Buying a private property as an owner-occupier? Think like an investor!

This blog post is in response to a comment by a reader, Jaime. See it here.



Hi Jaime,

How to buy a private property for self stay? I am most probably considered an amateur when it comes to buying private properties but I am happy to share my thoughts with you.

Just keep visiting showflats if you want to buy new. Or keep viewing apartments (look through the classifieds in the papers or search sites like Property Guru) if you do not mind buying from the resale market.

So, when you finally find a property you like and within your budget, do you just buy? That is a million dollar question, isn't it?

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.

A property's value is determined by the rent it is able to fetch if it were rented out. The higher the rent, the higher the property's value. Putting it simply, we will always value highly anything that is able to benefit us more, right?

Annualise the potential asking rent and calculate the yield based on the selling price of the property. This gives you a very rough idea if a property is worth buying.

To get a more accurate picture, ask how much is the monthly payment to the MCST, property tax and find out how much would insurance cost. Deduct all these from the annualised rent. What is left is net property income (NPI) or income after all maintenance costs have been accounted for. Calculate the NPI yield based on the selling price of the property.

If a housing loan is taken to finance the purchase, interest rates must be given due consideration. In the current low interest rate environment where housing loans could attract interest rates of 1% or lower, a NPI yield of just 3 to 4% is probably enough to make a property investment worthwhile.

If interest rates should bump up by a percentage point or two, investors would demand higher NPI yields as well. This could be achieved either through higher rents or lower selling prices. In a weak economy, prices across the board would likely take a hit since higher rents are less likely to come by. Lower rents and prices are even more likely when coupled with oversupply.

Some might ask why I say 3 to 4% NPI yield is enough to make a property investment worthwhile if interest rate is low? Isn't inflation in Singapore in excess of 5% now? Shouldn't we be invested in assets that could outperform inflation rate?

Well, theoretically, real estate should see its value at least keeping pace with inflation. So, investing in real estate should give us returns over and above inflation rate. Remember, however, that this is in theory. In reality, this is an imperfect world and there will be times when things go out of sync due to decisions made with imperfect knowledge; and these are times when savvy investors capitalise on the imperfections either as a buyer or a seller.

There will be times when things could go horribly wrong, when things go out of sync for a prolonged period. When something is stretched to an extreme, it does not just return to the mean. It is likely to overshoot to the other extreme as it tries to find equilibrium again. Sounds scientific, does it not?

You might be thinking of buying a home for self stay but think like an investor and look for value. You might one day monetise your home. Who knows?

Oh, yes, it could be lots of legwork but have fun in your search in the next few years. It is going to be a buyers' market. So, sharpen your bargaining skills. ;)


You might also be interested in these blog posts:

1. Making your first million dollars in real estate investment.

2. New or resale property?

Selling a private property just got harder.

The Singapore government has "imposed an Additional Buyer's Stamp Duty (ABSD) for private property of between 3 per cent and 10 per cent for Singaporeans, Permanent Residents and foreigners to moderate investment demand for private residential property and promote a more stable and sustainable market."  Read article here.

This development is likely to hasten the weakening of private residential real estate prices which is something I expect to become really evident in 2014 or 2015.  Weakness in the resale market would probably manifest itself markedly much earlier now.

Anecdotal evidence already shows that it is harder to find buyers in recent weeks. The ABSD which takes effect from tomorrow will likely cause weaker sellers to lower their asking prices.

In real estate investment just like in any investment, price is always a function of who is more enthusiastic, the seller or the buyer. Such enthusiam or the lack of it is the function of many contributory factors. How is the enthusiasm competition stacking up?

If we search Property Guru for listings of recently completed condominium projects, we would be amazed by how many are trying to sell their units. So, let us see The Trevista in Toa Payoh which recently got its TOP.

The Trevista has 664 listings under "units for sale" right now! Granted that many listings are probably repeated, let us say each unit has been advertised by 5 different property agents, it would still mean that 130 units or so are up for sale. There is no question that many bought private real estate as an investment in the last year or two.

Now, the more realistic investors would probably settle for lower selling prices. In the end, those who are unwilling to sell at lower prices must have holding power. What affects holding power? Rental and interest rates. Rental should be as high as possible and interest rates should be as low as possible. Of course, how much financial muscle one has to begin with is an important consideration too for obvious reasons.

The rental market has been softening, from what I hear. So, rents, in time to come, could provide diminishing comfort. With more residential real estate being completed over the next few years, lower rents are a realistic expectation.

Interest rate although widely expected to remain low until 2013 is a wild card from then on. With expectations of oversupply from 2014 onwards, the expiration of low interest rate at the same time would be a double whammy.

Good luck to all who are still heavily invested in private residential real estate in Singapore.


Latest update (CNA, 8 Dec 2011):
CEO of PropNex Realty Mr Mohamed Ismail said he expects a price correction of approximately 15 to 20 per cent in the central core region and a correction of 10 to 15 per cent in the mass market segment in the next six months.  Read article: click here.

Related posts:
1. Money continues to flow into Singapore.
2. Should we be staying invested or in cash?