10 Things to look out for when renting out an apartment

[mobo]

Sure, happy to share my experience here. There are many hidden costs in collecting rent from investment properties, a lot of times it can be quite hard to track because some items are quite random and are incurred in an ad-hoc manner. However, I found out that over the years if you average it out it’s quite consistent actually.

1. Property Tax – Quite a big hit @ 10%, effective tax rates tend to be slightly <10% when rents are rising and >10% when rents are stable or falling. This is because IRAS AV is like a moving average that is slower to reflect actual rent markets

2. Income Tax – If you are still working, likely you will clear the first $20,000 bracket and the rent will be further subject to income tax ranging from 4% - 20% depending on your employment income. Through creative deductions on interest and operating expense, you can bring down the tax slightly.

3. Conservancy / MCST / Landscape Costs – For HDB, landlord needs to bear conservancy, condo would be the MCST maintenance fee and sinking fund contribution and for landed will be general landscaping costs.

4. Depreciation / Rental of furniture – Generally most residential units are leased out furnished or at least semi-furnished in Singapore. Most landlords here choose to purchase furniture themselves, this needs to be depreciated accordingly over 2 – 5 years depending on what furniture it is and the quality of it. It is becoming popular among some landlords to lease furniture sets from companies, for this case of course the costs of such furniture rental need to be taken into account

5. Structural / Interior Insurance – Structural insurance is definitely a must. Interior (renovation/fitting/furniture) insurance depends on preference. Personally I always buy both because they are not very expensive and gives me the peace of mind. Paying $100,000 to refit everything in the event of a fire is not funny -_-;;

6. Major Capex – Very hard to predict because it depends on what breaks down and at what time. Some of the big ticket items include air-con (happened to me once, had to change the whole compressor after it broke down and the model was obsolete), stove and oven, fridge, plumbing, electrical wirings automated gates if landed. If you are very strict on accounting, technically need to accelerate depreciation and write-off when that happens!

7. Minor Maintenance – All the very nitty gritty stuff that comes along the way. Standard rental clauses usually have tenants pay for <$100 breakdowns like changing light bulbs, soap holders, regular air-con cleaning etc. But there are still other stuff like curtains, structural defects like ceiling cracks, torn laminates, pest control, changing taps, carpet foaming that usually landlord needs to pay.

8. Agent Commission – In the event lease not renewed or terminated due to exercise of diplomatic clause, most landlord will go through agents to get a new tenant. Standard commission is 1 month gross rent for a 24 month lease.

9. Vacancy Cost – Prudently it is good to accrue for around 0.5 – 1 month for every 2 years although past 2 years the economy was quite good and I managed to get tenants back to back with at most 1 week gap.

10. Tenant Damages – By right, landlords are entitled to seek reimbursements for any damages to the unit or fittings caused by the tenant. But sometimes tenants will play punk and insist they are not to be blamed and argue from all angles. At the end of the day, you might not be able to fully recoup the damages from tenant. I had an idiot tenant family of 5 once. Apparently I do not know what sort of detergent they used, but it badly damaged the parquet flooring resulting in blackened strips and popped out tiles. Tenant refused to pay citing poor finishing and hot weather as reasons. End up we settle by him reimbursing me $500. That was nowhere near enough for me to fix & change the tiles and repolish.

thank you for the wonderful sharing, i get the full picture now

it is certainly not as easy as i thought. i had the impression that collecting the rental will be the hardest cos quite "embarrassing" to chase for rental if tenant pays late. Now i realise there are at least 10 other things to consider

No probs

Collecting rent has been relatively painless for me as I only rent out to big companies and their expatriates or decent above middle income families. From what I gather asking around, it seems landlords who have particular problems with collecting rent are usually those either have very old and rundown properties attracting less than ideal tenants or those who choose to split lease one unit to multiple single or double tenants. These have a higher risk of running late on payments or doing a “midnight disappearance”.

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Wow mobo thank you for the comprehensive list. Perhaps I should create a separate sticky thread and label it "10 things to look out for when renting out an apartment"?

