8 Criteria In Choosing A Right Property For Rental Yield
One of the most significant advantages of property, as an asset class, is that it can generate rental income.
During the early years, rental income can help to offset costs such as taxes and mortgage interest rates.
In the later years, when your home loan is paid up, the rental can ensure a constant stream of passive income during your retirement.
However, not just any property will do when it comes to rental income. Some properties are easier or harder to rent out, while others – due to inherent factors like higher costs – are less profitable as rental assets. To avoid the common pit traps, consider the following criteria when choosing a property for rental:
Rental Rates and Demands of Surrounding Properties
Before committing to a property with good rental yield, it is essential to research on how well the nearby projects are doing in terms of occupancy and rental rates.
For example, to determine if Stirling Residences is a good buy, you can look at the relatively new Commonwealth Towers and recently T.O.P. Queens Peak. While these two projects are directly linked to the Queenstown MRT, Stirling Residences is only 3 minutes walk away with NO MRT noise.
A quick check shows that both projects enjoy high rental transaction volume.
Based on the latest rental transactions, a 441sf level 28-30 one-bedder at Commonwealth Towers can fetch $2,500 and a 431sf Queens Peak level 19 floor unit at $2,700. A level 19 441sf unit at Stirling Residences was sold for $844,000. Using $2,500 to $2,700 as a guide, we would be looking at between 3.55% to 3.83% rental yield for Stirling Residences. I must say this is a very decent rental return. Perhaps Stirling Residences might fetch a better rental rate because it will be the newest condo when it T.O.P. in a year or two.
Do take note, for newly T.O.P. projects, there will be fierce competition for tenants. Supply and demand will dictate the rental rates. Tenants have a lot of choices and can afford to pick and choose. For landlords who want to rent out fast, they must be willing to accommodate more requests and accept a relatively lower rent. For those who are willing to wait until most units are taken up, they can then demand a higher rent. Also, rental generally goes up after the first cycle, when supply is lower.
Size of the Development
There is always an ongoing debate, whether smaller or larger development is better.
My take is, for investment purpose, go for a bigger development with between 500 to 1,000 units or even more.
While larger developments mean more competition for tenants, it is more than compensated by better, bigger and more facilities.
Mega project such as Treasure at Tampines, with 2203 units, boasts of 13 (!!) pools, 9 (!) function rooms, a 2500sf 24-hour gym, reading room and culinary studio.
Another best-seller, Parc Clematis (1468 units), will have 400,000sf of facilities, that include beach pool, three 50m pools, four themed clubhouses, gym, dance studio, two tennis courts and two basketball courts!
Life will never be boring in such large developments! Most tenants will love where the action is.
Age of the Development
Another perennial question is: is a new launch or resale condo a better investment choice?
I have covered at great length on this topic in my article on “Investment Property: 6 Reasons Why New Launch Is Better Than Resale”
Many buyers are fixated on the price PSF, hence opt for a resale condo, but the savvy investors look past $PSF (see my article on “4 Reasons Why People Still Buy When The Price PSF Is So High”).
Based on my experience, the newer condos, with nicer facilities and designs, are easier to rent out. While you may be paying more in terms of PSF (but lower in gross price), the rental yields are better. It is our human nature to like all things new and nice.
Tenants also prefer newer condos which give them lesser worries about breakdowns and repairs, especially with air-conditioners and appliances.
Upkeep of Facilities
This is a concern for older resale condos if you want to buy them to rent out. You need to ensure that advertised facilities, such as gyms, BBQ pits, pools, are well maintained. Don’t underestimate the problems this can cause you as a landlord.
In 2017, for instance, the lifts at People’s Park Complex became notorious, as some residents had to wait as long as one hour to get home. It was a nightmare for the landlords, as some tenants demanded to renegotiate, claimed they had been cheated for renting there, etc.
Sometimes it can also happen to newer condos, as in the case of The Seaview condo. On July 3 2015, the residents of sued the developer, architect and contractor for $32m over swimming pool tiles popping up, falling concrete blocks, foul odours, sewage issue and various other defects. Eventually, the case was settled out of court for an undisclosed figure.
The management fees for most condos are around $300-400 per month, but this can vary widely. Maintenance fees can impact your rental yield, so it’s often the tie-breaker when comparing between two different condos.
For example, if condo A and B both cost the same, and have the same location and facilities, then the one with the higher maintenance fees would be the worse choice.
