It’s easy to get sucked into the idealized view of the landlord as someone who rules over his “subjects” (tenants) and collects his monthly tribute (rent) like some feudal nobleman. Until that little medieval fantasy gets shattered by the reality of absconding tenants and complaints about noisy flat mates, leaking air conditioners, and disgusting backed-up toilets. It turns out that there’s a lot more to being a landlord than collecting rent. Here are 5 factors you must consider before stepping into the role of landlord:
1. Know What You Want to Rent Out
Before becoming a landlord, you need to decide what you intend to rent out. Do you have an empty room in your flat that’s screaming for a tenant? Will you search the market to purchase a second property to rent out? Or are you thinking of moving into a new flat, using the rental income from your old flat to pay off your mortgage?
Due to the latest MAS cooling measures, if your total debt servicing ratio (TDSR) is over 60%, you’ll have to stick to renting out your spare bedroom instead of taking out a home loan on another property. Regardless of which landlord path you take, one thing is for certain – you’ll need to have enough cash on-hand to pay for rental expenses – bringing us to point #2.
2. Know What You Can Afford
If you plan on taking out a home loan for a new HDB flat that you’ll move into (to rent out your old flat) or want to purchase a private property to rent out, expect to pay a cash down payment of 5% – 25% (in addition to paying the Additional Buyer Stamp Duty of 7% – 15%). This is the biggest up-front payment you’ll have to make, so if you can’t fork out the initial $20K – $50K+ required, forget about it.
Whether you take out a home loan on another property or want to rent out an empty room in your flat, you’ll probably pay thousands before you even have your first tenant. Here are some additional expenses you’ll be expected to cover as a landlord:
- Initial Lost Rent: Unless you plan on leaving your room/flat as bare as a baby’s ass and already have a tenant lined up, you’ll need to spend 1 – 3 months furnishing/repairing/marketing your place to prospective tenants. Unless you’ve already paid off your flat, you’ll have to eat up the cost of several months’ lost rent before landing a tenant.
- Furnishing: You’ll have to furnish your room/flat with at least the basics (bed(s), wardrobe(s), washing machine, and refrigerator) to make your place more appealing to renters. If you want to really lure in the renters, expect to shell out thousands for a good television, furniture, internet/cable television, maid service, etc.
- Repair/Replacement: If the room you want to rent out still has caveman paintings on the walls from your kids, repaint. If the restroom’s plumbing routinely coughs up things that aren’t mean to be coughed up, fix it. If the bed is 50 shades of yellow, for the love of God replace it!!! Even new flats occasionally have defects, so be sure to check every square meter thoroughly.
- Property Agent Fees: If you’d rather leave the marketing of your flat to a “professional” property agent, be prepared to pay at least a month’s rental to the agent for finding a tenant, which can be thousands.
- Insurance: There are numerous insurance plans to consider purchasing (if you already haven’t), such as home insurance, fire insurance, and rent protection insurance, which protects you from the worst kinds of tenants, those that don’t pay or skip out on the rental agreement. Expect to pay yearly premiums of $500+.
- Interest Rates: If you’re already paid off your HDB, ignore this one. But if you’ve just taken out a home loan (5 – 35 years maximum) at a nice, low interest rate – expect any rate hike, regardless of whether you have a fixed- or variable-rate (because in Singapore, a fixed-rate doesn’t last the entire loan term) to directly increase your loan payments.
- Taxes: Any rental income you make will be taxed. Thankfully, the Inland Revenue Authority of Singapore (IRAS) was kind enough to include many tax deductions, but still expect to pay tax rates of up to up to 20% of rental income.
3. Know What You Can Manage
So what kind of landlord are you? Are you the kind that’s always attentive to the needs of your tenants – checking up on your tenants at least once a month to ensure your property hasn’t gone to hell like something from Animal House? Or are you the hands-off kind of person who’s willing to pay a professional tenancy management service to do all of the check-ups, payment reminders, and collecting rent?
If you’re a busy, high-net-worth individual who’s renting out a condo in Keppel Bay, a tenancy management service will solve your problems. Otherwise, you’re going to have to manage your tenants directly because being a landlord is a responsibility. So save yourself some potential tenant headaches by reading this article from MoneySmart Editor Ryan Ong.
4. Know the Legal Obligations
Before you even think about becoming a landlord, you should check out HDB’s regulations on renting out your room/flat to ensure you’re not breaking any eligibility or occupancy rules. Also, you’ll have to ask HDB for approval if you want to sublet your whole flat. Of course, you could illegally sublet your flat, but then you’ll risk having HDB unleash its wrath by fining or even repossessing your flat! So don’t risk it.
That isn’t all you’ll have to worry about though – you’ll need to prepare yourself for the inevitable tenant dispute. Drafting a clear, strong tenancy agreement will help you in the event that you take a tenant to small claims court for violation of the contract. Here’s a basic tenancy agreement that you can follow, which includes many of the “must-haves” in any tenancy agreement (1-month security deposit, immigration status, maintenance, termination, notice period, etc.).
However, if you’re a high-net-worth individual who’s renting out some prime real estate with some expensive furnishings, you might want to consider hiring a landlord lawyer to help you draft a watertight tenancy agreement.
5. Know Your Endgame
What do you want to accomplish by renting out your spare room/investment property? Do you want to play the landlord game for 10 – 15 years and cash out for a nice lump sum to fund your retirement or children’s education? Or maybe you want hold onto it to receive a nice income stream to live on during your retirement years (if you can find regular tenants).
And what about your property when you’re gone, will you pass it on to your children, or sell it and divide up the proceeds amongst your family? These are the questions you’ll need to answer sooner rather than later. So if you intend to hold onto the property, it’s a smart idea to plan and write out a will to protect your interests.
Next week, we will talk a bit more about how you can protect yourself from the perils of dealing with rogue tenants, so stay tuned by following us on Facebook! If you’re ready to purchase another property because you want to generate rental income visit MoneySmart today to find the best home loan deal out there!
What else do aspiring landlords need to know before taking the plunge? Share your experience with us on Facebook!
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