You may have heard that there are several ways to make money in real estate.
Making profits from property flipping (admittedly harder to do today).
Earning huge upside upon an en bloc sale of your estate.
And renting out your unit – which, coincidentally, happens to be our hot topic of the day.
John Stuart Mill, 19th-century philosopher and economist, once said this:
Well, costs of living may have been far less expensive back in the 19th-century, but you can bet on one thing – there’s always a way to make some money as a landlord.
That said, there are also a number of pitfalls that often make renting a unit out much harder than it actually should/could be.
In this piece, we explore the advantages and disadvantages of renting out a unit, as well as our top 10 tips for a (relatively) hassle-free experience.
Let’s dive into it!
Advantages of Renting out
Rental Income
I’m sure we can all agree that this is the biggest benefit to renting out.
With tenants, you’ll receive a tidy sum every month that’s bound to cover a reasonable portion of either any outstanding mortgage on your property, or any other expenses for the month.
Hard to argue with a consistent stream of passive income like that, which feels even better if you own the property outright.
Tax Benefits
Every bit of rental income you earn is subject to income tax.
Fortunately, the Inland Revenue Authority of Singapore (IRAS) also offers the convenience of pre-filled rental expenses to those who rent out their properties.
Simply put, in the process of producing rental income, some expenses incurred may be claimed as tax deduction.
These expenses include:
- Costs to secure tenant (agent fees, stamp duties, etc)
- Housing loan interest
- Property tax
- Certain repair and maintenance costs
- Replacement costs for existing furniture and fittings
- Fire insurance premiums (touch wood…actually, don’t!)
Longer-term Appreciation of the Property
You might be expecting another ramble about how you can profit in the long term from the appreciation of the property when you sell it in the future.
While that’s true too, here’s another interesting angle…
Some circumstances may cause you to want to ‘panic-sell’ the property; maybe housing prices in your area are taking a dip, you found a nicer place, or you just got laid off from your job and you need that money urgently, etc.
In which case, the passive returns from renting out would discourage you from selling off the property and instead wait out the longer-term. And as we know, a majority of housing in Singapore do increase in appreciation gains as the years go by. While subject to outliers, this scenario is often a win-win monetary wise.
(Besides, sell too early and you might be doomed to paying a hefty Seller Stamp Duty fee)
Gains in Equity
In the words of Wikipedia –
“Equity is ownership of assets that may have debts or other liabilities attached to them”
If you’re still paying the mortgage for the property you just rented out, your equity is considered low.
As the months pass, however, you will be able to use monthly earnings in rent to make mortgage payments, effectively building equity (owning more of the property) without having to pay the mortgage yourself – especially if you have good rental yield.
You are Your Own Boss
At the end of the day, you have the flexibility of managing your own investment/rental returns on your own terms.
It’s your call to decide on matters like rent rates, expenditure, contracts, and terms. You can think of it as your mini business that generates a good portion of passive income.
Disadvantages of Renting Out
Paying Income Tax on Rental Received
“Wait, didn’t you mention I would get tax deductions?”
Yep, you will get tax breaks, but unfortunately, there’s no running away from income tax.
Prepare to be taxed on the net amount left of your rental income, after excluding any allowable expenses (for tax deductions).
Risks and Legal Issues
Renting out your property never comes without risks.
For example, you might get litigated by a low-balling tenant who got injured on your property.
Or maybe the unit got vandalised by a tenant you had to later evict, or the tenant is always submitting his/her payments late – all these, amongst many other possibilities.
To try and mitigate the consequences of these issues, you would need to keep yourself up-to-speed on current property laws and legislations that could help you ‘fight the case’ should the unthinkable happen (hint: it happens more often than not)!
Extra Costs to Consider
Even with tax deductions, there are some rental expenses that can’t be claimed.
Some of those expenses include:
- Costs of addition of extra furniture and decorations
- Home insurance
- Renovations to the property
- Costs of securing your first tenant – ie. agent fees, advertising and legal expenses amongst many others (good news though, these costs are claimable if incurred when securing subsequent tenants)
Time/Tenant-Management
Despite the benefits of a direct, passive income stream, it’s never a bed of roses when it comes to being a landlord.
This is especially true when it comes to the amount of time you have to invest in the role.
Some of the endless time-consuming scenarios include showing potential tenants around the property, screening potential tenants, coordinating maintenance and repairs, and even meeting with tenants for administrative matters.
Vacancies
Last, but not least, the emptiness of a vacant rental property.
As a landlord, vacancies may turn out to be a financial burden if you are still paying for the property’s mortgage and other related expenses.
On top of that, the longer the property is vacant, the more painful it gets for you, especially if it’s one of many similarly-tiered units in the same development – which would heavily reduce your chances of renting out the unit.
Top 10 Tips for Renting out
#1 – Keep IRAS in the Loop
When starting out on your rental journey, it’s vital that you inform IRAS on 2 things:
- The start of your lease – You have to inform IRAS within 15 days after renting out your property for purposes regarding property tax.
- Any increase in rent fee – Increase in rents on an existing tenancy agreement should also be reported to IRAS within 15 days of issue.
(You can inform them via their e-Stamping Portal here)
#2 – Access the All-in-One Calculator
IRAS also has a Rental Income ‘calculator’ on their website to help you tabulate your net rental income while taking into account your rental expenses.
This useful tool will help you in calculating these total gains/costs that could then go into your tax deduction claims.
