So, you want to buy a second property

There is no get-rich-quick scheme that can turn you into a multiple-property owner after a weekend workshop, PropNex Realty associate marketing director Avis Wong warns.
There is no get-rich-quick scheme that can turn you into a multiple-property owner after a weekend workshop, PropNex Realty associate marketing director Avis Wong warns.ST PHOTO: DESMOND FOO

Real-estate expert's free e-book looks at what to consider and potential pitfalls

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.

In her free-to-download e-book Double Your Wealth Through Real Estate, Ms Wong looks at how such schemes work and the potential risks and pitfalls.

UNLOCK THE PROFIT

One common way is by leveraging your existing property, says Ms Wong, associate marketing director at PropNex Realty.

"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.

  • Couple sold off flat and bought two properties

  • Selling their family home allowed one couple to expand their property portfolio.

    Mr and Mrs Tan (not their real names) are both in their early 30s and have two young children.

    They live in a three-bedroom condominium in the east.

    Mr Tan earns a gross monthly income of $7,000 and his wife, a salary of $4,500 a month.

    Last November, the couple sold their five-room Design, Build and Sell Scheme (DBSS) flat in Tampines for $700,000.

    They pocketed $286,000 in cash after paying off the outstanding mortgage and the funds and interest that they had utilised from their Central Provident Fund (CPF) accounts to buy the flat five years ago.

    The couple was thinking of upgrading to a three-bedroom, 1,216 sq ft condominium in the east at a hefty price tag of $1.3 million.

    They would need to pay 5 per cent, or $65,000, in cash and another 15 per cent, or $195,000, from their CPF accounts for the condominium.

    An 80 per cent loan of $1.04 million over 30 years would mean monthly instalments of $3,844.

    After deducting $2,185 from their combined monthly CPF contributions, the Tans would have to fork out $1,659 cash a month to service the loan.

    As they have always dreamt of owning a second property to earn a passive income, the couple decided to buy two properties - an older resale condominium for themselves and a one-bedroom apartment for investment.

    Mr Tan took up a mortgage of $784,000 to be paid over 30 years for a 1,238 sq ft, three-bedroom resale condo unit in Tampines, which cost $980,000.

    Meanwhile, Mrs Tan bought a one-bedroom apartment in Geylang for $600,000. The project is expected to complete next year.

    Mrs Tan is hoping to lease the unit for $2,200 a month. The rent will be used to offset its monthly cash instalment of $739. She plans to use the remaining $1,461 to help pay for the family home.

    But even if they do not find a tenant, they have set aside cash from the sale of their flat to tide them over.

    Joyce Lim

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, whose 60-page e-book can be downloaded from www.facebook.com/DoubleYourWealth.

"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".

GEARING UP

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."

A version of this article appeared in the print edition of The Sunday Times on September 27, 2015, with the headline 'So, you want to buy a second property'. Print Edition | Subscribe