In our first article, we established the value of property as an investment class that produced superior returns over equities and bonds on the long term. Yet, property as an investment class is not as accessible for the ordinary investor as it requires a large cash outlay.
For our fellow Singaporean Citizen who had realized their first home ownership and interested to enter the investment property market.
A typical $1 million private residential condo can cost:
COST OF PROPERTY
As this is going to be a second property loan, current guidelines limit borrowings up to a max. 45% LTV ($450,000) in mortgages. Minimum cash down payment is 25% that means a minimum $250k in cash with the balance of 30% either settled in cash or CPF or both.
STAMP DUTIES & OTHER FEES
Buyers stamp duty (BSD) is estimated around $24.6k and additional buyer stamp duty (ABSD) of 12% is applicable for 2nd purchase at $120k. Other outgoings include valuation, lawyers and mortgage stamp duty sums to approx. $148k (or ~15% of property value) that must be funded outside of any loan arrangements.
In summary, $698k is necessary in cash and/or CPF contribution of which $250k minimum in cash before bank financing kicks in. That is close to 70% of the desired $1 million property purchase.
Upon purchasing the property, there is the servicing of annual property tax, estimated $3,000 pa., income tax on the rental and maintenance fee for the condo of approximately $200-$300 monthly. There may also be the incidental mortgage and fire insurance premiums on this property, not to say the least a cash buffer for any emergencies.
TOTAL MORTGAGE INTEREST
Based on a typical 30-year loan with rates fixed at 2% for first 3 years and increasing to 3% from year 4 onwards.
The total estimated interest payments are ~ $213k (~ $105k in the first 10 years). This cost of financing quickly raises the breakeven by ~ 21% (~ 10.5% in 10 years).
THE TRUTH IS
Taking on an investment property alone; not only does it entail a huge cash outlay but also a strong conviction on the particular location choice to be able to recover from the various stamp duties, mortgage and costs that hurt your returns. Have I mentioned Sellers stamp duty (SSD)?
Follow our next piece to find out how fractional investing can become a game changer for you.
by Jessica Choy VP, Business Strategies
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