But seriously, this laundry list makes me feel that collecting dividends is so much more hassle-free compared to owning a property and renting it out!

Haha yes from a dividend vs net rent point of view, it definitely makes more sense to go for a diversified portfolio of stocks. But we all know the key reason most investors cum speculators go for property is a combination of cheap credit and potential to flip at a higher price. I doubt the throngs of people crowding out showrooms every weekend are there for the rent income.

I hoped the list was useful to some extent to correct some misconceptions on being a rent collecting landlord because most people I spoke to seem to only consider financing arrangements in buying the property and hardly anyone talks about operational costs in running the property.

[brattzz]

Investing in Property is to use the leverage of credit and potiential price appreciation...
Use 20% cash to gain the 100% upside...

Most of the time it works well in SG! :O

[Temperament]

mobo Wrote:
10. Tenant Damages – By right, landlords are entitled to seek reimbursements for any damages to the unit or fittings caused by the tenant. But sometimes tenants will play punk and insist they are not to be blamed and argue from all angles. At the end of the day, you might not be able to fully recoup the damages from tenant. I had an idiot tenant family of 5 once. Apparently I do not know what sort of detergent they used, but it badly damaged the parquet flooring resulting in blackened strips and popped out tiles. Tenant refused to pay citing poor finishing and hot weather as reasons. End up we settle by him reimbursing me $500. That was nowhere near enough for me to fix & change the tiles and repolish.

Hi MOBO,

Ah... yes! There is no "free lunch" in this world. Does it helps with every new tenant the landlord make him sign a list of all the major items in the rental property in the conditions as seen with dated photos as backups? In case there are disputes in the future, there are evidence to backup.
i think some landlords advise "to be landlords" to do this with every new tenant. i think there is psychology advantage not only for the landlord but for the new tenant too.
What do you think?
I am still not sure i want to be a landlord but i have to give it a try from 2013 onwards. Then see how it goes........???
NB:
To be fair, if you go and read expat's tenant forum, you will read a lot about unreasonable landlords too. How unfair they treated tenants.
God bless us all!
Shalom.

[mobo]

mobo Wrote:
10. Tenant Damages – By right, landlords are entitled to seek reimbursements for any damages to the unit or fittings caused by the tenant. But sometimes tenants will play punk and insist they are not to be blamed and argue from all angles. At the end of the day, you might not be able to fully recoup the damages from tenant. I had an idiot tenant family of 5 once. Apparently I do not know what sort of detergent they used, but it badly damaged the parquet flooring resulting in blackened strips and popped out tiles. Tenant refused to pay citing poor finishing and hot weather as reasons. End up we settle by him reimbursing me $500. That was nowhere near enough for me to fix & change the tiles and repolish.

Hi MOBO,

Ah... yes! There is no "free lunch" in this world. Does it helps with every new tenant the landlord make him sign a list of all the major items in the rental property in the conditions as seen with dated photos as backups? In case there are disputes in the future, there are evidence to backup.
i think some landlords advise "to be landlords" to do this with every new tenant. i think there is psychology advantage not only for the landlord but for the new tenant too.
What do you think?
I am still not sure i want to be a landlord but i have to give it a try from 2013 onwards. Then see how it goes........???
NB:
To be fair, if you go and read expat's tenant forum, you will read a lot about unreasonable landlords too. How unfair they treated tenants.
God bless us all!
Shalom.

Hi Temperament,

Yes, it is generally considered good practice to take some photos on important furniture and fittings as well as know faults and have both parties acknowledge before the handing over to the tenant and vice versa. It minimizes the disputes later on. I do that as well.

But the key contention in most tenancy agreements is the clause that say if normal wear & tear landlord pay, if damage not from wear & tear is tenant pay. The problem comes when bad things happen, landlords will attribute to user damage while tenants will claim it’s normal wear & tear. Some circumstances are clear cut, for e.g. children drawing on the wall, one big scratch on a furniture, burn marks at kitchen etc. clearly user damage.

