The profitability of property investment is enticement enough to buy a second property. But buying another property is also a risky move that can wreck your finances if you’re not prepared. That’s why it’s important to understand both the housing market and your responsibilities as a property owner.
So before you purchase your next property, become familiar with the following:
- Know the Housing Rules
- Know the Property Taxes
- Know the Rental Rates
- Know Your Debt to Net Worth Ratio
- Know the Current Home Loan Interest Rates
Know the Housing Rules
Staying up to date with the latest MAS housing rules and regulations is a necessity if you plan on buying your second property. If you don’t know the housing rules, you won’t know whether you qualify to buy a second property, let alone the additional costs.
By knowing the housing rules, you can find out the following:
- Your Eligibility
- Your Down Payment
- Your Loan-to-Value (LTV) Ratio
- Your Additional Buyer’s Stamp Duty (ADSD)
- Your Central Provident Fund (CPF) Withdrawal Limit
Know Your Eligibility
Do you currently live in an HDB flat (new/resale) or an Executive Condominium? If you do, know you cannot purchase your second property until you fulfill a Minimum Occupation Period (MOP) of 5 years.
Also, you cannot buy another HDB flat unless you dispose of your existing flat within 6 months of purchase.
On the other hand, if you currently live in a private property or Housing and Urban Development Company (HUDC) flat, you’re not under such restriction.
Here’s a table to illustrate the properties you can buy without disposing of your existing property:
Your Existing Property
(With 5-Year MOP)
|2nd Properties Eligible for Purchase
Your Existing Property
Know Your Down Payment
Unlike your first home purchase which required up to a 5% cash down payment if you used a bank loan, your second property requires a 25% cash down payment of the property’s valuation limit. The valuation limit is determined by the current property value or purchase price, whichever is lower.
Know Your Loan-to-Value (LTV) Ratio
With your purchased your first home, your LTV ranged from 80% – 90% depending on whether you took out an HDB or bank loan. But when you purchase a second property, your LTV will drop to 50% for loan tenures up to 30 years. If the tenure extends beyond 30 years or your 65th birthday, the LTV drops to 30%.
Know Your Additional Buyer’s Stamp Duty (ABSD)
In addition to a higher cash down payment and a lower LTV, you’ll also have to pay a 7% Additional Buyer’s Stamp Duty (ABSD) on either the current property value or purchase price, whichever is higher. PRs are required to pay 10% and Foreigners cap off at 15%.
Know the Property Taxes
By now, you’re probably familiar with calculating your property tax. But if you’re purchasing your second home as an owner-occupier, you’ll fall under the same progressive tax scheme you’re paying on your first home.
But if you’re intending to rent out your second property, you’ll need to pay a 10% flat tax on the annual value of your second property.
Important Note: Keep in mind that the current flat tax rate for non owner-occupied properties will change in 2014 – 2015 in favor of a progressive tax scheme that will range from 10% – 20%.
Know the Rental Rates
Before calculating how much you’ll charge for rent, it’s a good idea to see what the current rental rate is for property in your area. Ideally, your rental rate should cover and exceed your monthly loan repayments.
You can determine your rental rate by using your monthly repayment as a starting point and getting quotes from at least 3 property agents. The quotes you receive should at least exceed a minimum markup of 20%, which should be enough to compensate a minor drop by tenant haggling.
As a protective measure, you should have enough savings to cover at least 2 months of vacancy.
Know Your Debt to Net Worth Ratio
Your debt to net worth ratio is the sum of your total liabilities divided by your net worth. This ratio should not go below 50%, and if your new property takes you under this percentage, it’s a warning sign that you’re taking too much risk.
Remember, if you can’t pay your home loan, it’s possible to lose both of your properties. Investing in property isn’t like buying shares, so if your property becomes a liability, you can’t sell it immediately. So make sure your debt to net worth ratio is above the 50% mark!
Know the Current Home Loan Interest Rates
The property market is never static. A fixed SIBOR rate might be the best choice today, but 5 years down the road, a floating SOR rate may offer best loan rate out there. The only way to stay up to date on the latest home loan interest rates is to contact every bank find out what their current home loan interest rates are.
This is a time consuming process, but you can save some time by speaking to one of MoneySmart’s Mortgage Specialists here.