After slaving to pay a home loan for 15 years, what better way to celebrate than by doing it all over again? That’s Singapore’s property market for you: As habit forming as crack, and twice as profitable! So okay moneybags, it’s obvious you might something out of this. But don’t go off half-cocked; houses aren’t poker chips at the Saturday night game in mum’s kitchen, and another property is a gamble that can cost you. Read this article, and be sure you’re ready for that second property:
The major considerations for getting a second property are:
- Housing rules
- Property taxes
- Rental rates
- Debt to Net Worth ratio
- Check the new home loan rates
I’m not going to tell you to check the valuation, find a decent agent, etc. If the experience of your current property hasn’t scarred the lessons onto your soul by now, then I doubt a blog post will do it.
1. Housing Rules
Before you buy another property, are you currently living in a HDB flat? Because if you are, you should realize that buying private property obliges you to sell your flat within 6 months. This has been true since 2010, so if you were planning to rent your flat while you live it up in a condo, you better think again.
Likewise, things like payment schemes and stamp duties are all subject to change. Remember the additional buyer’s stamp duty that happened almost overnight? The alert buyers scrambled to back out fast, and managed to avoid the brunt of it. But despite the news plastered across every state newspaper and more websites than Hawking could count, some buyers still ignorantly blundered into it. Mainly, because they assumed the rules were the same as before.
So before getting your second property, always re-check the housing rules. They aren’t as static as Singaporeans like to assume; you don’t want to put down 1% (option to purchase), then suddenly realize you need to back out.
2. Property Taxes
I assume you know how to calculate your property tax by now.
But you need to know that having multiple properties can affect your tax rates. Likewise, if you intend to rent your new property, there is a tax on rental income to consider. Because of the complexity of tax law, you should contact IRAS or seek basic legal counsel.
It’s not just about following the law, though I expect not being in jail with the winner of the last weeks’ gang fight is appealing enough. You need to determine the profitability of your second property. Is the new house going to pad your bank account, or is it the equivalent of dollar diarrhoea? A tax miscalculation can have you seeing cash cows where none exist.
3. Rental Rates
Ideally, rental rates should cover or even exceed the loan repayments. Otherwise, the property’s just a liability.
Before buying a second house, calculate the minimum that you need to make in rent; this is usually based on the loan repayment. Next, get quotes from at least three different property agents. The average of those quotes should exceed the minimum requirement by 20%.
This is to compensate for the inevitable haggling and bargaining that will occur. Remember, agents are prone to inflating such figures. You should also determine if your savings are sufficient to cover two months of vacancy. Because if a house does remain vacant for more than two months, your eyeballs should be bulging out of their sockets as you race to sell it.
4. Debt to Net Worth Ratio
Your Debt to Net Worth ratio is your total liabilities (which may be more than the new loan) divided by your net worth. This ratio needs to be around 50%, and if your new property will take you under it, then go find a safer hobby. Like juggling flaming chainsaws.
Alternatively, a simpler (and less accurate) gauge is to determine the percentage of your monthly income that goes into the home loan. This amount should be less than 35%. Don’t factor rental income into this, as there is a always a chance of vacancy. Also, rental income may be hindered by collection issues, such as with a tenant who pays late (or eventually takes the fast bus to Johor).
Remember that if you can’t pay a home loan, and you run into arrears, it’s possible to lose both houses. Buying property isn’t like trading stocks and shares; you can’t sell a condo by next Tuesday just because its become a liability. Once you buy that property, you’d best make sure you can pay it through.
5. Check the New Home Loan Rates
As with point 1, don’t assume the property market is static. Maybe a fixed SIBOR rate was the greatest when you bought your first home. And maybe right now, it’s the punchline to a mortgage banker’s bad joke.
You need to review the home loan packages all over again, and keep an open mind. Go to MoneySmart to compare the cheapest current bank rates. Enter the type of property and the expected loan amount, and the site will filter the most appropriate packages. You’ll even be contacted by a mortgage broker, who can advise you on your purchase.
Are you considering buying a second property? Comment and let us know!
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