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Thread: Doing the sums on shoebox flat investments

  1. #1
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    Default Doing the sums on shoebox flat investments

    http://www.straitstimes.com/Invest/S...ry_784022.html

    small change

    Doing the sums on shoebox flat investments

    At first look, these small units may offer a decent return, but finding a tenant willing to live in such a tiny space may not be so easy

    Published on Apr 1, 2012

    By Lee Su Shyan, Money Editor


    'The tenant is quite used to it,' the property agent said airily, dismissing concerns that a shoebox apartment is going to be quite difficult for any reasonable-sized human to enjoy living in.

    I was at a showflat on the fringe of Paya Lebar recently, which showcased an apartment of around 450 sq ft.

    There were perhaps half a dozen others in the showflat as well and it did not seem crowded. Possibly this was because there was hardly any furniture. There were two small chairs and the kitchen sink, but no dining table, sofa, fridge, TV set or computer - surely features that a normal apartment should contain.

    In the bedroom, there was no bed either, but a carpet to represent where this narrow single bed clearly was going to be.

    Leading out from the bedroom was a balcony that ran along the living room as well. By the way, the washing point was on the balcony, so this means that the washing machine was going to be sited there.

    Many at the showroom seemed caught up by the excitement of owning a piece of private property for less than $600,000 and, for some moments, I was as well.

    A back of the envelope calculation goes like this. Assuming the price is $650,000. Assuming I already have a property loan, I will have to fork out $260,000 in cash and take out a 60 per cent loan of $390,000. Taken over say 25 years, this comes up to a $1,560 monthly repayment at an interest rate of 1.5 per cent.

    Assuming rent of say, $3,500 a month, this makes for a return of around $1,940 per month after paying off the loan or $23,280 per year.

    One way of looking at the return is the total rent divided by the total investment ($42,000 divided by $650,000), which makes for a yield of 6.5 per cent.

    Another way is to look at the rent after deducting the loan repayment divided by the actual cash outlay. This comes to a gross yield on the investment of about 8.9 per cent ($23,280 divided by $260,000 of capital).

    These returns are far more attractive than any fixed deposit currently. Throw in the promise of capital gains and it sounds like an even better deal.

    All well and good, but look at the assumptions behind this handsome return: Such a return assumes that interest rates will stay low and that there will not be periods when the apartment is vacant.

    All these are standard considerations when buying a property for investment but in particular, for a shoebox apartment, a very important factor is the tenant, and a tenant willing to pay $3,500 at that.

    My fear is that this tenant - slight of build, who hardly ever cooks, sleeps standing up perhaps, is seldom home and when he does come home, is out on the balcony - will turn out to be a pipe dream.

    After all, he is also supposed to be able to fork out $3,500 per month in rent, preferably be an upstanding professional who works in the central business district area, and most importantly, pays the rent on time. A tall order indeed.

    Better still if he never complains about faulty appliances and other minor problems.

    I exaggerate, I know, but this is the scenario that is often portrayed by many of the agents.

    How realistic is that scenario?

    Looking at the negatives first, there is a tremendous amount of supply coming up in Geylang, for example, in the next few years - close to 1,900 units all told and fairly small units too.

    This means that one is looking at potential tenants who are single or at best couples. Even a small family or friends hoping to share an apartment will find it near impossible to squeeze into the unit I viewed.

    Another factor is that the rental market needs to be supported by the Housing Board (HDB) rental market. If the HDB rents are still buoyant, at say $2,000 or $2,500 for a flat, then perhaps there may be a group of people willing to pay over and above this amount to live in a private property with facilities.

    On the macro front, Geylang is an area undergoing gentrification. It is a stone's throw from the upcoming Paya Lebar commercial hub. It has good transport links and it is just a few bus stops away, along Nicoll Highway, from Suntec City.

    Dakota MRT station is perhaps a 10-minute walk away. And good food at all hours of the day is easily available. In a few years, the Sports Hub will also be up.

    As more business activities fan out from the city centre to the suburbs, there will be a need for housing, making a compelling case for investing in this characterful area.

    Still, I cannot help but feel that the proof is in the pudding to see if a shoebox apartment is indeed liveable. The bulk of them have yet to be completed so we will have to wait and see.

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    If the going gets tough, rental for these shoebox apartments will simply fall and demand will still be there. Investors will not likely to get the kind of returns they have expected. Given the small loan size, investors will survive though they may not be in the money.

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    Quote Originally Posted by Leeds
    If the going gets tough, rental for these shoebox apartments will simply fall and demand will still be there. Investors will not likely to get the kind of returns they have expected. Given the small loan size, investors will survive though they may not be in the money.

    Size of loan is relative to household income.

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    any MM owners can share whether $3.5k/mth rental is realistic? Personally i heavily doubt so.

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    Quote Originally Posted by Leeds
    If the going gets tough, rental for these shoebox apartments will simply fall and demand will still be there. Investors will not likely to get the kind of returns they have expected. Given the small loan size, investors will survive though they may not be in the money.
    Curious to know why you think demand will still be there?

