3 Things to Know Before Becoming a Landlord

By Aaron De Silva / EdgeProp SG | April 19, 2018 4:00 PM SGT
For many people in Singapore, the dream is to have at least two properties to your name: one to live in, and one to rent out. The goal is to have the second property be a cash cow, providing a stable and passive source of income.
The reality of being a landlord, though, isn’t quite as straightforward. There are a bevy of financial, legal and even emotional and psychological issues to navigate. Here are some considerations you need to be mindful of if you plan on becoming a landlord.

Money Matters

Obviously this is the most pressing concern for many folks. How much outlay do you need upfront? What about running costs? If it’s a condo, who pays for maintenance – you or your tenant? Will your rental income be taxed? Will you even make money in the end?
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First, the upfront costs. Let’s assume you take a loan of $800,000 on your second property. At an interest rate of 1.8% per annum (current bank rates range between 1.6% and 1.85% p.a.) for a three-year fixed package, you’re looking at a monthly mortgage of $3,972.
And that’s just the first three years. From the fourth year onwards, that figure is likely to increase, in which case you can consider refinancing.
When your property is finally ready to welcome its first tenant(s), you may find yourself having to wait for a month or two before that actually happens. This could be due to a variety of reasons. But the fact remains: the unit remains vacant while you still have to service the mortgage.
Or perhaps you’re mid-way through a tenancy. Suddenly, the tenant finds himself/herself retrenched, repatriated or relocated, and has to vacate the unit. Again you find yourself with a vacant property, and another month or two goes by without any rental income.
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Before becoming a landlord, it’s advisable to have a reserve of funds set aside – enough to cover at least six months of repayments. Taking that earlier figure of $3,972, you’ll need a buffer of around $24,000. Not a small amount.
In terms of running costs, think about the usual maintenance and repairs: repainting of walls, servicing or replacing of worn-out/broken down appliances/fittings and so on. In some cases, you may even need to carry out minor renovation works, say, retiling of floors or replacing of windows.
These costs add up over the long run. If you want to be a good landlord and attract higher calibre tenants, you’ll probably want to spruce up your property every time a lease is up and before a new one begins.
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The cleaner and more well-maintained your place looks, the higher your chance of getting a tenant who’s willing to fork out a bit more. Some ideas on how to increase the value of your property can be found here.
Now, if your property is a condo, you as the legal owner are obliged to pay the condo’s monthly maintenance fees. Depending on the size and prestige of the development, this can range anywhere from $250 to over $1,000 for luxury condos.
And, despite having to stump up this fee, you can’t even (legally) use the facilities or the parking space once you’ve signed a lease – that right technically belongs to the tenant. To be able to use the facilities, your tenant(s) has to sign you and/or your family in as guests.
At the end of the day, your rental income isn’t 100 percent yours – up to a fifth of it will go to the taxman. More information on rental income taxes can be found here.
Assuming that 20 percent tax rate, and assuming your mortgage is $3,972, you’d need to lease your property for around $5,000 a month in order to even cover your mortgage.

Tenant Issues

If your tenants aren’t Singaporeans or Permanent Residents (PRs), they need to have the relevant permits or passes.
Before signing the Tenancy Agreement (TA), it’s vital to perform a background check on your tenants. Expectedly, the government frowns upon illegal immigrants and overstayers, and the penalties are severe: up to $6,000 in fines or a 24-month prison sentence.
The authorities also maintain strict regulations regarding the maximum number of tenants that your property can accommodate. This is especially true for HDB flats, where the current cap is six unrelated individuals for 3-room flats and nine unrelated individuals for 4-room or larger flats.
The limits were recently revised. From 1 May 2018, owners of 4-room or larger flats will only be allowed to rent their properties to a maximum of six unrelated individuals. Those with HDB commercial properties, such as shophouses, will only be able to accommodate six tenants, down from the current eight.
Lastly, your tenants are not allowed to sublet your property. When signing the TA, make sure that it lists clearly the names and details of each tenant. Don’t get caught in a situation where a tenant goes behind your back to sublet a space, like a utility room or household shelter. You’ll bear the legal consequences, not your tenant.
Finding the right tenant is no walk in the park. Here are some tips that could be useful.

Emotional/Psychological Concerns

If you’ve spent some time living in the property you’re going to rent out, you’ll probably have formed an emotional attachment to it. Maybe you watched your kids grow up there. Maybe you had many happy gatherings. The longer you’ve lived there, the more precious your memories, and hence, the deeper your ties.
Once you’ve rented out that property, be prepared for possible emotional distress. You might start wondering what your tenants are up to, whether they’re maintaining the place properly, or even if they’re pilfering your things.
It’s therefore important to cut personal ties with the property. Don’t leave behind any personal belongings that might have emotional significance. Just think of the property as what you intended – an investment tool.
Ultimately, ask yourself this: will renting out the property cause you to stress out about your financial stability? What happens if you’re the sole breadwinner, supporting your entire family, and you get retrenched? Or you get a new job that pays less than what you were earning before?
Circling back to the first point: if you have ample cash reserves, it takes the sting out of this potentially stressful scenario. In the end, although becoming a landlord is fraught with potential risks, it could also turn out extremely fruitful. Like any investment, it depends on your financial goals and your risk appetite.