Thursday, February 25, 2010

Renting and owning a property

Many decades ago, when properties were inexpensive, it was advantageous to buy a property to live in, rather than to rent a property.

The situation has changed. Property prices are high. It may be possible to find a rental property that cost much less than the installment payment to buy a home. In this situation, renting a property may be a more attractive option.

One big advantage of renting a property is the flexibility. You can rent a property that is close to your place of work and reduce the travelling time and expenses. If you change your workplace, you have the flexibility to move to a new rented property.

Many people still like to invest in properties to earn a rental income. This is not as attractive as in past years. It is a hassle to rent out a property and to meet the requests of tenants on repairs, maintenance and other issues. The tenant may not take care of your property or may delay paying the rental.  You also have to pay commission to get a tenant.

After deducting the expenses, the net yield on a property is between 2% to 3% (and not counting the hassle that you had to go through). You hope that the yield can be enhanced when you sell the property for a capital gain. But this is not certain, as the value of the property will drop due to age and a shorter lease period. While the price of new property may increase, the high rate of  increase does not apply to old properties.

It does not make sense to own a property for renting out. It make better sense to be a tenant. This situation is likely to persist until property prices drop to a more sensible level.

Tan Kin Lian


Owner said...

Property prices new or old will not drop drastically.
This is because of interest rates.

As long as interest rates remain low,
prices will remain on the high side. The only event that will make it drop will be natural disasters and war.

Property or land will always be another asset class. There is REITS, but they are not freehold and can be de-listed.

Renting as a tenant has its own issues too. Minimum period is usually 1 year with 2 months rental deposit.

Rent : $2500 ( fully furnished )
Annual : $30,000

Purchase Home : $500,000

With $500,000 you can rent for 16 years, provided rental rates remain constant.

Would it not make sense to buy a home instead? You get to have property as an asset class.Decorate it to your taste, will it away to your loved ones etc.

With rental, you would need to incur costs to buy REITS if you want a "balanced" portfolio.

Land has always been a measure of wealth and as a resource since humans understood economics. I do not think it will change. Wars have begun over issues of land.

We cannot time the markets too.

Joshua Ng said...

I think renting is fine as a short-term measure, and if the tenant is able to invest the excess money at a nice return (above annual inflation rate)

Renting is still dead money. I am looking at my tenants struggling to save enough to buy a property someday. I believe if Singapore is not careful, there will be more permanent renters around for a long time.

Anonymous said...

It is a hassle to rent out a property but also a hassle to rent a property.

Landlord said...

Renting out properties allows you have a passive income stream.

It will not make you rich but you will have cash to pay bills. Provided of course the property is fully paid up.. and you dont have kids and old folks to look out for.

$2500 per month is not fantastic, but it beats working your butt off as a taxi driver. Just wander around MRT stations and window shop.

I wont be surprised if there is a sizable number of people doing this.

Anonymous said...

Well, if you expect a higher return in other investments, it might be a good idea to rent instead of purchase a property. I think that's what TKL is talking about. BTW, I believe that $2500 rent doesn't include the bank interest/payments and maintenance cost.

Anonymous said...

REX comments as follows,

this is the first time i think i have seen someone advocating renting instead of purchasing. Somehow it is against the flow of the Singaporean culture.

I think most singaporean by the time they reach about 50 would be owning some kind of property, it will be intresting to see what kind of society we will have if majority people in age 50 and above are still renting properties. In some ways it can be advantages, because one will have more CPF money in the ordinary account since rent has to be paid cash. Another advantage is that legal fees, stamp fees, etc of at least $20,000 or more would have been kept intact in the ordinary account, since renting is very simple and no lumpsum hidden costs need to be paid. Come to think of it, renting a property might actually turn out to be good for old age as one will have a LOT more of CPF intact and untouched for use in the golden years.

But how to get rid of the psychological burden , the feeling that you never own your own propoerty, this is a mental hurdle to clear...


Anonymous said...

As a retired banker and over 60 years old, my advise to everybody is buy a "home" which you can afford.

Difficult to feel homey in a rented premise.

Timing market is for investors.

Conventional said...

Yes, I agree with retired banker.

Human beings need to have a sense of permanency, and belonging. That is why, the concept of having 3 to 4 jobs in a lifetime is very unsettling. This is perhaps why TKL suggests that renting is better: we do not know where our new jobs will be located.

I suppose we could regard a home just like a car. After 5 years, get a new one.. after all, the finance company or bank is actually the true owner, similar to the landlord!

But to spend $500,000 over 16 years and not own it?..( even though cars cost as much )
Somehow, I cannot fathom.. just like what "Rex" says..

Anonymous said...

if you rent a house for prolong period of time, you are subsidizing your landlord for his monthly instalment.

to get a decent return on property investment, one must not overpay for the property as otherwise it becomes a liability. The book "Rich Dad Poor Dad" is something that we all can learn from it.


landlordchoice said...

It is better to own a property than just renting it. In the end of time the property is not yours! So save a lot of money and buy a house!

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