Others are murky like brand new door knob damaged due to frequent slamming of doors, electronic equipment with minor breakage and cracks, torn sofas & beds from suspected children abuse, damaged shower heads that look like it got clubbed, damaged furniture bottoms from too much water used when mopping, stained windows from using inappropriate cleaning agents etc. These are things that if the tenant is reasonable and admit fault, usually can be resolved quite quickly. But there will be people who try to punk around and drag on hoping you will either give up or enter into a compromise. For small amounts that is not worth getting into litigation with, it usually ends in compromise of around 50/50 split on costs. This means additional repair expenses for the landlord.

[Temperament]

mobo Wrote:
10. Tenant Damages – By right, landlords are entitled to seek reimbursements for any damages to the unit or fittings caused by the tenant. But sometimes tenants will play punk and insist they are not to be blamed and argue from all angles. At the end of the day, you might not be able to fully recoup the damages from tenant. I had an idiot tenant family of 5 once. Apparently I do not know what sort of detergent they used, but it badly damaged the parquet flooring resulting in blackened strips and popped out tiles. Tenant refused to pay citing poor finishing and hot weather as reasons. End up we settle by him reimbursing me $500. That was nowhere near enough for me to fix & change the tiles and repolish.

Hi MOBO,

Ah... yes! There is no "free lunch" in this world. Does it helps with every new tenant the landlord make him sign a list of all the major items in the rental property in the conditions as seen with dated photos as backups? In case there are disputes in the future, there are evidence to backup.
i think some landlords advise "to be landlords" to do this with every new tenant. i think there is psychology advantage not only for the landlord but for the new tenant too.
What do you think?
I am still not sure i want to be a landlord but i have to give it a try from 2013 onwards. Then see how it goes........???
NB:
To be fair, if you go and read expat's tenant forum, you will read a lot about unreasonable landlords too. How unfair they treated tenants.
God bless us all!
Shalom.

Hi Temperament,

Yes, it is generally considered good practice to take some photos on important furniture and fittings as well as know faults and have both parties acknowledge before the handing over to the tenant and vice versa. It minimizes the disputes later on. I do that as well.

But the key contention in most tenancy agreements is the clause that say if normal wear & tear landlord pay, if damage not from wear & tear is tenant pay. The problem comes when bad things happen, landlords will attribute to user damage while tenants will claim it’s normal wear & tear. Some circumstances are clear cut, for e.g. children drawing on the wall, one big scratch on a furniture, burn marks at kitchen etc. clearly user damage.

Others are murky like brand new door knob damaged due to frequent slamming of doors, electronic equipment with minor breakage and cracks, torn sofas & beds from suspected children abuse, damaged shower heads that look like it got clubbed, damaged furniture bottoms from too much water used when mopping, stained windows from using inappropriate cleaning agents etc. These are things that if the tenant is reasonable and admit fault, usually can be resolved quite quickly. But there will be people who try to punk around and drag on hoping you will either give up or enter into a compromise. For small amounts that is not worth getting into litigation with, it usually ends in compromise of around 50/50 split on costs. This means additional repair expenses for the landlord.

Indeed, speak with real experience. Very good advice. Litigation is almost always usually not worth it. From what i read it is usually better to settle "privately" when you meet "CHOW KWANG". Or even get nothing when you know you are entitled. i think if i want to survive as a Landlord i have to take your advice.
Shalom.

[NTL]

Let me do a little bit of maths here with regards to rental, with the following assumptions.

