A real estate purchase is a huge financial commitment and is probably the biggest purchase many of us will make in one lifetime. This is especially so in Singapore where homes do not come cheap; it’s one of the main reasons why most of us continue to live with our parents until the day we get married and step foot into our matrimonial homes.
Houses developed and sold by the Housing Development Board also come with certain eligibility conditions. For example, an unmarried person cannot buy a flat unless he/she is at least 35 years old, etc.
Be it renting or buying, you will be faced with many considerations before making your final decision. The following are some factors that analyses both ends of the spectrum, and hopefully with more knowledge, you will be able to make a more informed decision.
Upfront/ Initial payment
When it comes to initial payment, renting is, without a doubt, the cheaper option.
The upfront cost to rent a property is usually 2 months’ worth of rent. Putting the down payment on a property will set you back a lot more, at a figure that ranges between 20 to 30 percent of the price of the property.
For example, a property valued at $1 million will cost you approximately $3,000 to rent (hence, $6,000 as a deposit). The same property will require $200,000 – $300,000 as a down payment if you intend to purchase it.
On the topic of monthly (re)payments, however, the amount you spend is distinguished by two terms: rental and mortgage. While paying off your mortgage brings you closer to the full ownership of your home, paying rent is quite the opposite.
In fact, paying rent is equivalent to throwing money out the window – there are no opportunities for capital gain since ultimately, you do not own the property.
Paying rent is comparable to paying off a car loan, as your capital gain is tantamount to nothing.
Management fees and property taxes will cost between 0.2-0.3% of the property value each year. These are the fees you would have to bear as a homeowner or landlord, but good news for tenants – they are off the hook for this!
Speaking of capital gain, owning a property allows you to build up equity – possibly a significant amount too! It goes without saying that property owned is an asset.
Whether you are staying in it and building equity, or renting out and earning passive (rental) income, you can put a price on owning a home, which is something you will miss out on should you choose to rent instead.
With an average inflation rate of 2.65%, it probably suggests that your property value would double in about 25 years (compounded). To put it simply, a $1 million property will probably be worth about $2 million in 25 years.
Subsidies, Grants, and Duties
Home buyers, rejoice! Those of you looking to buy a HDB, the good news is that you can take advantage of the subsidies and grants put in place by the Government, especially if you are a first-time buyer. That said, however, you can only purchase a HDB flat if you are a Singapore citizen or a Singapore Permanent Resident, albeit with certain conditions or requirements.
According to HDB, the HDB Resale Price Index moved from 88 to 133 over the last 20 years. This translates to a 51% gain in terms of the value of the HDB flat if you have bought it in 1997 (i.e. a $300,000 flat purchase then would be able to fetch $453,000 today!)
For foreigners, purchasing a property means incurring additional stamp duties, which might make more sense to rent a property instead.
Furthermore, foreigners are not eligible for subsidised HDB flats and grants. The good news is that according to www.ura.gov.sg, the Singapore Property Price Index saw an increase from 30 to 140 in the last 30 years (i.e. a $1 million property purchase would translate into a whooping value of $4.6 million!)
Level of Commitment
The duration of your stay will also be a determining factor when deciding whether to rent or buy. If you consider yourself a nomad and want to stay in different parts of Singapore every 2-3 years, then the rental option gives you the freedom to move around.
But if you are looking to settle down and am ready to commit to something for the long term, then buying would be the more suitable option.
This is due to the fact that renting is definitely not a financially savvy option in the long run; rental payments are considered expenses that you can never get back once spent.
For many of us, our home is our personal sanctuary. The interiors of our homes are of absolute importance, down to the colour of each wall or the look of each marble floor tile.
For the rest of us, maybe not as much.
Changes to the interior of our homes can be more important to us than we realise, and having a limit put on it may have us yearning for more.
If you were to opt to rent a property, the amount of structural and physical change you can make to your home is limited. As compared to buying a property, where you have complete freedom to alter the entire look of your home, both inside and out.
Let’s face it: some of us lead such busy lives that we barely have the time to visit the dentist on a regular basis, let alone maintain a home. This is where being a tenant would be more suitable than being a home owner, as you have less obligations committed to maintaining your home. Most major repair works are usually serviced by the landlord, although with certain exceptions (e.g. air-con servicing).
Many of us chase after the Singapore dream of home ownership, a place where we can call home. We may also keep it around long enough for us to retire in, or even pass it down to future generations.
But renting does come with its advantages, as evident in many western societies, and who knows, maybe it could be the solution for you?
Article by Sherlyn Chua, Associate Director at Redbrick Mortgage Advisory.