    I was talking to an expat friend 1 yr+ ago as we were going to his St Thomas apartment. We ran into the property agents pushing the MM's where the old walkup apts had been.

    400 sq ft they promised could bring in 5k rent. My friend started to look interested until I asked him could he live in 400 sq ft..... Well if you can't, what makes you think others can - plus the 3 bedroom apartment which is 3 times bigger you are renting now costs only around 3k. Sure it's older but who thinks of that when they are sat at home watching TV.

    I also think like the writer of this article. Who is this fantastically stupid tenant who is smart enough to earn the big bucks to drop 5k on rental but simultaneously dumb enough not to do any market research on the property market before rental.

    I think the low interest rates are going to provide many casualties in the future due to present "affordability" and unrealistic yields (100% occupancy, no sinking fund or management fund included in calculation, no agent fees included in calc, no property tax in calc, no interest charge in calc, etc....) pushed by unscrupulous agents.

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    Quote Originally Posted by EBD
    Curious to know why you think demand will still be there?

    I was talking to an expat friend 1 yr+ ago as we were going to his St Thomas apartment. We ran into the property agents pushing the MM's where the old walkup apts had been.

    400 sq ft they promised could bring in 5k rent. My friend started to look interested until I asked him could he live in 400 sq ft..... Well if you can't, what makes you think others can - plus the 3 bedroom apartment which is 3 times bigger you are renting now costs only around 3k. Sure it's older but who thinks of that when they are sat at home watching TV.

    I also think like the writer of this article. Who is this fantastically stupid tenant who is smart enough to earn the big bucks to drop 5k on rental but simultaneously dumb enough not to do any market research on the property market before rental.

    I think the low interest rates are going to provide many casualties in the future due to present "affordability" and unrealistic yields (100% occupancy, no sinking fund or management fund included in calculation, no agent fees included in calc, no property tax in calc, no interest charge in calc, etc....) pushed by unscrupulous agents.
    What if the demand is so bad that people are willing to rent the MM units for a just $800? Sure demand will come back. It is a matter of price. As long as the price is attractive enough, people will go for it and perhaps, for a short one year lease to try out.

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    Quote Originally Posted by Leeds
    What if the demand is so bad that people are willing to rent the MM units for a just $800? Sure demand will come back. It is a matter of price. As long as the price is attractive enough, people will go for it and perhaps, for a short one year lease to try out.

    If the economy is bad, people would rather rent 4 room HDB for $2k per month and share it among 3 or 4 friends. cheaper and bigger.

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    All TCSS ... obviously depends on location mah

    The Trumps 1br (700sqft) rental is about there ..
    Ride at your own risk !!!

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    Quote Originally Posted by Ringo33
    If the economy is bad, people would rather rent 4 room HDB for $2k per month and share it among 3 or 4 friends. cheaper and bigger.
    a 3i hdb with utility room, 3 rooms alrdy 2k..

    perhaps then hdb at 1.5k/4 pax= $375/= chip chip

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    Quote Originally Posted by phantom_opera
    All TCSS ... obviously depends on location mah

    The Trumps 1br (700sqft) rental is about there ..
    if demand is bad or economy is bad as mentioned by forumers..

    doubt pple care much abt location by then.. rather concern abt their job and expenses to tide over

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    Quote Originally Posted by Ringo33
    If the economy is bad, people would rather rent 4 room HDB for $2k per month and share it among 3 or 4 friends. cheaper and bigger.
    As long as the rental market does not collapse, there is always a demand for the right price. There will always have people willing to pay a little more for privacy. If the competition get tougher, rental for MM may go to the point to compete with renting a single room of HDB flat. Market forces will dictate the fate of the rental rate for MM units.

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    Quote Originally Posted by jwong71
    a 3i hdb with utility room, 3 rooms alrdy 2k..

    perhaps then hdb at 1.5k/4 pax= $375/= chip chip
    MM owners should remember and MM property is a luxury item not a necessity.

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    Quote Originally Posted by jwong71
    if demand is bad or economy is bad as mentioned by forumers..

    doubt pple care much abt location by then.. rather concern abt their job and expenses to tide over
    I am surprised by your remark, property is all about location ... you are telling me MM @ Tanjong Pagar about 450sqft & 400sqft 8@W vs 450sqft Ripple Bay will have exactly the same rental when economy is bad??

    That's why teddy keeps saying buying 1.3kpsf SOHO in Punggol is mad
    Ride at your own risk !!!

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    Quote Originally Posted by Leeds
    As long as the rental market does not collapse, there is always a demand for the right price. There will always have people willing to pay a little more for privacy. If the competition get tougher, rental for MM may go to the point to compete with renting a single room of HDB flat. Market forces will dictate the fate of the rental rate for MM units.
    Assuming owner has a loan of $600K @ 1.5% for 30 years, monthly mortgage will be $2K + maintenance of $200 = $2.2K.

    How low can the owner go?

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    Quote Originally Posted by phantom_opera
    All TCSS ... obviously depends on location mah

    The Trumps 1br (700sqft) rental is about there ..
    yea lor...

