Don't bet on rental income

Rental yields are likely to remain depressed due to oversupply and weak demand

FRANCIS KAN

THIS is not the best of times for landlords, especially those banking on rental income to pay the mortgage. Investing in property has long been seen as a good way of supplementing one’s income in Singapore.

The process goes: Buy and rent out a home in a good location, use the rental income to pay the mortgage instalments, sit back and wait for the value of the property to appreciate, then sell the property and prepare to retire.

While it remains viable to hold a property for the long term with the aim of selling it for a profit, the prospects of earning a decent return from rentals, or rental yield, can be dicey today.

Rental income refers to what one gets after subtracting the cost of holding the property from the rent earned from the tenant. Due to oversupply and weak demand, rental yields (the annual rental income as a percentage of the cost of the property) have been going down for the past few years.

In fact, the rental market is likely to stay depressed in the foreseeable future.

VACANCIES REMAIN HIGH

One key statistic pointing to a sustained lacklustre rental market is the private residential vacancy rate, says Mr Chang Hui Chew, Content Manager, PropertyGuru Singapore.

He adds that vacancies have remained high — standing at over 8 per cent in the third quarter of last year. Anything above 7 per cent is generally considered problematic.

He says there has been an excess of new developments on the market since 2015 because of “a glut of land sales and exuberant en-bloc sales earlier this decade before the Government reduced the number of land sales and implemented property cooling measures”.

At the same time, rental demand has declined.

WAIT-AND-SEE ATTITUDE

With more properties on the market, it will take longer for landlords to find tenants. This impacts anyone planning to offset his mortgage payments with rental income.

For those considering buying investment properties, Mr Chang advises: “Stop and think again — especially if you are likely to have cashflow issues should the unit not be rented out within six months.”

If you are determined to invest in a property for rental, do your homework on locations that can give you more bang for your buck. A property located close to amenities such as MRT stations, bus interchanges and shopping malls can help increase its value by 10 to 15 per cent, compared with similar units in the same area.

In this climate, it is probably not advisable for those looking to earn passive income from their properties to depend on rentals to cover their cost. A safer bet is to buy a property only if you have the resources to hold on to the unit until it can be sold at a profit — regardless of the rental yield.