This article should pique your interest if you are one of the many HDB flat owners, who are in the position of wanting to acquire a new private property and cannot decide yet what to do with your HDB flat - is it more profitable to retain and rent for a regular income stream or sell for a possible lump sum profit?
You may be uncertain of what to factor in for consideration, hence making this a very difficult decision to make. In this writeup, we hope to shed some light on some of the more important elements when it comes to such a situation for you to be able to make a more informed decision for arguably one of the most important assets in your life.
It goes without saying that everyone wants to make the most out of their situation - which in this case is attaining maximum profit with what you have. But before you can achieve that and instead of just diving headfirst, one of the first pre-requisites is to consider your financial position and regulations that have an impact on it.
Let’s look at the implications of retaining your HDB flat for the purpose of renting it out, while acquiring a new property. As Singaporeans are not able to own 2 HDB flats concurrently, your second property will have to be a private property.
First thing to take note of at this point in time is whether you have any outstanding loan for your existing HDB flat. If you have not paid off your existing property loan whilst trying to attain a 2nd loan for the new property you are acquiring,
i) the maximum Loan to Valuation (LTV) ratio will only be 45% - which means the bank will only lend you 45% of the new property’s valuation, a decrease from 75% in contrast to if you do not have any existing loan
ii) The minimum cash required for down payment will also increase from 5% to 25%
From a layman point of view, this means that you would need to have more funds (Cash/CPF) for down payment; while from a financial perspective, this would imply a higher initial funds outlay which will then decrease your potential return on investment. We will be writing on how to calculate return on investment so do stay tuned, but in the meantime, feel free to reach out to us if you have any questions about it here.
Secondly, you will be subjected to Additional Buyer’s Stamp Duty (ABSD) when you purchase additional properties while not disposing of the existing one. A second property will incur a 12% ABSD for Singapore citizens and 15% for Singapore Permanent Residents.
Similarly from a financial perspective, any additional costs incurred will prevent you from attaining maximum profits. (Read also: Why Do We Need ABSD and How Would It Affect Singapore Property Owners?)
You will also need to consider the restrictions on CPF usage for multiple property purchases if you choose to retain your HDB, as this will determine how much funds you have available for use.
If you have used your CPF savings for a property and are applying to use your CPF savings for a second or subsequent property - and depending on your age and the property’s age - you are most likely required to set aside at least the Basic Retirement Sum (BRS) amount before you can use the excess savings in your OA.
For more details, you can refer to the Terms and Conditions for Use of CPF under the CPF Housing Schemes.
With these considerations, you would have undergone the first funnel in your decision making process of whether it is viable for you to retain your existing HDB. Naturally, having no outstanding loan will help in reducing your financial burden.
Now that we have examined certain regulations that may impact your financial position, let us take a more in depth look at the profitability analysis between keeping your HDB flat for rental income stream or selling it off in the secondary market.
Let’s talk about selling. This can go both ways - either you are looking to downsize, or upgrade. Some looking to downsize can be due to minimal occupants and age, as discussed in our recent Aging Population article; whereas for younger homeowners, most are looking to upgrade to owning a condo.
One of the important points to note when it comes to selling is the age of your current flat. Though the HDB is an asset that follows inflation well, when it hits the 40-year mark is when it may start to become more of a liability than an asset.
If your flat is approaching the mark, it may be time to take a look at its value and really consider your next move before the real possibility of it depreciating gradually.
In addition, everything has an intrinsic value and how much people are willing to fork out for it. Sometimes, you may chance upon a golden opportunity when these prices get blown out of proportion. If you are able to sell your property above its intrinsic value, you can then allocate and make good use of the additional profits for your new property.
This brings us to the next option: to keep your HDB for renting purposes. Landlords are aware that rental yield is one important element when it comes to renting out an apartment.
Most people use Gross Rental Yield, which is calculated as the income you earn from renting out your property per year as a percentage of the property’s total value. A property with a value of $600,000 earning $1500 a month will have a gross rental yield of 3% per annum.
Gross Rental Yield however does not take into account the property expenses you incur as a landlord which have a bearing on your eventual profits. Thus, it is important for prospective landlords to understand what are the underlying expenses you would need to incur, so as to properly quantify your return on investment.
