Advice

I’m Looking To Buy A 3rd Property To Generate $10k Per Month Rental Income: Which $1.5m Property Is Best?

Stacked
February 3, 2023
12 min read
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12 min read

I kind of like the way you analyze things. And hence this email

Am looking to set up a pool of assets to generate passive income. Am hoping to generate 20k sgd of passive income a month (10k from residential assets and another 10k from CPF and dividends from shares)

Am currently holding on to 1 property outside Singapore (where I live in it) and 1 property along River valley generating 7k sgd a month. Am looking to buy 1 more property that can generate about 3k sgd a month

This pool of assets to generate passive income is for retirement planning and hence the next property I am looking at (which has to generate 3k sgd a month) has to be able to rent out easily. Unlikely I will sell. Am planning to buy and hold

My budget is around 1.5m sgd. Do you have a specific recommendation? 1 of the main requirement is to be able to rent out easily for years to come (this asset is meant to finance my family’s retirement)

Thank you

Hi there,

Happy to hear that you like our work.

It’s great that you have a diversified portfolio which reduces your risk, especially with stable sources such as CPF. In this current market where rental rates are on the rise, finding a $1.5 million property that will generate a $3,000 rental isn’t the issue. The challenge really is if the property can continue to generate this rental amount in the long run.

So even though you are planning to rent out the property for the long term and have no plans on selling it anytime soon, it is still important to purchase a property that can hold its value. It will not make sense to earn a decent rental income but eventually, lose a huge chunk of your capital.

Before we go into it, let’s see if it is sensible to wait and see

It’s no secret that property prices are at an all-time high now and thus purchasing an investment property in the current climate may seem quite risky.

While we understand that rental rates are also at an all-time high, we have to factor in the high-interest cost today as well as the impact that a possible upcoming recession could have on the property market.

This leads us to think about two scenarios:

The first scenario involves buying a $1.5M property today and renting it out. Gross rental is $4,700 per month, but after accounting for costs, the net rental gain is just around $3,250 per month. This translates to $78K in rental over 2 years.
The second scenario involves waiting 2 years to see if prices do fall. We don’t have a crystal ball for this (obviously), but let’s say we assume property prices fall by 10%, which means you’ll be able to spend just $1,350,000 instead. This translates to a “savings” of $150,000 – about twice the amount that you could earn from renting out in the first scenario.

We also ran an analysis to see the difference between both scenarios when it comes to breaking even – assuming no capital appreciation in both cases and that interest rates are 4% within the first 2 years and 2.5% thereafter (assuming a recession results in lower interest rates).

The outcome is a difference in around 4-5 years, where buying today at $1.5M would take 4-5 years longer to breakeven as compared to buying it at $1.35M 2 years later.

Ultimately, the decision to wait depends on whether or not you believe that the property market would be impacted by an upcoming recession. It also depends if you are willing to take the risk in buying today when there are signs that we are at a market high now.

If you’d like to check out what your projected returns look like, you can use the tool that we created below:

Moving on, let’s consider scenario 1 in greater detail.

Costs of purchasing a third property

Although you will be purchasing your third property, the overseas property does not add to the ABSD count so assuming you are a Singaporean, the ABSD payable on this next property will be 17%.

As there is no mention of how you plan to finance the property, we will presume you’re paying the property in full.

Description	Amount
Purchase price	$1,500,000
BSD	$44,600
ABSD	$255,000
Total cash/CPF required for the purchase	$1,799,600

As BSD and ABSD are payable within 14 days after you’ve exercised the OTP, they will have to be paid in cash first as there isn’t enough time to apply for the withdrawal from CPF. If you have sufficient CPF funds to pay for it, the cash will be reimbursed at a later date.

Now that you are clear on the funds necessary for the purchase, here are 3 developments that could make sense. Do note that these developments are recommended just based on the little that was shared and there could be better-suited developments for you.

Parc Esta

Parc Esta is a 99-year leasehold project situated in District 14. It is a mega development with 1,399 units of 1 – 5 bedroom types spread across 9 tower blocks. It just obtained its TOP last year but its lease starts in 2018, making it 5 years old.

The project is conveniently located just across the street from Eunos MRT station, and it is also within walking distance of both Eunos Crescent and Geylang Serai Market and Food Centre. There are also numerous other eateries, supermarkets and miscellaneous shops all within a 10-minute walk from the development so you’re well covered in terms of food and basic necessities, which would mean high rentability in terms of tenants.

