Should You Buy or Rent Real Estate?

Singapore has one of the highest homeownership rates in the world. However, should you follow the masses and own one as well? In this article, we will address some reasons why you should own your own property. And in what circumstances should you rent instead?

Owning your own property also serves to protect your dollar value in erosion over time due to inflation rates. Most savings account have an interest rate of 0.05 to 0.25%, which is grossly under the average of ~2%. Singapore’s Private Property Index has increased substantially by 20% from Q1 2010 to Q1 2020.

Even comparing the HDB Resale Price Index in the same duration results in an increase of ~5%. It is safe to say that your investment in residential properties will serve as a functional, wise choice.

Owning a property usually brings a more predictable cashflow. There are many competitive mortgage rates offered by banks, and these rates are usually lowered in times of a financial crisis, as a way to encourage consumer spending. Rental prices will be the volatile factor, as vacancy rates can significantly affect your cash flow. Do not worry, as vacancy rates have been decreasing over time in Singapore from a high of ~9% in 2016 to ~5% in Singapore.

In the case of a bad market with high vacancies, be prepared to lower rentals accordingly, and remember that your primary objective is on capital appreciation. Rental income is simply a means to meet mortgage repayment.

In the event where you are experiencing tight cashflow issues from other debt repayments, you will be able to use your property as collateral for an equity loan. Consolidating your existing debts is a good way to have better control and lower interest rates. This will help you to save a huge sum of money from interest fees.

Renting instead of buying a property to live in often requires you to move often. This can be very disruptive and might have a negative impact on your children’s friendship when growing up. Although we do not experience this greatly since we are situated in Singapore, as we are a small country there is still bound to be some impact. If moving is a stressful affair for you, how much more will it be for your kids who are still in their formative, vulnerable years?

“Moves are also hardest on kids in the midst of other transitions like puberty and school changes. Middle school seems to be the toughest time to make a transition.” – Psychology Today

This point might be arbitrary, as purchasing your own home has cost which might significantly overweigh the costs from renting. It is important to define clearly what this “cost” is though. When you make regular mortgage repayments to your condo, you are adding on to its overall intrinsic value. This will subsequently contribute to your overall net worth.

In regards to renting, however, the monthly payment that you make is an intangible, which is the lease to occupy the premises. This does not add to your overall net worth.

Investors are seldom bound to a singular financial instrument. Here on Estate Magnates, we like to talk often in regards to real estate investments, and we do also recognize the strengths of other forms of investments. For the savvier investors, some will not like to lock up most of their capital in real estate and would rather have the liquidity. This is, however, something that we will not recommend for novice investors.

If you are not careful in analyzing the complete cost and liabilities of purchasing a property, the huge quantum of buying a property can strongly erode your profits. Take, for example, the Additional Buyer Stamp Duty (ABSD). If this is the 2nd or subsequent count of property that you are purchasing, you might need to pay an additional 12% or more based on the transacted price, up to a maximum of 20% if you are a foreigner!

What about in an event if you require cash on hand for an emergency and you have just bought your property in the last 3 years? Be expected to pay between 4-12% depending on how long you have held the property!

Assuming a Singapore had just purchased a $1,000,000 home as their 2nd property and had to sell it within the same year, he/she will have to pay $264,600 in taxes! A capital gain of at least 26% within the same year is required to breakeven!

For individuals that are career-driven, owning properties might be a hassle. Moving out of the country for job requirements usually require you to find tenancy for your property so as to pay off your mortgage.

Your duties do not end the moment you rent out your place either! How will you be able to enforce the clauses as stipulated in the Tenancy Agreement to an unruly tenant?

One option is to hire a property management company that will be able to provide these services at a nominal fee. But this brings about another issue. How will you then ensure that they will be vigilant in fulfilling their duties?

Property maintenance is also another challenge as it will be subjected to wear and tear. Similarly, to the above point, you can look into hiring a property management company. But the general responsibility still falls upon your shoulders should there be a problem. Renting a place to stay allows you to simply avoid all these unwanted issues.

Seeing that the real estate market is very dynamic, you have to constantly monitor it closely in order to avoid huge losses in the capital value in case of a significant downturn. This event, however, is however unlikely in Singapore due to existing government policies which reduces such huge fluctuations.

Thanks for reading our thought on how whether you should buy or rent your residential for stay! If you require more information or our advice on how you should proceed with your next step, contact +6596329840 or email us at estatemagnates@gmail.com

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