IT IS every property investor's dream: buying a second home to rent out and having your rental income cover - or even exceed - the monthly mortgage payment.
However, with home prices in general now rising faster than rents, it is difficult to find investment homes that pay for themselves.
But it is still possible to locate such homes, say property experts.
In general, such investment homes are more easily found outside the prime districts, said Mr Eric Cheng, senior division director of property agency PropNex.
This is because home prices in districts 9, 10 and 11 have increased alongside rising rentals.
In contrast, some projects in city-fringe and suburban areas are commanding higher rentals without a corresponding increase in capital values.
In Tampines, for instance, a four-bedroom unit at 99-year leasehold The Tropica is now going for $640,000, down from its initial price of $800,000 about a decade ago.
However, the unit's monthly rental has stayed the same at $2,800, due in part to the schools in the area, said Mr Cheng. This means the property's rental yield is now about 4.3 per cent, compared with its initial yield of only 3 per cent.
He estimates that based on a 30-year loan, the monthly instalment needed for such an apartment would be $1,600 to $1,800.
'After property tax and maintenance fees, you would still have $500 to $600 in excess,' he said.
Right now, most projects on the market have rental yields of about 3 per cent to 3.5 per cent, added Mr Cheng.
But for monthly rental income to exceed the mortgage payment, you 'need rental yield to be in the range of at least 4 per cent roughly', said Mr Leong Sze Hian, president of the Society of Financial Service Professionals.
This kind of yield is more likely to be found in smaller homes, such as studios or two-bedders, which can usually fetch about 4 per cent to 4.5 per cent, said Mr Cheng.
One such example is an 840 sq ft apartment at the freehold Strata in Novena, which was bought for $700,000 and is now being rented out for $3,500 a month - an annual rental yield of 6 per cent.
But larger units may also command better rentals as they are scarce and in demand, said Ms Jacqueline Wong, national director of residential property at Jones Lang LaSalle.
'There will be an acute shortage of supply of large apartments above 2,500 sq ft to 3,000 sq ft when collective sale properties such as Lucky Tower come down, so these rentals would appreciate,' she said.
Older properties that can be bought more cheaply and then renovated to fetch higher rentals are also a good option, added Ms Wong.
But Mr Leong sounded a note of caution to such property investors, saying that 'in a property investment, rental yield is only one consideration'. Investors should consider the overall rate of return - including capital gains and cash flows - of any property purchase, he said.
He added: 'If you rely on cash flows from rental income to service your mortgage, that is very dangerous because if the market goes south you're facing foreclosure and possibly bankruptcy also.'
fiochan@sph.com.sg