#3 – Having an Online Presence
Apart from going door-door or getting the word out via friends and relatives, listing a rental property now is far easier thanks to the internet.
Instead of over-investing in (often useless) pamphlets and billboards, you now have the convenience of online listing/advertising platforms (social media groups included) to secure potential tenants.
#4 – Anticipating your Rental Yield
Rental Yield (%) = (Net Annual Rental Income / Total Property Cost) x 100
It’s preferable if your calculated rental yield lies in the 3% to 4% range. Currently, the average rental yield for shoebox units in Singapore is at a healthy level, with the average for central districts and non-central districts sitting at 3.64% and 3.57% respectively.
Furthermore, rental yields tend to vary in terms of districts and development types, so be sure to do your market research before listing your property.
Go too high and you won’t get any renters. Go too low and you risk losing profits in the long-run.
#5 – Checking Nearby Rental Prices
What’s the first thing that drives a potential tenant away? Exorbitant prices.
Imagine you were looking for a 400 sqft home in a region where rental prices ranged between $1,200-$1,500 a month, and you chanced upon that one 400 sqft unit priced at $2,000.
In most circumstances, you would pass on that unit (unless of course, it came with extra asset/service worth looking into).
To avoid being that one unit, here’s another life-saving tip – compare prices with nearby rentals according to unit size, type and amenities, before setting your own rental price.
#6 – Keeping Evidence!
If you are managing the rental alone (ie. without any third party help), it is wise to take note of your property’s condition prior to the tenant moving in, and everytime your tenant changes.
You can do this by taking pictures of major areas like the kitchen, living room and toilets, and share them with your tenants.
That way, if a tenant happens to damage your property, you can claim any necessary cost by seizing his/her security deposit, using the pictures as proof to rightfully claim your loss (this also encourages tenants to behave responsibly).
#7 – Furnishing the Place
Of course, you don’t have to spend on furnishing prior to renting out, although it is your responsibility to provide bigger ticket items like ceiling fans, fridges, sufficient lighting, etc.
That said, furnishing the unit does increase your chances of getting an eager tenant. Check out some of our top interior design tips here!
#8 – A Landlord’s Insurance
Chances are, you already have the compulsory HDB Fire Insurance Policy (which also entitles you to tax deductions as a landlord).
However, even though over 68% of fires occur in Singapore residential premises, fire insurance alone is often insufficient.
You see, there are other ways in which damages to property can occur, like wall cracks, mold damage, or even tenant misbehaviour.
As unlikely as some of them may seem at first glance, a landlord’s insurance with a relatively high degree of protection and coverage is essential nonetheless.
#9 – Screening Tenants Thoroughly
Opt to be thorough with tenant screening procedures, especially when it comes to background checks
Have a systematic procedure with a fixed set of questions in place from day 1. Run that exact same procedure with every prospective tenant, even if it’s your relative, close friend, or secondary school crush.
After all, the last 3 kinds of tenants you want are:
#1 – The Tenant who never pays his rent on time
#2 – The Tenant who gets regular visits by the police
#3 – The Tenant who never turns down the music
Thorough tenant screening is often bothersome. But you’ll will be thankful in the long term that the tenants you host are great ones.
#10 – Maintaining Open & Clear Communication
Effective communication between landlord and tenant is key in ensuring both parties are on the same page about their expectations and such.
If you have any doubts when running through a tenant’s supporting documents, don’t hesitate to clarify with him/her. In addition, have all tenancy agreements, terms and conditions in writing along with all necessary details.
Even after signing on the dotted line, it would still be helpful to maintain an open line of communication with your tenant.
BONUS: Specificity when choosing a unit
Also, here’s an extra (important) tip you deserve to be in the know about.
Should you choose to pick a property not for you to stay in, but for the sole purpose of renting out, it would help to take note of these pointers:
- Always analyse the actual lay-out attractiveness of the unit, and not just the square footage
- Know your tenant demographic
- Bear in mind how much your tenant is paying (certain number milestones prove hard psychological barriers to crack)
- Good rental yield doesn’t always mean good rentability (demand)
These tips are further explained in one of our previous articles, where we give you a more in-depth consideration of unit size when renting out.
Final Words
Before I conclude, one thing I haven’t yet discussed is renting out for the short-term – versus renting out for the long-term.
For those in the know, you’d understand by now that renting out for the short-term in Singapore is actually illegal.
Unlike other countries, all residential properties in Singapore are meant for long-term residence, and not for short-term tourist/visitor stays (ie. few days/weeks). For those wondering why, this regulation is actually in place to safeguard the safety, privacy and security of and local communities and homes.
In fact, ask any landlord, and they’d tell you that they prefer secure, long-termed rental deals that generally reduce the volatility and effort spent on securing and managing tenants.
At the end of the day, having a stream of much-needed passive income is always a welcome prospect, especially when you can claim certain tax benefits.
That said (and as you probably know by now), being a landlord isn’t always the easiest thing – so knowing what to expect in advance certainly sets you forward in more ways than one.
At Stacked, we like to look beyond the headlines and surface-level numbers, and focus on how things play out in the real world.
If you’d like to discuss how this applies to your own circumstances, you can reach out for a one-to-one consultation here.
And if you simply have a question or want to share a thought, feel free to write to us at stories@stackedhomes.com — we read every message.
Frequently asked questions
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