The Better Rental Strategy?

If you intend to buy an investment property to rent out, it’s important to first consider your tenant demographic. This is because different types of tenants value different amenities, and a location that one tenant would consider good would be considered bad by another. Tenants who form a family, for example, may prioritise school locations over having malls nearby. In this article, I will examine one of the most basic considerations – families versus unrelated tenants – and explain the investment pros and cons behind each one:

Before we begin, do take note on restrictions regarding the number of unrelated tenants

Back in May 2017, URA instituted a cap of six unrelated tenants for residential properties. This cap applies regardless of your property size – so even if you have a huge bungalow to rent out, the cap is unfortunately still six (as you can see, this already impacts your property investment decisions).

Note that if your family resides in the same property, this will lower the cap accordingly. So a family of three, for instance, can only take on three unrelated tenants.

URA has also clarified that domestic helpers count as family, for the purposes of this rule.

Pros of renting to families:

• Easier to rent out unfurnished
• Family tenants are more “sticky”
• Tend to sign longer leases at one go
• No need to mediate disputes between them
• Can spare you the trouble of collecting rental from multiple tenants

1. Easier to rent out unfurnished

In general, tenants who are singles or couples, or who are staying for a shorter term, will prefer fully furnished units. Families, particularly those settling in for the long term, tend to prefer unfurnished units.

This is because most families want to customise the furnishings to their own needs; they may want space for a crib, pool table, and additional study, etc. Having existing furniture in the home will simply get in the way (not to mention raise the risk of damage, if they have young children or pets).

This can be a win-win scenario if you’re the landlord: leaving the unit unfurnished means a smaller cash outlay at the start, since you don’t have to pay for any furniture. It also saves you the trouble of a lengthy inventory list, and having to check for damage each time the lease is renewed.

It’s not always true, by the way, that an unfurnished unit will rent for much less. There are scenarios where “bare bones” units have managed to rent for as much as their fully-furnished counterparts; just so long as the location is good. For more help on this, contact me directly, and I can give you a good estimate on the potential rental price for your area.

2. Family tenants are more “sticky”

This is not true for all family tenants. However, most families become more entrenched in a given location. This is because their children may go to a nearby school, or because the main breadwinners have their workplaces nearby.

I have also found that, over time, families with children tend to make use of enrichment or tuition services nearby; some of them are reluctant to change their children’s music or maths tutor, for example.

For this reason, family tenants are what we can call “sticky”. Once they settle in your property, they tend not to move until reaching a milestone many years later – such as the children completing school, they’re moving back home, etc. This is helpful to landlords, as you’re assured of having no vacancies for a certain number of years.

Some landlords will prefer families whose children have just started school in the area, possibly even giving them a better rate.  This can mean continued rental to the same family for four to six years, without having to re-market the property.

3. Tend to sign longer leases at one go

As part of being more “sticky”, many family tenants will sign two-year leases at one shot (or a shorter one-year lease first, and then subsequently two-year leases once they’re sure).

This saves time and money on your property investment. You won’t have to go through the paperwork, such as the Tenancy Agreements, as often as with six-month stay tenants. It can also save money, as every time a tenant moves, there’s a risk of vacancy before the next one moves in.

That’s why landlords who don’t like to keep listing the property, and vetting new tenants each time, may prefer family tenants.

4. No need to mediate disputes between them

Family members can be left alone to settle any disputes between them. This is quite different from unrelated tenants – if you have two or three student tenants who are quarreling, for instance, you tend to end up having to mediate (lest you risk losing one or more of them).

Mind you, family tenants do not guarantee a lack of drama. There are cases where domestic disputes are so bad, the management and neighbours will press the landlord to handle the situation; so do vet your tenants with care.

5. Can spare you the trouble of collecting rent from multiple tenants

If you have unrelated tenants, you will have to collect rent from each of them separately (unless you have only one master tenant, subletting to the others). This has more administrative difficulty, as you need to track who has paid, who hasn’t, and who has been late or on time more often. It also, invariably, means spending more time making phone calls or sending emails/texts.

With family tenants, you only need to collect from the one family. One adult can usually speak for all of them, if there’s any problems with the rent.

Cons of renting to families:

• More custom needs
• If they leave, you lose all the rental income at once
• Potential noise and damage issues where children are involved

1. More custom needs

Families may have more needs to accommodate, compared to singles or young couples without children. For example, families may require you to accept pets (and note that families are more likely to own multiple pets than singles). They may need to convert a room to a nursery, or may need modify windows with safety grilles.

As I mentioned above, it’s sometimes better to offer the unit unfurnished for them to customise. If you already have a fully furnished unit, however, these changes can be troublesome to accommodate. Do remember that, after they move out, you may need to reconfigure everything again for the next tenant.

2. If they leave, you lose all the rental at once

One advantage of multiple unrelated tenants is that, even if one or two leave, you’re still able to collect rent from the others. With family tenants, all your eggs are in one basket – when they leave, the rental income drops to zero.

