Tibits I learnt from "The Ultimate Guide to Real Estate Investment in Singapore"

As I was talking about looking to increase my competency in investing in residental real estate in Singapore, or at the very least, understand why are people doing it, in a post here.

I'm basing my takeaway from a rental investment property POV.

So here we go:


Suggestions from the Author

• Start early with a longer time horizon (the same mantra given for shares)
• longer loan duration, which requires lower installments (but you pay more interest somewhat)
• Property prices increase with inflation
• Don't keep waiting to save enough for your dream home, can start with HDB and progress to private properties. Most people keep saving but fail to pull the trigger when the opportunity arises.
• Get your finances in order and know how much you can commit
• Buy a reasonably sized property within your affordability so that you do not slave your whole life to pay it just because you overextended yourself

Some Rules to Follow

1. Always Split property for own stay from your investment property
• Harder to liquidate own property to realise gains
• Lack of flexibility as you still need a place to stay
• Multiple small properties is better than one large one
2. Target Newly completed/Resale Condominiums
• Avoid under construction as you have no idea what it actually looks like
• Do take note condition and lease balance for resale (minimum 70 years)
3. Acquisition of property by gearing up with debt
• This is the confusing part as different editions gave different recommendations
• 1st Ed: 33% upfront (30% for downpayment and 3% for fees), loan 70%
• 3rd Ed: 23% upfront (20% for downpayment and 3% for fees), loan 80%
• 4th Ed: 43% upfront (40% for downpayment and 3% for fees), loan 60%
• I guess it varies with interest rate environments
• Seems like the point is to ensure rental covers loan repayments
4. Buy and Hold for the Long Term
• As you pay down the loan, interest cost goes down, while rental yield may follow inflation, which will generate positive cashflow
• Holding property allows the value of property to appreciate with inflation
• However, do note that unlike a REIT, initial rental is usually unable to cover interest cost, let alone all the fees you pay (I wonder how it affects XIRR if property prices move in tandem with inflation)
5. Buy at Fair Value
• Valuation methods
• Sales Comparison Approach (look at recent transactions and price per sq ft)
• Gross rental yields (aka, Income approach, we can invert it and get gross rental multiplier)
• If all fails, just ask the bank to value or get multiple valuers, should fall within 5% error
• Generally, try to get 0-10% lower than fair value
• Undervalued opportunities are usually presented only in foreclosures in property auctions during a bear market
• I was surprised that there was nothing about cap rates, valuation metrics (such as P/FFO, P/AFFO, CAPM, Discounted Cashflow)
6. Do not buy to Flip as it is SPECULATIVE
7. Do Ground Research on Property (Amenities, location and surroundings)
8. Location of Property
• Central Region Condominiums target market are wealthy foreigners 
• Outside Central Regions target market are locals and PR
• Regions must have Strong Rental Demand
9. Track loans tightly
• Refinance every 2-3 years
• Compare loan packages often
10. Look for future catalysts from Concept/Master Plans (for capital gains and rental demand)
11. Ensure property is well maintained and very habitable
12. Aim for good quality tenants (generally, corporate, expats/FTs and families)
13. A Security Deposit is a MUST
14. Have tenant pay rent via GIRO (for efficiency and prevent late payments)
15. Keep an eye on your property (ensure you don't get into trouble with authorities)

Operating Costs to Note

• Property Tax (~10% of Annual value, which is annual rent)
• Income Tax (there are deductibles you can reduce tax here)
• Loan Repayment (Bank/CPF)
• Agent Management Fees (if they are assisting you with managing the property) / Agent commissions to secure tenant
  
• Property Maintenance Fees/Repairs
• Utility Bills
• Fire Insurance

Transaction Fees

• Stamp Duties (3%) 
• Conveyance Fees (~0.4%)
• Advisory Fees (?) (~1%)

Exiting Your Property

• Ensure it looks good and in good condition for viewing (people feel better will be more willing to pay)
• Set realistic prices based on the valuation metrics described above, but dependent on bear or bull markets
• Sometimes the first offer is the best
• Ideally exclusive listing for agents

Some Closing Thoughts

Seems like there's a lot of costs (which I feel could be streamlined in the future with technology like the stock exchanges) and many things to manage manually. I wonder how are the comms for agents to assist with some management of the property and how many properties is enough to achieve economy of scale.

Do also note that the Singapore Government wants to control speculation in housing, especially HDB flats and perhaps condominiums, however, not at all but not the higher priced private ones though.
A sample tenancy agreement would be nice, especially one that covers everything nicely. 
 
I feel Net Operating Income (Net Property Income) could be a better way to gauge which gives you cap rates.

The book says that as long "Gross rental > mortgage interest rate = +ve cashflow", but I feel it would be more accurate to use Net Rental or Funds from Operations (or even Adjusted Funds from Operations), as did not factor other costs yet which could affect returns.

That being said unlike a REIT, one will slowly pay down the loan with time. Assuming capital gain and rental grows in line with inflation, gross rental and equity will increase, interest cost should decrease or maintain the same. Not sure how it really reflects in real life for Return On Equity and Return On Asset. I wonder how would those numbers be like.

Factoring depreciation is another question I have not found answered as well.


For Home owners, if you

• If you own a HDB flat and don't track your loan and forget about it - get HDB loan
• If you own a Condominium OR you track your loan - ALWAYS refinance every 2-3 years

That's all for this long post. Hope you enjoyed it.

EDIT (07Apr18): A discussion on Facebook, a user pointed out this after attending a talk by the Author:
"If you can, buy an EC. This is because an EC is about 10-20% cheaper than a similar private condominium during a launch. After 10 years, it will be privatised and the selling price will be comparable to a similar private condominium."
Sounds interesting :)