It is not uncommon to see property investors purchasing old properties and giving them a refurbish before selling them out for a profit. However, in order to successfully pull this off, one has to have both the knowledge and experience in this field to overcome any obstacles. Here are some factors to consider while buying old properties in Singapore. You can also seek help from trusted commercial real estate developers like Frasers Property.
Cash flow considerations
Properties that tend to have cash flow considerations are those which have less than 60 years remaining to their lease. As the lease is less than 60 years, you will usually face some challenges in obtaining a full loan-to-value (LTV) from a bank when getting a mortgage.
Based on the LTV limit in Singapore, a bank can only lend you up to 55 percent of the properties’ purchase price or valuation of which the lower amount will be considered. To put this into perspective, a S$1 million home can only yield up to S$550,000 of bank loans. If the remaining lease is deemed to be too short by the bank, the maximum loan out will be reduced to 50 percent or even less.
Given a property with a short lease, with the LTV imposed at 50 percent. The amount to fork out would be tremendous. For example, a 1,500-sq-ft unit apartment that is sold for just S$650,000 sounds good. But having the LTV at 50 percent only would mean that the down-payment is a whopping S$325,000 or more. On top of this, there would be stamp duties that you as a buyer must settle.
Furthermore, if the bank grants a lower loan quantum, the CPF may act as another obstacle if you are looking to use your CPF OA savings to purchase the property. This suggests that the cash payment might attribute to at least 30 percent of the property’s purchase price.
As such, cash flow issues make up a major portion of the things to take note of. Even though old properties are worth the buck, you have to delve deeper into the details and not just look at the overall price.
Maintenance issue for cases with lack of management
When purchasing old condominiums, it is essential to see if the management has been keeping track of the maintenance. Some management councils may give up on old properties and not maintain the facilities such as pool, clubhouse, gym, or any other amenities.
This lack of maintenance could lead to the property having a poor outlook and orderliness; which could eventually chase away some potential buyers of the property.
Although many of us would already expect some sort of expense for renovation purposes, we must take note that renovation can only be done for your own unit and not for communal facilities. Another thing to take note would be the maintenance fees, some older condominiums may have higher maintenance fees due to the higher propensity for things to break down.
Getting an inspector to check for lead paint is essential if you are buying a property that was completed before the mid-1980s. Thankfully, lead paint is not used nowadays due to the high toxicity and health risks that it poses to younger children and the elderly.
However, as lead paint was commonly used from the 1950s to the 1980s due to its superior drying rate, we need to consider the cost of replacing the paint for units with lead paint.
Wood flooring prone to fungi and rot
For units with wood flooring, take note of the areas which are usually hidden in plain sight. Examples of these areas are under carpets or mats. Different shades of wood on the floor may indicate that the wood has been replaced recently.
As wood is not waterproof, it can allow the growth of bacteria and fungi; especially mushrooms which can grow ideally in Singapore’s humid weather. It is common to see mushrooms thriving on floorboards or on door frames.
This problem is usually solved by replacing the infected floorboards or door frames completely, or else it may spread to other parts of the house. This replacement may cost up to five figures for a decently sized house around 1400-sq-ft.
Although the concern about internet access is mostly eliminated in this day and age, some old non-landed properties may not have the necessary set-up points.
The cost of installing a set-up point is not likely to be high, but since it takes time to install the set-up point, it will not be feasible to move in immediately.
Not enough time to earn back your investment
When purchasing an old leasehold property to rent out for passive income, you must take into account whether you’ll be able to earn back your losses. In order to prevent a problem of shortage of time, it is recommended to look up the previous rental rates for the area of interest and take 70 percent of the average rates.
For example, if the rental rates were S$3,700 around the area, we assume that you will get roughly S$2,590 a month. In order to calculate safely, an underestimate is usually used; also we have to take note that the age of the unit will also cause the rental rates to plummet.
For this aspect, it is best to consult a qualified financial advisor or wealth manager for advice. Even though the property agent can offer some advice, consulting a financial advisor may give you insights on matters from a broader perspective.
Zone changes may cause investments to either succeed or fail
Due to the possibility of zone changes around Singapore, there may be advantages or disadvantages. The Urban Redevelopment Authority (URA) is in charge of rezoning matters which may happen anytime. For example, in 2015, Geylang was rezoned from existing institutional/residential land parcels to commercial sites.
These changes can affect the property buyer either adversely or for the better in the long-term. For the case of Geylang, residential owners may find it advantageous to sell their units in batches to developers who specialize in commercial property. (Commercial land is usually more valuable than residential land.)
No matter what the situation, buyers are advised to read up on the URA Master Plan if they want to buy an older property. Next, if the old property is in an area that is not flourishing or does not have many new additions to it, the probability of depreciation could be higher. Such places could contain other old properties that are much the same, which can greatly increase the competitiveness when trying to sell off the property in the future.