased out.
She also highlighted that vacant properties are mostly concentrated in prime districts and owned by wealthy investors.
The Total Debt Servicing Ratio (TDSR) framework ensures that people are not allowed to borrow beyond their means. Even so, Ms Wong, 42, still advises “exercising prudence”.
Mr Royce Teo, the regional head of Treasures Private Client and Treasures at DBS Bank, notes how the three-month Sibor or Singapore Interbank Offered Rate rose from 0.457 per cent in Jan to 1.138 per cent earlier last week.
With rising interest rates and softening property prices and rents from the rise in residential supply, it would be “challenging to first secure a tenant and then using rental income to cover the housing loan instalment of the investment property”.
For those who wish to keep their existing home and do not have excess cash to buy another, an alternative is to “gear up” by taking out an equity term loan to invest in another property.
Such an option is only available for people who own a private property, one that has risen in value.
Consider this scenario: Your condominium is worth $750,000 and you have a mortgage of $250,000. In addition, you have saved $100,000.
“You would have the option of paying down your loan with your $100,000 of savings so that you have peace of mind with your smaller outstanding loan, or to take out an equity term loan of $250,000 on your current loan. By ‘cashing out’ an additional $250,000, you would have $350,000 of cash to invest in another property,” says Ms Wong.
She emphasises that this method is not suitable for everyone and advises getting an impartial financial assessment by a qualified third party. The homeowner would have to pay ABSD and can only borrow up to 50 per cent for the second property.
The age of the borrower is another factor to consider.
“It will be quite challenging for those in their late 40s because loan tenure will be much shorter, unless the person has a lot of CPF (Central Provident Fund) to leverage on,” says Ms Wong.
Selecting a suitable mortgage that offers a combination of stability and flexibility with interest rates rising is equally important, said Mr Dennis Khoo, UOB’s head of personal financial services (Singapore).
When applying for a mortgage, property buyers will also need to take note that their TDSR cannot exceed 60 per cent and Mortgage Servicing Ratio is capped at 30 per cent of their monthly income.
Mr Khoo adds: “For investors in their 20s to 40s, it is important to understand that by having a long-term investment horizon and investing as early as possible, it can help them smooth out the impact of volatility on investment holdings and manage their market risks.
“The first step for investors is always to understand their risk appetite and financial goals, then adopt an investment strategy they are comfortable with.”