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    Quote Originally Posted by Ringo33
    MM owners should remember and MM property is a luxury item not a necessity.
    It applies across the board.

    Some tenants will take the opportunity to upgrade to condos/landed or to better locations during a economic crisis. Whereas, some will be forced to downgrade to cheaper and poorer locations or even to HDBs when times are bad.

    So, be prepared to set aside a comfortable buffer to tide over bad times.

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    Quote Originally Posted by phantom_opera
    I am surprised by your remark, property is all about location ... you are telling me MM @ Tanjong Pagar about 450sqft & 400sqft 8@W vs 450sqft Ripple Bay will have exactly the same rental when economy is bad??

    That's why teddy keeps saying buying 1.3kpsf SOHO in Punggol is mad
    not refering down to same rental, but down in terms of same % +-...

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    Quote Originally Posted by Ringo33
    Assuming owner has a loan of $600K @ 1.5% for 30 years, monthly mortgage will be $2K + maintenance of $200 = $2.2K.

    How low can the owner go?
    self stay ?

    or partition the MB and living hall / HS to house 8 construction workers with 4 double deckers

    SOHO can put triple deckers
    Ride at your own risk !!!

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    Quote Originally Posted by Leeds
    As long as the rental market does not collapse, there is always a demand for the right price. There will always have people willing to pay a little more for privacy. If the competition get tougher, rental for MM may go to the point to compete with renting a single room of HDB flat. Market forces will dictate the fate of the rental rate for MM units.
    A fairer comparison would be comparing MM with condo master room.

    Market forces will determine the rental rate across the board.

    Bigger sized condos are not supported by the rental yield currently. Things will worsen when economy turns sour. Be careful

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    Quote Originally Posted by Ringo33
    Assuming owner has a loan of $600K @ 1.5% for 30 years, monthly mortgage will be $2K + maintenance of $200 = $2.2K.

    How low can the owner go?
    If investor has the means to hold on to the property, he would settle for the low rent instead of leaving the apartment empty. If he is not able to hold, he will sell it probably at a lost. This is when fire sale starts.

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    Those who buy MM has the means to pay 40% upfront... what do u think of their holding power?
    Ride at your own risk !!!

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    I had been to a MM showflat. The unit proposed to me was priced at 500k thereabout.

    Investors would be taking a maximum 60% loan of 300k. To be on a safer side, a 300k loan with 3% interest rate and a 25years tenure will have a monthly installment of $1423.

    A rough estimation will be $2k gross rental in order to maintain a positive cash flow.

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    Around 500 sq ft still ok. Those 300+ are bullshit. Anything below 400 is like shit.

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    Buyers of MMs should study the floor plan carefully and make sure that the layout is reasonable with minimum balcony and air-con ledge.

    For OCR MMs, to be on the safe side, rental of around 2000 pm would be reasonable expectation not even 3000 pm as this would be able to rent a 3 bedder in OCR in bad times.

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    Quote Originally Posted by phantom_opera
    Those who buy MM has the means to pay 40% upfront... what do u think of their holding power?
    It will be enlightening to know the profile of investors.

    If significant investors are HDB owners with limited funds and could only afford MM to "fulfill" property investment dreams, then we could be riding into a nightmarish situation soon...

    I even forsee URA allowing adjacent MMs to be converted into single bigger unit to reverse inefficient land use....

    Regards

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    HDB can enter the rental market and bring rental yield down down down if they oversupply again.... all mati...

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    It will be interesting to watch this sector in a severe down turn. There could still be takers as you may potentially have ? 4 pax in a well laid out MM with 2 sets of bunk beds, one in the bedroom and one in the living room. If an HDB storeroom can be rented out as living quarters, the MM can surely be "subdivided" and rented out to be shared in a dorm-style.

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    Quote Originally Posted by chiaberry
    Buyers of MMs should study the floor plan carefully and make sure that the layout is reasonable with minimum balcony and air-con ledge.

    For OCR MMs, to be on the safe side, rental of around 2000 pm would be reasonable expectation not even 3000 pm as this would be able to rent a 3 bedder in OCR in bad times.
    A 3 bedroom condo unit in the suburbs can go as low as 2k during 2003-2005. Similarly, it went as low as 2.5-3k for D9,10,11

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    Quote Originally Posted by phantom_opera
    Those who buy MM has the means to pay 40% upfront... what do u think of their holding power?
    You are right, most have strong holding power.
    Not easy to negotiate for a good MM deal in resale unless interest rates shoot up.

    Like what many have said, there will always have a market for MMs in CCR in good locations, with good facilities. In bad times, the rentals will be lower but most will survive. In the outskirts, it is harder to predict.

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    Quote Originally Posted by chiaberry
    It will be interesting to watch this sector in a severe down turn. There could still be takers as you may potentially have ? 4 pax in a well laid out MM with 2 sets of bunk beds, one in the bedroom and one in the living room. If an HDB storeroom can be rented out as living quarters, the MM can surely be "subdivided" and rented out to be shared in a dorm-style.
    I have seen desperate landlords turning their 3/4bedroom unit into a 'dormitory' too.

    Housing about 8-12 pax.

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