Before you start mentally raking in the rental income and capital yield of a second property, take note of the financial considerations of buying one.
PART 2 OF A FOUR-PART SERIES ON SECOND PROPERTY INVESTMENT
1. FIND OUT HOW MUCH CPF FUNDS YOU CAN USE
As one investor told us: “I have all that money just sitting there in my CPF account. I might as well use it to invest in another property, instead of just watching others get rich.”
CPF members can finance the purchase of private properties in four ways: To pay the purchase price; repay part of, or fully, the housing loan and/or for the monthly housing loan instalments; if you’re building a house, you can repay the construction loan (either in part or fully) and/or pay for the monthly construction loan instalments taken to buy land and/or to construct your house; and to pay the stamp duty, legal costs, survey fees and other related costs.
However, don’t assume you can use every single cent in your Ordinary Account for your second property. You need to first put aside the Basic Retirement Sum (currently set at $85,500 in 2018; it increases every year) before you can use the remaining CPF savings up to the Valuation Limit of the property. This is the lower of the purchase price or the market value of the property. For example, if you paid $1.1 million, but the market value is only $1 million, you can use your CPF to pay up to only the $1-million Valuation Limit.
For those under 55 years old, the Basic Retirement Sum is the funds in your Special Account (including the amount used for investments) and Ordinary Account. If you are above 55 years old, it is from your Retirement Account, Special Account (including your investment monies) and Ordinary Account.
You can’t use your CPF funds if the private property you’re buying has less than 30 years left on its lease. Or, if it has less than 60 years left but at least 30 years, but the remaining lease plus your age is less than 80 years. Also, remember that whatever you use will have to be refunded with accrued interest to your CPF account when you sell that property in future.
<b>photography</b> ALAN LEE/K STUDIO
2. CHECK YOUR LOAN RESTRICTIONS
When applying for a bank loan to finance your investment property, look out for:
• Total Debt Servicing Ratio (TDSR)
A cooling measure to stop speculators from over stretching their finances, this is calculated as: Your monthly total debts include any student loan, car loans, personal credit, current housing loan etc. Your TDSR must be 60% or below; this means only 60% of your salary can be used to pay off all your debts. This will affect how much loan the bank is willing to grant you.
• Tenure of Loan
The number of years you can use to pay off the loan. This is determined by the Income-Weighted Average Age (IWAA) of the borrowers.
If the income of the younger borrower (30 years old, earning $7,000) is higher than the income of the older borrower (50 years old, earning $3,000), this will work out as:
Income-Weighted Average Age
=(30 X $7,000) + (50 x $3,000) / ($7,000+$3,000) = 36 years
Max Loan Tenure
65 years (retirement age) – 36 years = 29 years
But if the income of the younger borrower (30 years old, earning $3,000) is lower than the older borrower (50 years old, earning $7,000), then it will be:
Income-Weighted Average Age
=(30 X $3,000) + (50 x $7,000) / ($3,000+$7,000) = 44 years
Max Loan Tenure
65 years (retirement age) – 44 years = 21 years
• Tenure + Age
Bank loans are granted up to the retirement age of 65 years.
However, it is possible to extend your loan tenure beyond 65 years, subjected to a smaller Loan-To-Value ratio. You must also cough up more cash as your downpayment.
• Loan-to-Value (LTV) ratio
This depends on how many bank loans you are financing, not the number of properties you have. If you fully paid up your first property, your loan for the second property will be considered your first housing loan. All housing bank loan repayment periods in Singapore are capped at a maximum of 35 years.
First housing loan
80% LTV for tenure less or equal to 30 years; or 60% for tenure of 31 to 35 years.
Second housing loan
50% LTV for tenure less or equal to 30 years; or 30% for tenure of 31 to 35 years.
Third and subsequent housing loans
40% LTV for tenure less or equal to 30 years; or 20% for tenure of 31 to 35 years.
Second-property hunter Dorcas Leo spotted a condominium unit that she liked a few years ago, but it stretched her budget a little too tightly. She chose to pay off her HDB loan for her flat so that she could borrow up to a maximum of 80% LTV for the condo unit as it would be considered her first housing loan, instead of just 50% for a second housing loan.
