The main objective of most real estate investors is to draw out good rental yield and capital appreciation. Easier said than done right? In my previous article titled, Buy-Rehab-Rent-Refinance, The Real Estate Strategy To Implement, the foundation of this method works similarly to what I have been proposing.
The article generally speaks about working on older properties that might require renovation/rebuilding. The BRRR strategy is not by any means new, but has been in practice by many western countries. However, its principles still apply strongly to the real estate market in Singapore.
This article which you are reading now is a continuation of the methods that were described in the BRRR article and expounds on it.
If you have not yet purchased your future home, click here to see how I can assist you.
Staying in a Landed Property Already?
Your landed property might be your humble abode, and you might view it as a sanctuary amidst the hustle of working.
However, do you know that your sanctuary would have huge upside potential, especially when it has been built more than 20 years ago?
Across Singapore, landed property prices have tripled since 2005. The idea is that landed property prices have increased due to increased demand, which is well balanced by the existing landed supply.
Before we proceed further, I will like to disclaim that prices will continue to increase by threefold into the future, and anyone advising as so should be able to provide credible evidence for their claims.
What we can predict is the general market direction. For freehold landed properties, this will generally always increase with consistent economic growth in Singapore. With Singaporeans getting richer, there will be those that aspire for living in a landed property.
Since you are already living in a landed property, how then will you be able to leverage this?
What Most People Do
If you have been living in your landed property for a long time (i.e. 15-20 years) and are deciding to cash out on your hard asset, here is what most homeowners will do.
1) Sell your landed home at a discount as compared to newly rebuilt ones
2) Slight renovation works to slightly restore the property and marketing it competitively to new units
For option 1, you are doing a great disservice to yourself. This is a viable option if you are a retiree with no intention of living in a landed property, and instead thinking of moving into a condominium. After all, your condo purchase should generally be cheaper and you will be able to cash out.
However, if you are intending to move into a landed home that is in better condition, you will likely have to fork out extra cash.
For option 2, renovation works are usually more to the benefit of the original homeowner. You might be able to target a particular segment of homebuyers that find newly rebuilt home by developers too expensive, and older properties unhabitable.
From my experience, older landed properties overtime will have latent defects, and most landed buyers rather be in the market for purchasing cheaper land to rebuild.
My Proposition
Take on the task of rebuilding the land yourself! This 3rd option is favorable against the two others.
Against the 1st option, you will have the flexibility to price your home against new properties. If you are unsure how to price your property, use the asking prices of these new properties as a benchmark.
Furthermore, developing your home as a private owner significantly reduces the overheads normally taken in by a property developer.
Against the 2nd option, with the flexibility to price your home competitively in the market due to the reduced overheads, you are appealing to the segment of newly rebuilt home buyers, which means that you stand a competitive advantage.
The following listings shown below are a good case study.
Assuming the owner is trying to release the above unit in the market at $3.03 mil. The true market value of this corner terrace is likely between $2.8-$3.0 mil, $1.1k-$1.2k (Land PSF).
If this was the original owner who has bought the home pre-2005, They bought it close to a $1 million ($400 Land PSF).
A complete rebuild for a landed property of this size will probably cost around $1 million - $1.5 million, depending on the type of finishing.
Your home value at this point will most likely cost around $4.5 mil. But selling it at this price is not ideal, as you will have to account for further profits when you start to market.
This next listing is a recently developed landed house that had just obtained a Temporary Occupation Permit (TOP). Take a look at the above asking price.
Now, I am not saying to market your recently rebuilt property at this price. But this is a good gauge on how to price your property. Remember that you will have to sell your property for more than $4.5 million to draw a profit. If you were to close it at $5.5 mil, you will be grossing a net $1 million post-renovation.
Not a bad sum for working the land!
Breakdown of Numbers
Price of Property, Circa 2005: $1.0 million
Price of Property, Circa 2020: $3.0 million
Net Gain If Sold: $2.0 million
Rebuilding Cost: ($1.5 million)
Price of Property Post-Rebuild: $4.5 million
Price of Property Post-Rebuild, Sold Competitively: $5.5 million
Net Gain If Sold After Rebuilding: $3.0 million
The numbers shown above are a realistic portrayal of the profits you can potentially make. However, do expect some discrepancies as some neighborhoods will generally be favored better for redevelopment. The best comparison will be to price it in comparison to properties within the same neighborhood.
The average rebuilding project will take approximately 1-1.5 years, which means that you will need to lease a property. The average landed property rental will cost approximately $5-$10k/month. So do take into consideration this cost when planning your rebuilding project.
Old Neighborhood?
I feel that neighborhoods with a high number of older properties do have a high potential for flips due to low new supply in the immediate area. However, the main detriment is that these new buyers will have to tolerate future construction noise when their neighbors are rebuilding their properties.
Disadvantages
Buying to Flip
This works best if you are already an owner of an aging property. If you are buying a property to work on it and flip, this is still a feasible method. But you are still liable to pay seller stamp duties (SSD) on this residential property.
The soonest you can sell your property will only be upon obtaining TOP, which means that the rebuild will need to be completed. This will take an approximate timeframe of 1-1.5 years. This means that immediately after, up to 8% on the price of the property or market value, whichever is higher.
A sizeable portion of your profit will be paid in stamp duties, so do take this into account.
If you intend to stay in the rebuilt property till there is no SSD payable, your property will technically be not classified as new, and you will have to price in accordance.
Strong Cash Reserve
Unless you are flushed with cash, you will most likely need to take a home construction loan. The various local banks in Singapore will be able to provide you with one. However, do take note that a home construction loan will incur interest.
If you are interested in speaking with a construction loan expert, contact me and I will link you up with one.
Housing Developer’s License
Be rest assured, you do not need to have a Housing Developer’s License when rebuilding your landed property. However, it can be advantageous if you have one as you can apply for a sale license.
A sale license allows you to start marketing the unit as soon as you have obtained the building plan approval. This gives you a good head start and realizing profits soonest possible.
No Strong Credentials
Housing Developers usually have a strong portfolio and this builds trust to the potential buyer that the home is being worked on by trusted Architects and Builders.
Working on the property as a private owner means that it takes more to convince home buyers that the right expertise has been involved throughout the process, and quality materials are used.
Ensure that you work with a qualified builder with a good track record of completion, this will minimize your own risk.
Conclusion
To summarize, rebuilding your property to flip is a viable option for earning profit from your hard asset. However, there is a high initial investment cost, which not many investors will be willing to stomach. However, the wait will be worth it when you realize your investment profits.
Perhaps after completion, you might be so pleased with the construction that you might decide to occupy it!
If you are in need of a trusted builder to be able to handle your rebuild project, contact me so that I am able to refer you to some of my trusted partners in the construction industry.
Considering a rebuild to sell project is a huge undertaking and you should exercise utmost caution. Contact me (Joshua) at +65 96329840 or send your queries to estatemagnates@gmail.com should you have further questions! I am able to advise on how you can realize your real estate investment goals!
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee, or other group or individual. The author does not accept any responsibility whatsoever for any harm or loss arising from accessing or relying on information contained in this blog post.