Asked on 02 Feb 2020
How is this a good investment, considering that there's so many other fees that need to be paid? Is this truly profitable?
As a savvy investor, you do not want to pay ABSD. Once there is ABSD involved, it's very hard to make money in current situation.
How not to pay ABSD? simple answer is husband and wife buy 1 each. One own stay one for investment.
Choosing the right property is most important from the start. The right property will be able to command better rental rates and equate to profitability in the long terms. My trusted property consultant has helped to achieve this for my past properties.
Profit = Revenue - Costs
In general, unless the rent is super super low, it’s very likely that even at a 60% loan, you can make some money.
A 700sqft apartment at Commonwealth Towers sells at around $1900-2000 psf, and rents for about $5.50 -6 psf (monthly rent), which is $66 - 72 psf (annual).
On first glance, if you look at this 66/1,900 = 3.5%, which probably not going to make much sense once you include ABSD, income tax (on the $66), property tax etc.
But the key is leverage - if you can borrow money from the bank (let’s assume interest around 2% and you can borrow 60%), the equation changes. Instead of 1,900 psf, your cash commitment is only 760 (need to add absd), and now you are making $66 / 760 = 8.6%. Now we just need to tweak the $66 a little: reducing it to take into account the bank interest, property tax and some furniture depreciation, and tweak the 760 a little (need to add ABSD).
Generally we don’t take into consideration income tax, it’s a good problem to have! (it means you have income!)
There’s huge variability across properties in Singapore (the correlation between rental psf and price psf is not super strong), and you could probably find something that can give you 10%. However rental is highly volatile (it’s been going down last few years), and price will probably only appreciate slowly.
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