This means you need to be more careful with maintaining a flow of tenants; you want to ensure that a new family is waiting to move in, as soon as the existing one moves out. However, this is easier said than done at times; such as in the current Covid-19 environment.

Investors will need to brace themselves accordingly, for any dry spells.

3. Potential noise and damage issues where children are involved

Where there are young children, there’s bound to be more noise. Likewise, expect more potential damage like stained walls, soiled furniture, etc. There really isn’t much you can do about this, it’s just part of the package.

One of the worst outcomes is that the children are so noisy, the neighbours and building management start to complain. These situations are always a bit awkward, as you’ll have to talk to your tenant about it. People are sensitive about their children, so this demands a lot of diplomacy and tact.

Pros of renting to unrelated tenants

• • Generally less demanding as tenants
  • Multiple sources of rental income
  • You might generate higher rental income overall
  • Can occupy smaller, low quantum units

1. Generally less demanding as tenants

Singles and young couples are, as a whole, less finicky than most families. They tend to have fewer pets, don’t need to accommodate children, and – for those on a budget – are fine with accepting fewer creature comforts.

There are single tenants who are okay with sleeping on futons or mattresses (these tend to rent unfurnished units); and many make limited use of kitchen equipment. Many singles, for example, just use the microwave oven or induction stove; whereas family units are more likely to do full-blown cooking, frying, baking, etc.

2. Multiple sources of rental income

Even if one tenant leaves and there’s a vacancy, at least you can collect rent from the others. Even decreased rental income is better than no income. Quite often, keeping just two rooms rented out will cover the maintenance fees, or the interest portion of your home loan.

Of course there’s still a chance that everyone might leave, but this is less probable compared to family units.

3. You might generate higher rental income overall

Sometimes, renting out each room separately would generate higher rental income. As an example, I know of at least one condo where the average rental should come to about $3,000 a month. However, the owner rents out four rooms at $600 to $800 per month, and a master bedroom (big enough for two) for $1,000 per month. This comes to around $3,400 per month in rental income.

It’s impossible to tell you, without checking, if this can be done for your property (drop me a note if you want me to take a look). However, the increased rental income and yield may justify this approach.

4. Can occupy smaller, low quantum units

Few families will rent a unit smaller than 800 sq.ft., with the “typical” family size condo being around 900 to 1,100 sq. ft.

New investors may be priced out of such larger units, which can average about $1.6 million even in fringe regions. Compact units at 500 sq. ft. or less, however, can still be found at prices below $1 million (even for new launch condos).

As such, a new landlord may want to start small, and focus on getting units to rent to single tenants first.

Cons of unrelated tenants

• Less entrenched than families
• Have to deal with each tenant separately
• Must watch out for those engaged in illicit activities

1. Less entrenched than families

Single tenants are more price sensitive, and also less attached to a unit (they have fewer belongings to pack up and move). This means they’re quicker to relocate, when they find a lower priced unit; sometimes within the same development.

Most of them are aware of this advantage, and may also insist on signing shorter leases – this is to give them the flexibility to move, as soon as a cheaper option presents itself. This increases your overall costs, as you need to re-market and find a new tenant each time.

2. Have to deal with each tenant separately

As I mentioned above, you need to collect rent and track payments for each separate tenant. Also, you’ll have to come down to inspect the unit, handle the handover of keys, etc., every single time one of the tenants moves out.

This can result in unrelated tenants becoming a large drain on time. Landlords who own multiple properties, all with unrelated tenants, can end up needing an actual accountant or property manager; although some might consider that a “good problem”.

In addition, individual tenants may bring up multiple complaints, one at a time – you need to hear it all out separately. The worst is when the complaints are about each other, at which point you have to mediate. I have encountered drastic situations where one tenant accuses another of theft; a far less likely headache if the landlord had rented to a family.

In any case, new landlords should keep in mind that multiple tenants will be a bigger drain on their time.

3. Must watch out for those who engage in illicit activities

Singles bring about a greater risk of issues like prostitution, gambling dens, or even using the property as a storehouse for contraband (e.g., unlicensed cigarettes). As a landlord, the law will hold you accountable for these issues.

As such, those who rent to unrelated tenants need to pay closer attention, and ensure nothing untoward is going on within the premises. Remember that, if one tenant does the wrong thing, all the other tenants could be affected as well (e.g., if the police need to search the property because one tenant smuggled cigarettes, then all the rooms will get searched).

Whichever option you pick, it’s advisable to have a realtor on your side, at least for the first few tenants

You can save money renting out your property on your own. However, for new investors. I suggest you get help from a realtor. Do this for the first one or two batches of tenants, and observe how all the paperwork is done. Once you’ve familiarised yourself, you can then use a DIY approach to finding subsequent tenants.

For more on rental strategies and the Singapore private property market, follow me on RonChongProperty.sg. I’ll keep you up to date with the latest happenings in the local real estate.