Advantages and disadvantages of renting or buying a studio condominium

Everything about real estate investment has always sparked a sense of passion among Singaporeans. No wonder the homeownership rate stands at around 87.9% in 2020. However, this raises the question of whether there is value in renting property in a country with such high homeownership rates.

Most Singaporeans will generally say that it is better to own and stay in their property, whether it is privately owned or an HDB flat, if they qualify, than to rent. Owning our property allows us to renovate the house as we wish and have a place where we can raise our family.

Whereas when we rent accommodation, we only occupy the place for a temporary period, subject to the terms and conditions of the owner, with an apprehension on the future rental rate, if the owner will grant an extension of what happens during of a change of ownership.

Despite these drawbacks, one should not readily judge that renting is inferior to owning your own condo studio.

Although the decision to buy or rent is based on a multitude of individual factors, we will discuss the pros and cons of renting a studio condominium versus buying it.

Read also : Is it worth renting and waiting for your BTO or paying the higher prices for a resale apartment now?

Advantages of renting a studio condominium

Advantages 1: You can get an idea of ​​the location and development before committing to the long term

Some of us, growing up, would have preferred to stay in a particular part of Singapore. However, for various reasons, we may not have had the chance to do so.

Renting a studio condominium allows you to venture to other cities in Singapore without fear of having long-term regrets. For example, one can covet a property in the first district 9. But it is only by living there that one will be able to understand the inconveniences at the morning and evening rush hours that one has to bear and the accessibility to other amenities that may not be a problem in a city from the heart.

In addition, it also helps to get an idea of ​​the livability of the development with respect to the working relations of the MCST committee and the maintenance of common facilities. Some condominiums may have hidden issues that may not be apparent at the start of the purchase, but will become apparent as you live there.

By renting, it gives the chance to live in a different neighborhood or development without having to make any long-term financial commitments yet.

Benefit 2: Save on initial costs required for purchase

Buying a private property requires a high down payment in the form of a minimum down payment of 25%, related taxes and legal fees. In addition to the down payment, you will also have to pay for renovation and furniture costs. However, as a tenant, there are no upfront costs other than the initial security deposit.

For example, a condo studio that costs $700,000 would require an initial down payment of approximately $230,600. The breakdown of these costs includes the following:

– 25% down payment: $175,000

– Stamp duty: $15,600

– Renovation and furniture costs: is $40,000

On the other hand, the tenant only has to put aside one month’s rent as a deposit for a one-year rental agreement. For a condominium studio, the rent can generally vary between $2,000 and $3,000.

Theoretically, if the tenant can achieve a return on investment of at least 10% per year based on the same initial cost of buying a property, the rental cost can be covered and the tenant can virtually stay for free.

Pro 3: more flexibility and mobility

According to the URA, the minimum rental commitment for private residential properties is three months. This gives the tenant both flexibility and mobility to change locations in Singapore or overseas without being crowded.

A tenant has little or no commitment to property maintenance or development and can easily move to another studio with better or newer facilities if desired. The owner, on the other hand, will be saddled with a higher maintenance cost just to maintain the condition of the property as the property ages.

Moreover, with the increasingly accepted mode of remote work, it will be easier as a tenant to seek such employment opportunities and be a traveling nomad than as an owner.

Renting also gives the tenant more flexibility and allows them to better react to changing job demands by moving to different parts of the island if job demands change.

Disadvantages of renting a condo studio

Cons 1: Time in market beats market timing

This adage that “it’s not about timing the market it’s about spending time in the market” is true not only for the US stock market, but also for our local real estate market.

Factors such as population and economic growth, coupled with land scarcity, have propelled Singapore’s property market on an upward trajectory over the past 40 years, according to the URA’s Private Residential Property Price Index.

Potential owners who chose to rent while waiting to reach the bottom of the real estate cycle might have been better off buying private property at fair value and keeping it for the past 5 years versus renting.

Based on the URA 4Qtr 2021 – Private Residential Property Rental Index, the index has generally remained flat since 1st Quarter 2017 to 4and Quarter 2020. Rents started to climb in 2021 due to COVID-19 restrictions on cross-border travel. This has led to a surge in rental demand from mainly Malaysians working in Singapore.

Appendix 1: Rent Index for Private Residential Properties

Source: URA

However, if we take a look at the house price index below, we can see that house prices have generally been on an overall upward trend since 2017.

Annex 2: Real estate price index of private residential properties

Source: URA

Therefore, renting a property as a way to time the real estate market is not always an effective strategy.

Con 2: Rent money is lost with no residual value

Proponents of home ownership would point out how buying a property is like a forced savings plan. As shown in the amortization chart below, monthly payments will add to the equity or principal amount of the home over time, as less of the payment is spent on interest payments.

Annex 3: Amortization table

Blue line – Principal amount; Black line – Loan balance; Gray Line – Interest payment

If we were to borrow $525,000 beginning in February 2022 for a 25-year term at a fixed mortgage rate of 2%, that equals approximately $2,226 in monthly payments.

The amortization chart above shows that a large portion of the principal payment (indicated by the blue line) at the outset is spent on the interest payment (indicated by the gray line). However, over time, the lines are separated and from the year February 2036, a larger part of the principal payment is dedicated to paying off the loan balance (indicated by the black line).

A landlord and tenant can pay roughly the same amount each month, either to the bank or to the landlord, respectively. However, as we can see in the amortization table above, a homeowner would have a higher paid-up home equity than the remaining loan after only 10 years, while a tenant would only have contributed the cost of ownership to the owner.

Con 3: Requires full down payment as unable to use CPF funds to pay rent

All Singaporeans and permanent residents of Singapore are entitled to receive CPF contributions if they are in an employer-employee relationship. For employees under 55, their overall CPF contribution rate is 37%.

For someone under 35, this will translate to a contribution of around 23% or $1,380.18 to the Ordinary Account (OA) if one were to earn $6,000 per month. Funds from our CPF OA can be used for a home purchase or a home loan. However, it cannot be used to pay rent.

As such, homeowners have greater flexibility in using their money or CPF to pay for their home as opposed to a tenant.

Read also : Complete Guide to Your CPF Contributions in Singapore (2022): Salary Caps, Contribution Rates and Award Rates

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