Should You Rent Your HDB Out To Rent A Condo Instead? How Rentvesting Could “Save” You Money

I follow a few property blogs, and the reason I do so is to look at different property landscapes and analyse the different financial strategies that come from these markets. One particular strategy that has caught my eye recently has been gaining prominence in Australia for the last few years.

I learned about rentvesting about a year ago, but this phenomenon has been around since the pandemic. This isn’t a research paper (thank heavens), so I won’t dive deep into its origins and when it started, but I’m quite confident this is something relatively new.

So what is rentvesting? Simply put, rentvesting is the concept where you rent where you want to live, and buy property to let where you can afford.

As far as I can understand, this strategy is best suited for established professionals who are able to afford renting in their ideal location, but have money to spare to invest in a rental property in an upcoming neighbourhood. Basically, in contrast to the typical Singapore property strategy, these investors’ first real estate purchase is solely for rental yields instead of their first property purchase being for their primary residence.

With some of my early-BTO friends’ flats reaching MOP desiring to live in condos, I thought this idea might be an interesting pitch.

Editor’s Note 27 June 2024: Updated table below to include rental income from the HDB.

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For many young adults in Singapore today, being able to own a condo on top of their HDB flats is an extremely expensive endeavour due to the high taxes and duties we have to pay (ABSD specifically). Most of the time, property agents would recommend selling their flat and using that money to buy a condo.

But it’s a hard pill to swallow, as owning an HDB flat is key to unlocking a high passive income to afford the bank loan for this lifestyle upgrade. The option of selling the flat to upgrade to a dual-key unit is also not an attractive one for those with bigger families.

There are large dual-key units that exist, but they might not fit every family’s requirements.

So would it make sense for those looking to upgrade their lifestyle to just rent a condo instead of buying one?

The benefits of rentvesting in the Singapore landscape

Clearly, Singapore is not Australia, and we are subjected to very different tax laws and property dynamics. Despite this, we can reap some similar benefits from using the same strategy.

Benefit #1: Not having to commit to debt for a lifestyle upgrade

I do always warn my friends about lifestyle inflation and the serious negative financial impact it can bear if you miscalculate your risk tolerance at any point in time.

Look, buying a condo is one of those shiny achievements many Singaporeans desire, but it doesn’t mean it’s a financially wise thing to do. Our generation will be subjected to very different property dynamics down the line, so there’s no telling if the success of our parents’ or grandparents’ buying condos would also manifest for us.

Buying a condo, or any sort of property, doesn’t always guarantee profit. We have established this with multiple analysis pieces; Condo price performances aren’t always positive, and while profitable winning transactions occur, there are also losing investments or ones where the original investors just barely break even.

We cannot account for all personal circumstances in our analyses, so it’s important for you to look at your own numbers and be realistic about what you can commit.

If you buy a small 3-bedroom in the Outside of Central Area (OCR) for a $1.3 million condo, you’ll have to pay a monthly mortgage payment of ~S$4,000+.

Let’s be real, this is ultimately out of reach for many Singaporean youths. Why bother putting yourself in debt when the condo wouldn’t be profitable until a successful sale is completed?

Instead, if you rent out your HDB and rent a condo, you’ll have the privilege of not having to commit to the financial stress while getting the lifestyle upgrade you dream of.

Let me just run the numbers (sample projection) using an example of someone who purchased a 4-room flat in 2019 at Sengkang and decided in 2024 to rent out their HDB to rent a condo in the same estate.

For this, I’ve taken High Park Residences, a condo with a ton of facilities (great for families) within the same estate. I was able to find rental transactions for 3-bedders based on URA’s records this year, and the latest URA data shows that a compact 872 sq ft 3-bedder in High Park Residences went for $1.27 million (8th floor) to $1.315 million (24th floor). For simplicity, I’ll assume it costs $1.3 million.

The reason why the net cash flow would be higher than say, selling the HDB and buying High Park Residences is due to the much smaller loan on the condo. As it is a second property, the Loan-To-Value is at 45%, so 55% of the price or value (whichever is higher) has to be forked out. Thus, while this option is what everyone wants, it’s very prohibitive due to both the tax and the cash/CPF that has to be put up.

If you rent out your HDB and rent a condo, you’ll only need to increase your expenditure by $400+ to stay in a development with facilities. Whaaat? That amount is just about $100+ more than if you had to pay for maintenance fees in a condo.

On the other hand, buying a 3-bedder at High Park Residences would set you back a hefty amount in mortgage payments due to the larger loan amount. Not to mention that for the option of keeping your HDB and buying a condo, you’ll be subjected to a very high ABSD tax!

In an environment where interest rates are high, committing to a home purchase to fund this new lifestyle could be costly. In this case, Rentvesting seems to be the more prudent, flexible approach.

So instead of forking out another downpayment, paying ABSD, and taking on a larger loan, you’ll only need to top up a couple of hundred!

Benefit #2: Being able to downgrade without being subjected to the 15-month penalty.

So, there is something called a wait-out period in Singapore. Basically, it is a cooling measure where private property owners will have to wait 15 months after selling their private properties before they are allowed to buy a resale flat.

So yes, for 15 months after you sell your flat, you will either have to rent a place or be homeless in Singapore (although it must be added that this is likely not a permanent rule). 

For many young Singaporeans who would typically need to sell their MOP-ed flats to afford the condo, this is a pretty nasty penalty because, for one, you’ll need to severely downgrade your lifestyle by moving back in with your parents, or pay a sharp premium to temporary rent while waiting until you’re allowed to buy a new home. Secondly, 15 months is a long time to wait to buy a resale flat, the fluctuating prices for the next 5 quarters would have you at the edge of your seat.

However, if you really need to downgrade due to financial reasons, you at least have (some) flexibility by attempting to get out of your condo lease. You would also have to negotiate with your HDB tenant, but that is probably still an easier and quicker move. 

If you don’t own private property, you won’t be subjected to the rules imposed on current private property owners.

Benefit #3: You can benefit more from running a small-scale business renting a condo vs more restrictive measures living in an HDB

Okay, before people come at me, I know you can do home-based businesses in an HDB flat as well. The URA has set up the Home-Based Business Scheme since 2003, so we are no strangers to mom-and-pop home-based businesses like mini hair salons and tailors.

As far as restrictions go, it’s generally the same rule of thumb for both properties; if you want to do it for your condo, you’ll need the property owner’s permission and the permission of the condo management. You still need to use the space for residential purposes most of the time.

However, if you start a home-based business in an HDB, you can’t offset your mortgage payments for tax optimisations, but this can be done for your condo rental (though not for the full rental, as you don’t use the entire space for business reasons. Speak to a tax consultant about it!).

So not real estate advice, but a tax optimisation one. Please note that I am not a tax expert, but this 3rd point is mainly something I learned from some entrepreneurs living in Singapore.

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Can rentvesting work in your favour? Well, at the end of the day, it’s all about what makes sense for each person financially. I do like rentvesting as a concept as it bases itself on what people can afford, instead of typical investment strategies that base themselves on projected earnings and greedy mentalities. 

For Singaporeans who already own an affordable home and can afford an upgrade via the renting path, this might not be a bad strategy to consider.

Rather than waiting years to build your wealth before you enjoy the finer pleasures in life, this method allows young investors the opportunity to upgrade without bearing large risks. If done right, you might even profit from this strategy.

So for my younger friends thinking of upgrading to a condo, have a serious think about it again on how you go about doing it.

If you’re unsure about your next steps when it comes to your property journey, feel free to get in touch with us for an in-depth consultation.