Seven Tips For Buying A Second Home

Source : The Business Times, March 27, 2008

There are still pockets of new developments in Singapore that are priced below $1,000 per sq ft, writes PETER OW

HOUSE hunting can be challenging at a time when sellers are holding firm despite a quieter property market while buyers are expecting a steeper discount based on weaker sentiment from the US sub-prime woes.

Those on a strict budget should note, however, that the record prices were achieved mainly by new launches in the first 10 months of 2007. This is also true in suburban locations as buyers pay more for new developments under construction. Nonetheless, there are still pockets of new developments in selected parts of Singapore that are priced below $1,000 per sq ft such as Bedok and Jurong.

Well, it may be the right time to start looking for a second home as an investment. Given the more cautious economic climate and rising inflation, price naturally becomes the most significant factor for a property purchase as that would have an impact on initial cash outlay and the long-term mortgage financing of the property. Here are seven key tips to note when shopping for a second residential property for investment. Before buying, ask yourself the following questions:

# Is the price reasonable?

# What are the prospects of getting a tenant?

# Can you possibly stay there yourself?

# Can you get financing and service the monthly instalments?

# What is the expected return on the investment?

# How long will you hold your investment?

# Is the tenure important?

Price: While price is a key consideration, nobody can predict when prices will hit rock bottom. Thoroughly research the locations you are interested in, walk around the area and check out the resale values. This is probably the best time to negotiate when nobody is interested in buying as there will be less competition.

Location: Location, location, location, that's what property is all about. We have to ask ourselves: Is this a location where expatriates like to stay? Districts 9, 10 and 11 will readily satisfy the criteria of convenience and proximity to the CBD. Outside these districts, a development near an MRT station, suburban shopping centre, or good views of the sea or waterway have great potential. For such locations, regardless of good times or bad, one will be able to find a tenant. Getting the wrong location might result in vacant periods when the economy is not doing well.

Returns: When buying primarily for investment, yield or return on investment is the key thing to consider. If the financing cost is low and the returns are much higher, then the second residential property purchase will, indeed, be an asset and a financial nest egg. A savvy investor might find that investing in equities offers higher returns. But equities are also riskier. Any property that gives you a gross return of 4-5 per cent is considered fair, while 6-7 per cent is good. Rentals are usually fixed for two years which gives you security of tenure.

Under current conditions, an investment in property will be better than putting money into bonds or fixed deposits, where yields are relatively low. However, when shopping around do not get the notion that high-end or luxury properties always give better returns. Keep in mind that not many expatriates have a rental budget of $30,000 to $40,000 a month. You may be surprised to find that an HDB flat near an MRT station will give you a higher return (possibly 10 per cent) than most private properties.

Financing: Look for a financing package that suits your needs. Most banks offer packages without a lock-in period at higher interest rates while those with lock-ins have a lower rate. However, early redemption or refinancing can be costly. If you are an investor with a long-term view, go for a package that offers the lower interest rate so as to reduce your costs as much as possible.

You must also consider how affordable your monthly repayments are. As a guide, they should not exceed 30 per cent of your disposable income. Most of us use our CPF to pay part of the purchase price or the monthly instalments. The prudent approach is not to do that. One should keep enough money in the CPF to pay instalments for a one-year period. This is a defensive strategy so that should you be out of work for a year, the loan can still be serviced.

Time frame: Property is an illiquid asset - it takes time to get in as well as to sell out. Thus, we should look at a longer time frame for property investment, preferably a three- to five-year holding period. Property prices go up and down, but if you look back over 30 years, the new peak has always been higher than the previous one. This leads us to the next consideration.

Can you stay in the property?: It is good to take this into consideration because if there is a need you can move into the property, be it for downgrading or upgrading. So if you have a family of four, it is advisable to buy a three or four-bedroom apartment. You will also have a choice of which property to rent out and which to occupy. You may want to rent out the unit that gives you the better return.

Tenure: Is a freehold property better than a 99-year leasehold? The answer is no because the rentals of both will be the same since the tenant will not bother about the tenure. Leasehold properties, being cheaper, will give a comparatively higher yield. Every investor has his own criteria for investment, thus a property suitable for one might not be suitable for another. However, bear in mind that the less risky the investment, the lower the likely return. Also, with any property investment, it is best to take the long-term view.

Peter Ow is executive director (residential) at Knight Frank