Singapore's property market has long been renowned for its potential to generate wealth. However, the cost of initial cash commitment is higher in Singapore compared to many Western countries. For example, in the US, the residents there are only required to place a downpayment of anywhere from roughly 5 to 20%, depending on the individual's credit score. With a good credit score, one can even put as little as 3% downpayment for the purchase of a property. This makes investing in properties for passive rental income way more accessible for the residents there, as the initial cost can be kept to a minimum. With the right investment, savvy investors can easily purchase a property that can generate enough rental to cover their monthly installments, with a surplus for positive cash flow.
As of 2023, research has shown that monthly rental for homes in Singapore has held its top spot in Asia - Pacific, with a median of $2,598. With such a strong rental market, surely most Singaporeans will be buying additional properties to collect rental right? Well, while working on the ground, we realized that it is very challenging for the average Singaporean to invest in our own property market to generate passive income. Does that mean that we should completely turn away from staying invested in the property market?
In this post, we will delve into the dynamics of how you can still be invested in the property market, exploring why it may be more prudent for the average Singaporean to focus on building net worth in property rather than solely aiming for immediate passive income gains, and turning away from this sector the moment we realize the latter is unachievable.
The High Cost of Initial Commitment
One of the primary obstacles faced by Singaporeans interested in property investment is the substantial cost of entry. A simple Google search will show you that the property prices in Singapore are among the highest in the world, making it challenging for average citizens to gather the necessary funds to purchase an investment property outright.
By requiring down payments of minimally 25% and including stamp duties, a large portion of an individual's savings can be depleted, deterring them from pursuing property investment as a strategy of generating passive income. So, for the many who are unable to hold on to multiple properties for investment, how else can they stay invested in the property market?
Building Net Worth through Property Restructuring
Instead of solely focusing on immediate passive income, Singaporeans can also benefit from adopting a long-term approach to property investment.
First, let us tackle the why before we move on to the how.
Why is it important to build up net worth through real estate in Singapore?
1.Instant vs Delayed Gratification
While generating immediate passive income may be enticing, it is also essential to consider the long-term benefits of building up capital in property investment. For many Singaporeans, the milestone of fully paying off their property loan by the age of 65 is a crucial component of their net worth. Once the loan is fully paid off, the total value of that property asset will fully contribute to the individual's net worth. Thus, with constant prudent upgrading into the right property asset, your net worth in the future will heavily benefit from the capital appreciation of the property. Why is this important?
2.Cost of retirement in Singapore
Singapore is known for having one of the highest costs of living and retirement in the world. Here is a study done in 2022 for the world's most expensive cities, with Singapore and New York topping the chart.
A recent study was also done on the cost for an American to comfortably retire in every country, and Singapore once again topped the charts, where it is averaged that they would require $1.18 million to retire comfortably in Singapore.
This factor emphasizes the importance of diligently planning for retirement and building net worth through property investments.
For example, a individual that has constantly stayed invested in their property upgrading now owns a 4 bedroom condominium unit valued at $2.5 million at the age of 65. Since the loan has been fully paid off, the entire property value is now part of his net worth. Once his children starts moving out and starts their own family, a 4 bedroom unit is too big for his needs. By then, he can choose to encash on this asset, and buy into a smaller 3 room HDB flat, say valued at $400k. Even if he retires at 65, he would have a total of $2.1 million cash to comfortably retire.
So, how do we go about achieving this?
By prudently upgrading and restructuring our current property assets.
Let us go through an example. Let's say you are currently a HDB owner
First and foremost, it's crucial to recognize that HDB flats are designed to provide affordable public housing for Singaporeans. They are not primarily meant as investment properties for substantial financial gains. Of course, we have also seen HDB flat prices rise to new highs over the years due to COVID-19 delaying the BTO constructions, but we are also seeing the government actively trying to cool the HDB market, ramping up the supply of HDB flats. As seen from the official HDB website itself, it is stated that from 2021 to 2025, they are targeting to launch up to 100,000 new HDB flats, if needed.
However, one can still stay invested even in the HDB market, by simply just upgrading to a newer HDB flat with a longer lease term and/or a better location with higher potential growth. Of course, the entry and exit point of the upgrading will have to be timed right, and one should fully research or seek consultation on the market situation and weigh it with their current needs and situation before moving forward, as a badly timed entry or exit can lead to potential losses.
Once finances permit, leveraging on the capital appreciation on their previous upgrade, one can even then upgrade to a Executive Condominium or a Private Condominium, as we all know that HDB flat's appreciation potential is heavily controlled by the government, as its main purpose is to be affordable public housing for Singaporeans.
Of course, this restructuring will have to be done prudently and one should thoroughly assess their financial affordability before deciding on their next step, as the next upgrade will vary depending on ones requirements, long term goals and financial capability. Only after going through all these preparations and planning, then one should decide if they should stay put, upgrade to a HDB with better potential, or a private property.
But what if i currently stay in a Private Condominium?
Well, the same concept above can also be applied, by spotting and upgrading into an area with better future potential. Do take note that for private condominiums, newer does not always mean better, at times, buying into a older development can be better, solely due to the potential for an en-bloc. But of course, there are still risks as no one can guaruntee that an en-bloc will happen, and these development will require deeper insights to the market to spot them.
Where should I start and what should I do?
Are you exploring plans and options for your property portfolio?
We understand that choosing the right property can be complex, and there's no one-size-fits-all solution. If you have the funds to commit to owning another property solely for investment, then you may go for it as well. Investing in property is not just about holding multiple properties to collect rental, and sell them once it has appreciated decently in value.
Our team specializes in providing personalized recommendations, backed by comprehensive data and real-world analysis.
Whether you're seeking the perfect location, upgrading your portfolio with the lowest possible additional cash outlay, or an opportunistic investment opportunity, we offer tailored insights to help you make informed decisions.
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