Before considering to get your first property, you should be asking yourself if you are ready for one to come you way. It certainly will be one of the largest commitment in anyone’s life and you must be prepared for the turbulent journey ahead (with the ups and downs).
And so you think you’ve been through those and now you’d like to take things further by doing it for as part of your investment portfolio? Here’s some key factors for you to consider before diving into property investment.
Pay off your existing mortgage, if any.
Before even considering to buy any second property, you must have at least paid off your current mortgage. Unless you gargle with bird’s nest in the morning, forget about buying a second property if you can’t pay off your existing mortgage.
Putting aside the usual costs like stamp fees and cost of vacancies, lets focus on the simple things. Let’s look at the current Loan to Value ratio (LTV). This Loan to Value (LTV) ratio refers to the maximum amount that you are able to borrow from the financial institution to fund the property. An LTV ratio of 80 per cent, which is usual maximum, means the bank will loan you up to 80 per cent of the property price or valuation (whichever is lower).
However, things do change if you have an existing home loan. Instead of the usual 80 percent, the maximum Loan to Value (LTV) ratio drops to 60 percent for your second housing loan.
Lets assume you are looking to buy your second residential apartment as a property for investment. The new apartment costs around $1.5 million and you still have outstanding mortgage on your current home. With the LTV ratio of 60 percent, the bank will only loan you up to $900,000.
That would mean that you will have to fork out the remaining amount as the downpayment, which is $600,000.
Even if you do have that amount of money, it’s questionable if you want to plonk all of it down on one property. If it leaves you with no money to invest in anything else, that’s called a one-way, unhedged bet; a total lack of diversification. It’s the kind of thing that gives your financial planner a stroke.
So until you’ve fully paid off your first mortgage, maybe hold off on being a property investor. Buy some Real Estate Investment Trusts (REITs) maybe, if you want exposure to property investments.
Have some spare cash, really.
As a landlord, you can’t always count on rental income to cover all your costs. For example, say you buy an investment property, that provides rental income of $4,000 a month. The loan repayments on the property are just $3,200 a month.
Well done, you make $800 a month, and you have an appreciating asset. But what happens if the rental market slumps (like it has now), and your rental income slides to $2,500 a month? Even worse, what if you can’t find a tenant for two to three months, and your property stays vacant?
Besides the rental market softening, remember that interest rates on home loans change as well. You need to be prepared if the monthly repayments suddenly shoot up, thus eating into rental income and capital gains.
You need to have sufficient savings to continue servicing the loan, and tide you through the down periods. Even if you want to use the last resort, which is to sell off the house, you can’t just call your agent and have it sold by this evening, like it’s a stock. It will take a couple of months to find a buyer, and get a decent price.
This means your savings fund should be able to service the property loans for at least six months, if something goes wrong. On top of that, the fund has to cover the cost of any emergency home repairs, like burst pipes, fires in the kitchen, and tenants who choose to be idiots.
Oh, and don’t forget, you’ll need to pay maintenance fees and higher taxes while all that’s going on especially on projects that has many facilities such as Belgravia Villas.
You need to work out the combined cost of all these for half a year, and have a large enough monetary buffer stashed aside before you start playing landlord.
As a property investor, you need to do a lot of homework
Want to be a property investor? Then school’s in. You need to learn to work out rental yields, check the historical price movements in the area, and be well-informed on the Urban Redevelopment Authority’s (URA) master plan.
In the recent years, integrated developments have a been really popular amongst investors. Some of the popular projects such as North Park Residences have been selling extremely well.
Often, by the time you hear about a property hotspot, it’s far too late – the prices of the properties have to rise first, before the media can report about it. So just spending all your waking hours poring through the property section of the Straits Times, or attending seminars, is not going to cut it.
You really need to do a lot of legwork, and spend time looking up and down the country for that hidden gem before anyone else finds it. Sometimes this can be counterintuitive; we wrote before about how run-down Geylang properties with expiring leases may be untapped sources of potential.
Property investing may seem easier than, say, trading in the stock market; but thinking of any form of investment as “easy” is often a prelude to losing a lot of money. It pays to bear in mind that due to the illiquidity and high amounts of capital involved, mistakes in the property market can be much more punishing.
Ideally, you should learn more about the various ways in which property is bought and sold. Many times, property investors will have to use other methods to get the financing they need.