“I was also saving on interest as I was paying 2.6% for my HDB loan, but just 1.3% for the condo’s bank loan,” she explains.
By taking a bigger loan at lower interest rate, she was able to tap into her savings to renovate her new home, instead of taking a renovation loan at a higher interest rate.
• Minimum cash downpayment
A compulsory cash component, it depends on how many housing loans you are servicing.
First housing loan
For tenure less or equal to 30 years, 5% must be paid in cash. For tenure of 31 to 35 years, it increases to 10%.
Second and subsequent housing loans
25% in cash, regardless of tenure.
3. BE PREPARED TO PAY ADDITIONAL BUYER’S STAMP DUTY (ABSD)
Whether you are buying your second property alone or with your spouse, ABSD will depend on the residency status of the buyer(s) and the number of residential properties they own.
Singaporeans are taxed 7% ABSD on their second property and 10% on their third and subsequent properties. Singapore Permanent Residents (PR) pay 5% for their first property and 10% on their second and subsequent properties. Foreigners are charged a flat 15% ABSD for any property they purchase.
The highest ABSD rate always prevails if the buyers are of mixed profiles. For example, if you are Singaporean but your spouse is a PR, the second property that you are co-buying will be subjected to 10% ABSD due to your spouse’s status. Or, if you are a Singaporean who co-owns one property with your Singaporean spouse and wants to invest in a second property with your brother (a first-time buyer), that investment property incurs an ABSD of 7%, thanks to you.
4. DON’T FORGET TO CLAIM TAX EXPENSES FROM RENTAL INCOME
Once you’ve collected the keys to your investment property, the next step is rent it out as soon as possible. After all, you will need to hold onto your investment for at least three years if you don’t want to incur Seller’s Stamp Duty. If you purchased your property after March 10, 2017, this is calculated at 12% if you sell within the first year; 8% within the second year and 4% within the third year; no Seller’s Stamp Duty is payable if you sell after the third year.
All of your rental income – 100% of it – is taxable. This includes the full amount of rent you charge for your property, as well as any related payments you receive such as the maintenance, furniture and fittings. You can, however, deduct expenses incurred in renting out your property, such as the interest paid on the loan or mortgage used to purchase the property. However, the actual monthly repayment amount of the loan and the penalty imposed by banks for late repayment cannot be deducted.
If you hired a property agent to find you a tenant, that expense is not claimable. However, you can claim the commission paid to find replacement tenants. You can also claim for the repair or replacement of furnishings made during the rental period to restore the property to its original state, the cost of maintaining the property such as painting, pest control or monthly maintenance charges, or the cost of engaging a property agent or company to manage your tenants. All Internet charges and utility expenses paid on behalf of tenants are also claimable, as long as these are not reimbursed by the tenants.
You also have to pay property tax on your investment property, which is calculated based on Non-Owner Occupied rates of at least 10% of the first $30,000 of its Annual Value, up to a maximum of 20%. However, you can claim your property tax as an expense against your income.
5. ENJOY TAX-FREE INCOME FROM CAPITAL GAIN
When it is time to cash in your investment, the good news is that your profit from the sale of a property in Singapore is not taxable as it is a capital gain. However, if you are deemed to be trading in properties, then the gains will be considered a taxable income. How this is determined is based on factors such as how frequently you are buying and selling properties; your reasons for acquiring and selling property; your financial means to hold the property for long term; and your holding period.
Many Singaporeans aspire to own multiple properties and often assume that capital gain and rental income are almost a sure thing. However, with the many rules like ABSD and Seller’s Stamp Duty put in place to curb feverish speculation, this also makes the game hard to exit if you are suddenly strapped for cash. We have all heard horror stories of investors who got burned dabbling in the property market, which was what spurred the Government to implement cooling measures in the first place.
During a soft rental market, your rental yield may also be lower than expected and may not cover your mortgage. Remember: An investment home is a luxury to make you extra money, not a necessity to put a roof over your head. Always do your sums carefully before you commit to house No 2.
In Part 3 of our Property Investment series, we explore some ways to avoid paying Additional Buyer’s Stamp Duty.