- Property purchase price: $1,000,000
- 20% downpayment: $200,000
- Stamp duty: $24,600
- Legal fees: $3,000
- Interest Rate: 1.5%pa
- Mortgage term: 30yrs

With above assumptions, it work out to be:
- Total principal upfront: $227,600
- Monthly Instalment: $2,760 of which 1st month payment of $1,760 is paying principle, $1,000 is interest

Taking further assumption of the rental,

- 1month break to look for new tenant
- Monthly Rental: $3500 (for 2year lease), or $3360/mth (including 1mth break) (4.2% rental rate)
- Agent Fee: $3,500 (1month rental per 2year), or $140/mth (including 1mth break)
- Maintenance fee: $300/mth
- Property Tax: $150/mth
- Furniture depreciation rate of $100/mth
- Renovation depreciation rate of $100/mth (Re-painting, re-do kitchen cabinet, fix air-con, etc)

So effectively, the cashflow is -$170/mth or -$2040/yr (-0.9% of capital) , the return of capital is $1570/mth or $18,840/yr (8.27% of capital), excluding increase/decrease in property price.

So, is it worthwhile to buy and rent out property?

---

Hi Temperament,

Regards your 1st choice,

Some banks nowadays do not have any lock-in period. One example is DBS. So if you don't like to be lock in, you can use DBS. Looking at the present interest rates, likely it will not go up too much in the next 3yrs. So for me, if lock-in can offering a substantial lower interest, I likely will just get lock-up.

As for investment instruments, I will likely consider UOB 5.05% Preferred Share or OCBC 5.1% Preferred Share. Very unlikely for interest to hit that rate in near future. Otherwise a portfolio of shares + REITS and hope to get similiar return.

Regards to 2nd choice,

You are referring to equity loan. The bank will still need to get valuations, legal assistances, so at the end, I think it still will much be the same. But maybe if you do it immediately after purchase, it may not be necessary? Need to check with bank. And it only can be done with private properties. HDB flat is not allow.

[koh_52]

Investing in Property is to use the leverage of credit and potiential price appreciation...
Use 20% cash to gain the 100% upside...

Most of the time it works well in SG! :O

"Most of the time it works well in SG"
Yes! this statement apply to most senior folks like me...low entry price , 10 yrs back or 20 yrs ago...forget abt the past, talk present.

Now, land cost is going aro $750 PSF for a 99 yrs LH property, break even cost touching $1,050 PSF.....looking at it rental will soon lagging behind ppty price.

SG average rental yield (2% -2.5%) for FH ppty and (3%-3.5%) for LH ppty, not a good ROI to me.....look outside SG like Philippine, Indonesia & Thailand easily you can get aro 7% return, well there is an exchange risk but it work on both side.

Those senior folks whose ppty are already fully paid is okay to go for rental as passive income...there is no such thing as vacant if you are prepared to drop your rental over market price....

But, nowadays most young smart alex who buy at high price thinking that tenant pay for his installment and after 20 yrs the ppty belong to him, so he can retire with rental income, these people are likely to have their ppty auction by bank.

Invest in property for?
capital appreciation or rental income...10 yr ago you can have both, now no way bro...

[Temperament]

Let me do a little bit of maths here with regards to rental, with the following assumptions.

- Property purchase price: $1,000,000
- 20% downpayment: $200,000
- Stamp duty: $24,600
- Legal fees: $3,000
- Interest Rate: 1.5%pa
- Mortgage term: 30yrs

With above assumptions, it work out to be:
- Total principal upfront: $227,600
- Monthly Instalment: $2,760 of which 1st month payment of $1,760 is paying principle, $1,000 is interest

Taking further assumption of the rental,

- 1month break to look for new tenant
- Monthly Rental: $3500 (for 2year lease), or $3360/mth (including 1mth break) (4.2% rental rate)
- Agent Fee: $3,500 (1month rental per 2year), or $140/mth (including 1mth break)
- Maintenance fee: $300/mth
- Property Tax: $150/mth
- Furniture depreciation rate of $100/mth
- Renovation depreciation rate of $100/mth (Re-painting, re-do kitchen cabinet, fix air-con, etc)

So effectively, the cashflow is -$170/mth or -$2040/yr (-0.9% of capital) , the return of capital is $1570/mth or $18,840/yr (8.27% of capital), excluding increase/decrease in property price.

So, is it worthwhile to buy and rent out property?

