Case Study Of A Singaporean PR Purchasing A Condo In Singapore
Recently I had the opportunity to meet up with a lovely couple who had just gotten their PR. They were incredibly excited and was looking forward to purchasing a condo in Singapore. If you are not aware by now, getting a Singapore Permanent Residency has some benefits. The most significant being the amount of additional buyer’s stamp duty (ABSD) payable when you acquire a residential property in Singapore. For PRs purchasing the first residential property in Singapore, the ABSD is only 5%. Now, compare this with a foreigner paying 20% ABSD and you are talking about savings in the hundreds of thousands of dollars.
Which is Better Rental or Purchase?
This couple has been staying in Singapore for a few years and has been renting all this while. So instead of paying rentals to the landlord where the money “disappears”, They have decided to explore the option of purchasing a property. The reason is simple. As homeowners, you only pay for the property for during the loan tenure of say 30 years. After that, the property is effectively yours to use for the rest of your life. After all, would you still want to continue paying monthly rentals at the age of 70 or 80 years old?
Are You Sure Home Ownership Is Still Better Than Renting?
Some people think it is better to rent because they can put their money to work elsewhere. And some insist on having their own home at the end of the day. If you were to consult me on this, I would tell you that there is no right or wrong answer. Whether it is worthwhile to purchase or rent depends on your scenario.
For example, if you are a foreigner who is working in Singapore for a few years, it might make more sense to rent. Your stay here may only be temporary, and Singapore is ultimately not a place to call home. On the other hand, if your objective comprises of staying on this lovely island for an extended time, purchasing might make more financial sense.
So How Do You Determine If Rentals or Purchases Are Better?
When I met up with the couple, they already have an idea of what they wanted. After all, the couple has seen a lot of properties in their 5-year stay. They have even lived in various locations across the island. In their mind, they already had a set of requirements which the new property must fulfil.
Although the couple knew what they want, there was one thing that they didn’t consider. And that was the exit strategy. Having an exit strategy is extremely important because it will determine if renting or purchasing makes more financial sense.
Firstly, they are young professionals without any kids and have lived in various cities throughout the world. In terms of job mobility, they are highly mobile and may not necessarily live here in the next few years.
Secondly, they have no planning on whether they should start a family. Understanding this is important because Singapore PRs have higher property transactional costs compared to Singaporeans. Imagine purchasing your first home to find out that you need to upgrade to a bigger one a few years later. To carry out the upgrade, you would need to sell your unit (agent commission market rate of 2%) and pay the 5% ABSD plus 3% BSD all over again. Assuming that the property is $1mil, 10% is $100,000, which is a significant amount to transact the property. As such, it may make absolute sense to rent in the meantime before ultimately purchasing a home that you truly need.
Is There A Magic Formula to Understand If Rentals or Purchases Are More Suitable for Me?
Well, there is! Just open an excel sheet and start keying in the numbers! In this scenario, the couple had already identified which development they are keen to explore. That made my job simple, so here are the calculations.
As you can see, the holding period of the property makes a lot of difference when it comes to determining if rentals or purchase make more financial sense. For a holding period of 5 years, the difference between purchasing versus renting is a whopping $91,240. That is, of course, assuming if the property prices do not change during this time. Even if I remove the factor of the renovation costs, renting these five years will still save you $14,600.
However, as the holding period increases, the transactional cost reduces significantly. In the above calculation with a holding time frame of 10 years, purchasing the property would make more financial sense. Besides, if you are buying a property with a higher potential for upside, you would be able to enjoy any capital gains as well.
Rent or Purchase? The Solution Varies from Individual to Individual
The above example is to show you that the holding period is the most significant factor to determine if renting or purchasing makes more financial sense. Also, there isn’t a one size fit all solution because
- Your stamp duties depend on your residency. If you are a foreigner, expect to hold the property for a more extended time.
- Different condos do have slightly different rental yields. If the rental returns are weak and you love staying in that development. Rentals make more sense.
- If you have read my earlier articles, some condos can appreciate while others cannot retain value. For those with a lower possibility of capital upside, rentals would make more sense.
To truly understand what is the best way forward, why not speak with us today? Whether you are a Singaporean or even an excited foreigner who had just gotten your PR, we work closely with you to understand your requirements. That way, we would be able to help you achieve your end objectives and save you thousands of dollars in the process.
Article contributed by Jerry Wong
Jerry Wong is a realtor with Propnex Realty. He loves coffee, cookies and condos. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home. Or making well-informed decisions that see their assets grow. Buy Jerry a coffee, and he will meet up with you on a 1 to 1 session to share the following
- How certain factors affect real estate prices. (Using historical transactions as references)
- Applying lessons from history to determine if a condo has the potential for upside or not. These condos can be those under construction, resale or the very one you are staying in right now.
- Or just prepare the toughest question you have on your mind! If it is interesting enough, the answer will be in a blog post and shared with everyone!