The following are some major expenses to consider:
1. Recurring Agent Fees for lease renewals
2. Maintenance and Repair above a deductible sum
3. Home Insurance
4. Property Tax
5. Rental Income Tax
6. HDB Conservancy Fees
There are a couple of ways to check on how much monthly rent you can receive for your HDB flat type. HDB provides a free online service that allows you to check the market rental rates for whole HDB flats rented out by flat owners in the past 1 year in a particular HDB town or street/block.
Alternatively, you can also refer to the asking rental rates on advertisements by other landlords in your vicinity. HDB also regularly updates a median rental rate table for different flat types across HDB estates.
Another less tangible thing that many tend to overlook is: are you ready to be a landlord? Though it may sound as simple as sitting back and collecting money, being a landlord is not always a fuss free position.
Firstly, there is no guarantee that your HDB flat can always be rented out and occupied. The rental market situation can be uncertain due to economic factors like COVID-19, and being over-reliant on your rental income can become a potential future pitfall.
Having your property empty for months also has an adverse effect on your rental yield and thus you might be receiving lesser gains than you would have expected.
It is crucial to ensure that even without rental income, you are able to pay off monthly loan obligations easily or in the event of job loss, that you still have sufficient savings to pay for up to at least 6 months of your outstanding loans.
Apart from these financial implications, there can be occasions where you may meet with tenants who are not easy to deal with or encounter problems like receiving payments late or having disagreements regarding repair issues.
A good thing to note is that with 2 properties, you are free to choose which property you want to rent out. If the HDB is not doing so well, there is an option of moving back to your flat and renting out your condo as well.
Let’s take a look at a case study below:
Assume that your opportunity cost of selling your HDB in 2021 = $110,000
Average rent per month if not selling = $2250
(Opportunity Cost refers to the profit that is lost when you choose one alternative over the other. For example, by selling your property now you can earn $410,000. However, 10 years down the road, the same property may only fetch the price of $300,000. The difference of $110,000 will then come out to be the foregone opportunity cost between the two scenarios .)
Over the period of 8 years, you will make ($2250 x 12) x 8 = $216,000 in rent. This may sound like a much better option already, but let’s deduct some of the underlying costs you might incur such as property taxes, non owner occupied tax rate, agent fees, rental income taxes, home insurance, maintenance etc.
$216,000 (rent) - $110,000 (sale) = $106,000 of ‘profit’
Again, assuming the average costs of the below are:
Annual value of property of $27,000 x 10% non-owner-occupied rate = $21,600
Agent fees of 2 years = 1 month commission, thus 8 years: $2250 x 4 = $9000
Rental income tax (10% tier) = $27,000 x 10% - $9000 (Agent Fee) = $12,600
Service and Conservancy Charges: $7488
Home Insurance of $200 per year: $200 x 8 = $1,600
Maintenance of $500 per year: $500 x 8 = $4000
Total underlying costs: $47,288
Final net profit:
$106,000 - $47,288 = $58,712
Imagine that you’ve purchased a second property valued at $1 million. Your ABSD of 12% will then work out to be $120,000.
After taking into account the underlying costs and taxes to be incurred (not mentioning the time and effort required as a landlord), it can be possible that renting out your HDB may not be the most lucrative solution. There is also a chance that the opportunity cost lost through depreciation can be reinvested somewhere else to produce a better rate of return.
However, the above example with the provided figures is not all-encompassing as it is based on a selected estate and also does not take into account certain variables. The rate of depreciation of your flat and hence opportunity cost of a non-sale depends on the price sustainability of the HDB area; while the rental income and yields are largely dependent on the rental market demand and supply in that area.
At the end of the day, there is no right and wrong or clear black and white in this situation. Some may feel more compelled in choosing to keep and rent out over selling as they feel more secure and prefer having an almost fixed monthly income whereas others may not find the option as appealing, and would rather sell off their flat at a good price and upgrade immediately.
Every property owners’ situation is unique and each has their own challenging decisions to make. What is most important is to analyse your situation with consideration of your financial position along with prevailing market trends in mind, so as to find the most suitable solution for you.
With each option having its own pros and cons, which would you choose in the grand scheme of things and why? Let us know what you think, and as always, feel free to submit topics you would like us to cover next.