Last updated on January 9th, 2020 at 08:36 pm

I bought my second property in 2017 just before the property index started to climb.

Back then, ABSD was 7%. Many would have thought it was better to sell off the HDB and avoid this tax. But I thought otherwise.

Since then, I’ve rented my old flat out and effectively built passive income.

When I posted the idea of doing this guide on facebook back in Sep2017 to share the steps, it quickly garnered multiple likes and comments.

Synopsis

Living off passive rental income is indeed a seductive idea.

Hence, buying a second property is an ambition to many. Me included.

The investment amounts to prepare are large. If you are not drawing a high income, the budgets are going to be tight. That’s unless you’ve gotten a massive bonus (good for you) or struck lottery (great for you!).

So how can you get there from a financial planning angle?

Is it possible?

Read on further if this resonates with you…

First words

Buying your first house was easy. For most of us, it is a home.

You had capital for it then and some initial CPF savings. You were probably debt free also.

If you had bought a BTO or EC, it was only a matter of qualifying for the loan required and signing off with HDB or the developer.

There was no need to engage agents or negotiate terms yourself.

But a second property will be different.

The financial calculations for loans are different to start with.

You would need to worry about rental income if not your cashflows can become stretched.

If you thought it was such a headache with your first house, you really don’t know what you are getting into.

So where are you right now?

Go to your section right away and don’t waste time.

Group A:

Cleared MOP guidelines/ Not restricted by MOP – have existing mortgage loans that you have MORE THAN ENOUGH to repay it off.

Group B:

Cleared MOP guidelines/ Not restricted by MOP – have existing mortgage loans >$500k BUT have at least $500k in cash+cpf now.

Group C:

Still under M.O.P guidelines

Group D:

Cleared MOP guidelines/ Not restricted by MOP – have existing loans that you do not have enough to clear

Group A:

Cleared MOP guidelines/ Not restricted by MOP – have existing mortgage loans that you should have MORE THAN ENOUGH to repay now

You are financially ready. I’ll start with the financial part soon…

But before that, think of this… : Do all investors make money? Unfortunately, no. And these owners are not silly folks.

Property prices can slide for years and doesn’t recover quickly. To have lost money on a property the owner does not call home is a lousy feeling. Worse, it could have been vacated and bleeding its owner monthly cashflow.That’s why some owners sell at losses.

BUYING A SECOND PROPERTY IS ACTUALLY NOT THE GOAL, GROWING YOUR WEALTH WITHOUT STRESS IS.

Your mindset may needs to change because as an investor, you need to know it and run it like a business. Supporting a bigger mortgage means more expenses that can become uncomfortable. It is essential to ensure it is generating rental income.

What are some new cash outflows?

1. Maintenance cost of your second private property (as properties age, this would increase only). For a new property, it is maybe $300/mth. For an old property, it may require an another $300/month into sinking fund. This is why a HDB flat is fuss-free. Maintenance is almost all by HDB.
2. Additional property tax. You pay less if you are staying inside and more when you rent it out. HDB flats enjoy a cap also. Assuming you buy a $1m property and rent at $3,000/month, your AV (in theory) may be $3,720. This costs you around $300/month.
3. Additional personal tax. You will need to incur a portion of the $3,000/month rent income into your personal income. There are some allowable expenses such as property tax paid and interest on loan. I did some permutations, it may cost you between $100- $200/month more onto your income tax for the scenario described.

Think through the expenses I’ve mentioned. Is it really still so good to invest still in property from a yield perspective? We haven’t even mentioned about interest costs you are paying to the bank….

Group B:

Cleared or not restricted by MOP guidelines – your existing

mortgage loan is >$500k BUT you have $500k in cash+CPFOA now

You may be in the right income level. If you keep your current mortgage loan, you can only borrow 45% LTV.

Your equation is simpler because if you can afford 2 mortgages then the TDSR restriction is out of the way.

The main limiting factor is the capital on hand.

If you have $500k cash+CPFOA, you can only buy a property with max value around $800k property (factoring in stamp duties etc…). Even with a minister’s salary, you won’t be allowed to buy something more than that. Again, the limiting factor is the capital on hand.

But as a friend, I would say what’s the rush? Don’t dive into some $800k shoebox unit. Buy an investment property only if you are sure of it.

BUYING A SECOND PROPERTY IS ACTUALLY NOT THE GOAL, GROWING YOUR WEALTH WITHOUT STRESS IS.

Be patient, it is likely in a few years, you would become more ready financially. Make the right decisions and don’t get stuck in a wrong mortgage.

You may consider buying a private “dual-key” big condo house. That achieves rental income while you have staying space.

This method avoids ABSD and technically is a house upgrade. I won’t elaborate further here but most units of this nature already come with a premium.

Steps if you are in Group B

1) Avoid loans now in this period. If you must, structure them to be short (such as taking 1-2year car loan at purchase). Cut off some off your credit cards as you prepare for mortgage assessment.

If you are stuck with a huge car loan, there is no need to repay. Keep that cash. You probably need the capital for home downpayment more than qualifying for a larger mortgage loan amount.

2) Avoid investments into stocks for the time being. Buy short term bonds or bond funds (2-3%pa) that can be ready for use in a year or two. Earn that extra $10,000 or $20,000 in interest. Every bit counts.

Want a ready made bond solution without the hassle to look at charts. Count me in now!

Group C:

Still under MOP guidelines

You are in preparatory years.

Steps if you are in Group C

1) Avoid loans now. If you must, structure them to be short (such as taking a short car loan at purchase). Cut off some off your credit cards. They reduce your borrowing limit.

If your monthly base income is >$8,000 and you are stuck with a long car loan then never mind, keep the car loan first. If income $5,000 to $8,000 per month, then yes, go clear your car loan because you cannot loan much without doing so.

If income less than $5,000/mth, set goals to increase your savings and income. Most likely you will need to some years to build up your capital instead.

Buy financial assets and invest medium to long term. That is the strategy you should seek.

Want a ready made portfolio solution without the hassle to look at charts. Count me in now!

2) Cut back on expenses.

Aim to get to Group A: Cleared MOP guidelines/ Not restricted by MOP – have existing mortgage loans that you should have MORE THAN ENOUGH to repay now

Group D:

Cleared MOP guidelines/ Not restricted by MOP – have existing loans that you do not have enough to clear

If you do not have enough to clear your existing loan,

you are NOT READY to invest in a second property.

There is almost NO WAY to get a private property with current rules.

Don’t waste time, I’ve tried MANY permutations already.

Some property agents will tell you to sell your HDB and buy 2 properties.

One in your name one in spouse’s name.

In my opinion, this is short-circuiting (not short cutting) proper financial building and disregarding the fixed expenses in your lifestyle.

You may become over leveraged into property as you and spouse borrow to the hilt.

Property as an investment is ILLIQUID and freaking hard when you need to sell.

You could instead go broke in a bad situation.

Do you know of the tenancy situation we have here these days?

There is no guarantee you can get a tenant.

The root of the problem is because you may not be saving enough.

A second investment property will put too much of your capital at stake.

Financial investments allow you to grow with much less stress.

Want a ready made portfolio solution without the hassle to look at charts. Count me in now!

Aim to get to Group A: Cleared MOP guidelines/ Not restricted by MOP – have existing mortgage loans that you should have MORE THAN ENOUGH to repay now

Steps if you are in Group D

1. Cut back on expenses.
2. Focus on building your investment base. Invest in liquid financial assets for the next few years.

Do not need to repay home loan early. Bank interest rates are still low.