---

Hi Temperament,

Regards your 1st choice,

Some banks nowadays do not have any lock-in period. One example is DBS. So if you don't like to be lock in, you can use DBS. Looking at the present interest rates, likely it will not go up too much in the next 3yrs. So for me, if lock-in can offering a substantial lower interest, I likely will just get lock-up.

As for investment instruments, I will likely consider UOB 5.05% Preferred Share or OCBC 5.1% Preferred Share. Very unlikely for interest to hit that rate in near future. Otherwise a portfolio of shares + REITS and hope to get similiar return.

Regards to 2nd choice,

You are referring to equity loan. The bank will still need to get valuations, legal assistances, so at the end, I think it still will much be the same. But maybe if you do it immediately after purchase, it may not be necessary? Need to check with bank. And it only can be done with private properties. HDB flat is not allow.

Thanks!
Actually both choice has one common thing to worry about. i can't guarantee to get back my capital in full any time when i need or force to pay up the balance of my loans from the bank for my property. If not investing in a Reit that pays 7% to 9 % still seems possible in today market. Another words when i invest i try not to be restrained by time factor. Or even better still if i can, by market's factors.

[mobo]

Actually there's a shortcut for quick back of the envelope calculations if you want to find out roughly your cashflow position when considering buying a "standard" property like a condominium for rent.

Looking at it in terms of yield will be faster and allows you to have a fast calculation no matter the price of the condo:

For eg, if you go into a showroom and look at a $1million 1,000 sqft suburb condominium and thinking of buying it, with a 80% LTV 1.6% interest. But you worried whether cashflow will be negative, on the spot take out calculator and do this:

1/12 x Purchase Price x Gross Yield x 80% - Monthly Instalment = Monthly Cashflow

In our above example will be 1/12 x $1,000,000 x 3.75% x 80% - $2,800 = -$300, i.e. negative cashflow.

Gross yield assumption of 3.75% should be relevant for most normal condos in Singapore while instalment can be worked out using any financial app on smartphone. I have assume 1.6% i/r over 30 years in this eg.

Formula also lets you on the spot calculate how sensitive the cashflow is to a sudden change in i/r, so you can plan out when deciding what sort of variable / fixed loan package you want.

The only thing to take note is shoe box units tend to have a higher gross of ~4.5%. But from what I heard vacany costs is usually much higher compared to normal units, so you might need to take a larger discount than the 20% I recommend when calculating net yields. How much I am not sure as I have no experience with shoe boxes.

[Temperament]

Actually there's a shortcut for quick back of the envelope calculations if you want to find out roughly your cashflow position when considering buying a "standard" property like a condominium for rent.

Looking at it in terms of yield will be faster and allows you to have a fast calculation no matter the price of the condo:

For eg, if you go into a showroom and look at a $1million 1,000 sqft suburb condominium and thinking of buying it, with a 80% LTV 1.6% interest. But you worried whether cashflow will be negative, on the spot take out calculator and do this:

1/12 x Purchase Price x Gross Yield x 80% - Monthly Instalment = Monthly Cashflow

In our above example will be 1/12 x $1,000,000 x 3.75% x 80% - $2,800 = -$300, i.e. negative cashflow.

Gross yield assumption of 3.75% should be relevant for most normal condos in Singapore while instalment can be worked out using any financial app on smartphone. I have assume 1.6% i/r over 30 years in this eg.

Formula also lets you on the spot calculate how sensitive the cashflow is to a sudden change in i/r, so you can plan out when deciding what sort of variable / fixed loan package you want.

The only thing to take note is shoe box units tend to have a higher gross of ~4.5%. But from what I heard vacany costs is usually much higher compared to normal units, so you might need to take a larger discount than the 20% I recommend when calculating net yields. How much I am not sure as I have no experience with shoe boxes.

Thanks!
i agree it's a very good practical guide for cash flow calculation for first time landlord who needs to take a loan from the bank. Even a layman with basic maths can understand. Thanks.
Shalom