Investment Property: Overlooked and hidden costs to consider

A common Singaporean aspiration is to own a second property as a form of investment to earn rental income.

People see renting out a property as an additional source of passive income that can be useful for retirement or a luxurious lifestyle.

Purchasing an investment property is not as cut and dried as it may seem. There are many aspects to consider before deciding to invest in a second property. Often, people overlook the hidden costs in buying a second property with the intention to earn rental income.

HDB owners buying investment properties

The most common property investors, according to Eddie, an Associate Division Director at Huttons Real Estate Group, are HDB owners who purchase their second property – more often than not, a condominium. If you’re looking to buy a condominium to earn rental income, you should purchase a studio apartment or a one- or two-bedroom flat as smaller units tend to move faster compared to bigger units.

One of the most important things to consider when purchasing a second investment property is the location. Is it near a MRT station? Are there amenities such as supermarkets, food centres, clinics etc. nearby? It would be more challenging to find tenants if the location is not close to any MRT or at least a few amenities.

Singapore market is no longer as easy to enter as it was back in the 80’s, 90’s or even in early 2000. It is a lot harder to enter the market today as the entry level is higher – in the sense that it is harder to get a bank loan due to Total Debt Servicing Ratio (TDSR) that was implemented in 2013. Another factor is the Additional Buyer’s Stamp Duty (ABSD) which is an additional payment required for a second property. – Eddie, Associate Division Director, Huttons Real Estate Group

Before investing in any property, you should look at the master plan provided by Urban Redevelopment Authority (URA) to see the upcoming developments around Singapore or better yet, engage a professional agent to guide you.

Some of the other costs to take note of:

Property tax

Property tax is determined based on the annual value of the property – rental per month x 12 months. Taxes on properties that are rented out (also known as non-owner occupied) follow a different set of rules compared to those that are owner-occupied. For investment properties or non-owner occupied properties, owners have to pay about 10.7% tax on the first $45,000 compared to the taxes for owner-occupied properties which is under 4%. Furthermore, IRAS calculates the annual value as the estimated gross annual rent of the property if it were to be rented out. This is applied regardless of whether your apartment is rented out or not. Below is a table that shows the tax rates for non-owner occupied properties.

Mortgage payments

Everyone is aware that you will have to take a home loan when you purchase a new property. This makes buying a property more affordable as you’re required to deposit as little as about 20%. Regardless of the amount of rent you receive, it is important to crunch numbers tightly to ensure you do not end up in a situation where you’re paying the mortgage from your own pocket.    

Maintenance fees

There are maintenance fees for most condominiums – they usually need to be paid either monthly or quarterly depending on the property. You will also have to factor in miscellaneous costs for general property maintenance. Some of those costs include repair of air conditioners, leakages, repainting, renovation or replacement of household items etc. The list can be quite extensive.

A breakdown of cost given by Eddie:

Property type: Freehold Condominium // 2 bedroom // 840 – 900 sq. ft. // close to MRT

Rental rate: approx. $2,000 – $2,300

Purchase price: approx. $900k – $950k

Let’s take an average of the rental rate and purchase price –

Purchase price: $925k

Rental rate: $2,150

Lease period: 2 years

Bank loan: $740, 000 (assumption: 80% loan for 30 years at 1.8% interest)

Total expenses: SGD 3,222.85/mth

Given the breakdown, it is clear that the rental rate does not cover the expenses. The buyer is, in fact, making a loss. It is essential to ensure that you calculate all of these costs to ensure you are not a loss when renting out your apartment.

Property as an asset is illiquid and unique unlike shares traded in the stock market. As an investor, you will also need to manage the property to ensure it is well-maintained and that the property is rented out or fetches a higher value in the market when you sell it. This requires some expertise, patience, and it may even cause you to incur further costs in managing the property. Having said that, investing in a second property may also pay off with great returns with some professional guidance, research and foresight.

TDSR is your total monthly repayments divided by your gross household monthly income. It is to set a cap on the maximum amount of money you can borrow from financial institutions.

ABSD was introduced to cool the residential market as there was an acceleration in the escalation of the price of residential properties.


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