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To rent or to buy: Rule of 15.

Friday, July 19, 2013

I get the feeling that most of us don't like the idea of renting a place to stay in Singapore. Why pay rent and not own the place? We are helping the landlord pay his mortgage on the property!

However, a question then is what if we were to buy our home only to find out that we bought it at a price too high? That has happened to many people before, I am sure. 

Then, in such an instance, the person who chose to rent instead of buying would have done better.

How not to pay a price too high?

I am sure that there are many things to consider but there is a nice little rule that can make it easier for us to make a decision on whether to rent or to buy.

"Rule of 15" says that if we could buy a home at a price that is 15 times or less the annual rent a similar property would fetch in the area, it makes more sense to buy than to rent.

So, if a two bedroom condominium is selling for $1.5m and the gross annual rent a similar property in the same area is $60k, it makes more sense to rent than to buy. Annual rent of $60k x 15 years = $900k.

We can also use this simple rule of thumb to help decide if we would like to put up a property for sale.

If we look at it in terms of rental yield, this rule is basically saying that if the gross rental yield of a property is 6.66% or higher, it makes sense to buy and if it is lower, it makes sense to rent.

For a while now, we see people buying real estate in Singapore and being quite happy with rental yields of 2+% to 3+%. This is acceptable really only because of the abnormally low interest rate environment. It won't last.

The "Rule of 15" is a rough gauge but it is a sensible one as it suggests that a 6.66% gross yield, whether we are owner occupiers or real estate investors, is what we should be looking for to survive more normalised (i.e. higher) interest rates in future.

Definitely, it does not take in all factors which are necessary for consideration but it is a nice preliminary check on whether we should buy or rent a home.

Related post:
Leverage up and buy investment properties.


Unknown said...

Hi AK,

when the yield is 6.66% or higher, it makes the property price less than 15 times annual rent... so it ake sense to buy!

you need more sleep =)

Unknown said...

Haha nvm.. i need more sleep =(

lzyData said...

Good point and good rule of thumb. But I suspect that at current prices, most residential properties in Singapore are going for more than 15 years' rent, or in other words their yield is less than 6.66%. Except BTOs, of course, but that is a special case.

AK71 said...

Hi IzyData,

Singapore is not very good for investors to buy real estate for rental income. The yields are relatively low.

The yields are only attractive because they are magnified through leverage using cheap loans. This will surely end.

HDB flats are exceptions. You are right. That provides another piece of evidence that HDB flats are subsidised housing. How else are they able to get rental yields which are above market rates? ;)

seefei said...

AK thanks for the post. This rule of thumb is definitely useful. However, a lot of time, our investment judgment is ruled by emotion and sentiment. And experience as well.

The current yield of property investment is definitely not attractive. However, like share market, the current property market could be a bull trap. I was a victim of this trap in 1996. It took me 16 years to escape.

AK71 said...

Hi seefei,

Many people were trapped back then and had to suffer negative equity. I know a few cases like yours, including my own family's.

Fortunately, we bought the property for our own stay and had the money to pay up in full. It is still our family home today.

It helps that my parents really like the project but, still, it only turned in a small paper gain after 16 years! Of course, my parents are quite philosophical about it. After all, it is home.

Now, if it was bought as an investment, it would have been a disaster! I feel that a similar disaster is now looming for Singapore's housing market. It just takes a longer time to unfold and when it does, it won't be a pretty sight.

Or is this time different?

AK71 said...

On Singapore properties, I think an asset bubble has formed. I was told a Chinatown shop has changed hands 6X in the last 6 years with the last sale price being $12 million (from $2 million at its first transaction).

Leasehold condos in Jurong were launched at >$1500 psf.

Most property investors, particularly first-timers, have not seen a property market in a previous down cycle when interest rate was high, the over-supply was large and job retrenchments were rampant.

- Isaac Chin

AK71 said...

"Even as a potential owner occupier, to answer this question, we have to think like an investor. This is the only way we do not end up overpaying for that dream home. We can pay but do we want to overpay? Remember, it is never about affordability, it is always about value."

Read full article at:
Buying a private property? Think like an investor.

EY said...

Hi AK,

I totally agree with your perspective in that article. A good read! I hadn't discovered your blog then but I think those ideas are even more relevant in today's context. :)

A few days ago, I took the whole evening to convince my friend who just returned from Holland for a home visit and eagerly wanting to buy a shoebox apartment because his cousin who's a property agent, gave him so much assurance about getting tenants.