As maintenance fees are not immediately advertised in listings, you’ll have to ask to find out.
It is interesting to note that maintenance fees are generally lower for larger and newer condo projects.
For instance, the maintenance fees at Treasure at Tampines starts from $150 a month for a 1-bedroom and up to $264 for a 5-bedroom unit.
For the 1410-unit Parc Esta, the fees range from $170 for a 1-bedroom to $230 for a 5-bedroom.
At the 23-year-old Jervois Lodge, with only 108 units, the maintenance fee for a 958sf 2-bedder is a whopping $583!
Accessibility and Amenities
Don’t just check for nearby MRT stations, shops, etc.; check if the accessibility and amenities are also relevant to your intended tenant demographic.
For example, an MRT station is often one of the most important considerations for students, who likely don’t drive (and can’t afford to keep using Private Hire cars).
On the other hand, an affluent expatriate, who wants to rent in a peaceful enclave, may prefer not to have the noisy MRT station nearby (they probably drive or use Grab and will never use it anyway).
Likewise, take an integrated development like Marina One Residences or DUO Residences. These have offices and high-end retail within the same development. While impressive, it may not mean much to families whose priority is to have their children near schools (not the case for either of those developments).
Know who you’re renting to, so you can properly gauge whether the amenity or accessibility is an issue to them.
Appropriateness of Floor Plan and Layout
Some unit layouts are better for rental. For example, if you want to live in the same unit while also having a tenant, a dual-key layout may be a viable option (as your tenant will have greater privacy).
For locations near to international schools or in the more upscale neighbourhoods (such as Holland and Bukit Timah), where the tenants are more likely to be families, it would make more sense to buy two or three-bedroom units (if budget permits).
On the other hand, for city-centre developments, like The M or Marina One Residences, which are more than likely to attract singles or couple professionals, a one or two-bedroom units would make more sensible investment options.
In many new condo projects these days, developers have come up with many different layouts to cater to buyers with different needs and budget.
For example, at Stirling Residences, there are two-bedroom (635sf) and two-bedroom premium (678sf). The main difference between them is, the former has one bathroom and the latter two. The price difference is about $70,000. The question is, which would you choose for your investment property?
If you’re uncertain which floor plan is better suited to you, drop me a message. I can help to explain which configurations or layouts are better for different tenants.
Picking the Right Unit
The goal of buying an investment property is to keep the costs low to maximise returns. Even after shortlisting the best projects that tick all the boxes, the question is, how do you pick the right unit for best rental returns?
Investors don’t always go for pool-facing units, highest floor units or unblocked view units. They usually come with premium price tags, but do they necessarily give you a better return?
We know with every floor up you would be paying more; in the case of Stirling Residences, it’s about $6,000 per floor. So would you choose the highest level you can afford or the lowest floor at a much lower price?
One of my clients bought a 2nd floor one-bedroom unit at Waterfront Isle from the developer for $577,000. The view sucks because it faces the HDB flat, which was so close I felt I could actually touch it (sorry, I know I am exaggerating). But guess what? I never have a problem helping my client to find tenants from day 1. The rental yield is 4.2%. A 12th floor unit, on the other hand, that costs $40,000 more is also renting out with the same rental yield.
I will discuss in more details in another article how do you pick the right unit.
Future URA Plans
Knowing the future URA plans nearby is also helpful to foresee the catchment of tenant pools. Chances of capital appreciation are also very high.
For example, under the URA Master Plan 2019 for Upper Bukit Timah, there will be a new Transport Hub near the Beauty World MRT. That could interest investors in properties like Daintree Residence and Verdale.
Finding the right property for good rental yields sometimes is not as straightforward as it seems. If you would like to know more, you can make a virtual appointment with me via the calendar below or drop me a note.
Danny Han has been a licensed real estate agent since 2005. He also had five years of experience as a financial consultant. The insights and knowledge he shares in his blogs are the results of years of experience in helping many of his clients in their Property Wealth Planning.
Prior to becoming a real estate agent, Danny was a full-time church pastor (don’t be shocked!) for 23 years. Even now, he is still actively involved in church work and preaches regularly. He has also made six mission trips to Myanmar to-date.
Danny is a foodie, so during his spare time he would go with his kakis to try different “CNG” (cheap and good) food. (Be sure to check out his Holland food blog in this site).
Do feel free to drop him a Whatsapp message for a non-obligatory discussion if you are planning to grow your property wealth.
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