Price

These are some of the recent 2-bedroom transactions:

Date	Size (sqft)	No. of bedrooms	PSF	Price	Level
Jan 2023	635	2	$2,441	$1,550,000	#08
Dec 2022	829	2	$2,105	$1,745,000	#09
Dec 2022	743	2	$1,963	$1,458,000	#04
Dec 2022	635	2	$2,173	$1,380,000	#17
Nov 2022	700	2	$2,201	$1,540,000	#09
Nov 2022	829	2	$2,051	$1,700,000	#05
Nov 2022	635	2	$2,173	$1,380,000	#15
Nov 2022	581	2	$2,219	$1,290,000	#11
Nov 2022	743	2	$1,950	$1,448,000	#03
Oct 2022	635	2	$2,181	$1,385,000	#15
Oct 2022	635	2	$2,078	$1,320,000	#11
Oct 2022	840	2	$2,132	$1,790,000	#16
Oct 2022	840	2	$2,011	$1,688,000	#05

Source: Edgeprop

The units we have highlighted in bold are the 2 bed 1 bath units which mostly fall within your affordability. With $1.5M, you might still be able to get the smaller 2 bed 2 bath on a lower floor.

The current average rental yield for a 2 bed 1 bath unit:

Average price (2022)	Average rent (last 6 months)	Average rental yield
$1,309,911	$4,702	4.3%

Given that the rental market is booming right now, the rental yield will be inflated. If you want to be conservative and use a 3% rental yield instead, the average rent would be $3,274.

Floor plan analysis

There are several different sizes and layouts for the 2 bed 1 bath units, however, as an example, we’ll talk about the 581 sq ft unit. It is averagely sized for a 2 bed 1 bath and comes in a dumbbell layout which we prefer as it is more efficient and has less wasted space. Plus, it is better for renting to tenants given it gives better privacy to occupants of both bedrooms.

Also, both bedrooms are decently sized and can fit a double bed. The kitchen is nicely tucked in a corner so it is possible to enclose the kitchen but given your priority to rent this wouldn’t really be an issue. For all the 2 bed 1 bath layouts, there is no direct access to the bathroom from either room.

There are also a few different sizes and layouts for the 2 bedroom premium units (2b2b), this is the floor plan for the 710 sq ft unit which also comes with a dumbbell layout. All the 2 bedroom premium units have either a long balcony that extends from the living to the master bedroom or two separate balconies, one in the living and one in the master. The L-shaped kitchen maximises the available space and can also be enclosed if you prefer but that would leave little space for dining.

A 2b2b unit will definitely be preferable if you can find one within your budget as the buyer pool will be larger in the event you decide to sell since this layout caters to both own-stay buyers and investors as compared to a 2b1b which targets mostly investors.

Performance

We can see from the graph above that prices at Parc Esta are moving in line with prices of the overall 99-year leasehold developments in Singapore and are performing better than that of 99-year leasehold developments in District 14. This does not come as a surprise given that it has recently obtained its TOP.

If you were to take a look at the projects in the vicinity of Parc Esta, you’ll notice that the majority of them are freehold boutique developments. As we have mentioned many times before, usually with these boutique developments, their transaction volumes are low which hinders their growth rates. Although you may get decent rental yields since the entry price is low, the potential for capital appreciation is also lower.

Seeing that there is a lack of good-sized developments with a healthy unit mix in the Eunos area, we believe Parc Esta will remain relevant in the long run.

Where are potential tenants coming from?

Parc Esta is just one MRT station away from the commercial hub at Paya Lebar Central which houses numerous office buildings such as the Paya Lebar Quarter (PLQ 1, 2, 3), Paya Lebar Square and Singpost Centre. It is also just a few stations away from Changi Business Park.

Citylights

Citylights is another 99-year leasehold development that is situated in District 8. It is a mid-sized project with 600 units consisting of 1 – 4 bedrooms as well as townhouses. It obtained its TOP in 2007 but its lease started in 2004, making it 19 years old.

The project is conveniently located just across the street from Lavender MRT station. There are lots of amenities just a stone’s throw from the development such as Aperia Shopping Mall, Kitchener Complex, North Bridge Road Food Centre and a wide variety of cafes and restaurants in the shophouses and HDB clusters nearby.