I showed him my unit and shared some calculations for different scenarios. Even when I got it at a pretty good price, my gross yield is not that fantastic especially if I calculate based on current valuation of $1.1m. I definitely would have done better with 2 shoebox apartments. I'm glad that he was finally convinced that he shouldn't just grab any property rashly and he would check with me before taking the plunge.

It's easy to get lost if we aren't aware of our herd mentality. Definitely agree with you that it's a lot of hardwork involved and of course some luck too.

BTW, my agent shared with me that one of the smaller penthouse units at 614sf, facing S-West and the construction site is considering an offer of $2800. I really wonder if times are that bad for owners to take such a low ball offer. But then again, it's the renters' market now. Like you said, need to be grounded/ :)

AK71 said...

Hi Endrene,

Yes, must stay grounded. My friend's unit in St. Michael's still has no takers. Imagine that. It has been months.

A property is a huge investment and in a place like Singapore, it is a mega investment! You are a good friend to warn your friend of the pitfalls.

Of course, property agents would paint a rosy picture. Why would they not? LOL.

Just like anything in life, buy not because we can afford it but because it is value for money. With properties, buy if we are able to get a discount to valuation and you are an expert at that. ;)

EY said...

Hi AK,

'Just like anything in life, buy not because we can afford it but because it is value for money.'

You want to put a caveat to this? Cos my spendthrift behaviour is justified on the same premise as above! LOL~ And it has rubbed on to my boys too! =.="

Anyway, for my friend's property investment, I'm just sharing what little I know. If he hadn't been a good friend I know since my teenage years, I won't go to such extent in sharing. It saps a lot of my energy trying to explain things that I do and decisions that I make.

For your friend's unit, not sure if he's been checking out the rental transactions around his area. I saw one of my agents listing a 1+study (489sf) in a rather new development in the same area and about 10min away from MRT, asking only for $2300 and it's been on the market for a while. Another 2 bedder at 667sf was done at $2600. Perhaps he might want to work out a strategy on how he could get his unit tenanted soon. In a market like this, leaving things to chance would only prolong the winter. Just my 2 cents. :)

AK71 said...

Hi Endrene,

Oh, I agree. My friend is not being realistic at all. Oh, well. I am sure he is not alone. I think it will start to bite soon and we will see rentals cascading.

I am naturally quite kaypoh. I remember telling an old couple in a supermarket who were trying to decide which brand of green tea to buy the one which I liked. They were appreciative and accepted my recommendation. ;p

However, these days, I try to do it less. Too kaypoh and people might find me a bother. So, being selectively kaypoh is probably the answer. LOL.

AK71 said...

Rental yield for non-landed private homes fell below four per cent in 2013, according to figures from the Singapore Real Estate Exchange (SRX).

The median gross rental yield for non-landed private residential properties dropped from 4.2 per cent in 2012 to 3.9 per cent last year.

SRX said 4 per cent represents a psychological barrier when it comes to rental yields for investors seeking income from residential properties.

AK71 said...

Unit at The Sail hits $2,249 psf.
In the CBD and Marina Bay area, prices likely to fall further.

AK71 said...

Julian Cheung Chi-lam and Anita Yuen Wing-yi are household names in Hong Kong and on the mainland for the many impressive roles they have played in films and TV dramas, and also because they are seen as a happily married, model couple in showbiz circles.

But there’s one thing about this rich and famous couple that you might not know, something I was not aware of until last week: they decided years ago never to buy property in Hong Kong. The reason was simple. Prices were outrageously high and too unreasonable.

Cheung once reportedly remarked: “With the amount I need to pay for a house [in Hong Kong], I can rent till I’m over 130 years old.”


Mr. and Mrs Financial Journey said...

Hello AK,

appreciate your consistency in blogging so that people like me can benefit from them. =)

My partner and I are considering getting a hdb next year, do you think this rule of 15 still applies?

AK71 said...

Hi Mr and Mrs FJ,

I am glad you like my blog. :D

As for the "Rule of 15", it helps us to stay grounded when buying a property.

I like to use it as a guide at all times.

If you are considering a BTO HDB flat, it will pass the rule with flying colors. ;)

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