For most new investors, the ideal property is a one or two-bedder condo unit. This is because the overall quantum is lower, and it can be affordable via a “sell one, buy two” strategy, or even as an initial stepping stone. However, property investing is a matter of detail and specifics – not all one or two-bedder units perform the same. In fact, given the large number of these small units, it’s even more vital that you be discerning, and make close comparisons. Here’s what you will need to consider:
Understanding the investment strategy behind a one-bedder unit
It’s important to understand that a one-bedder unit is primarily chosen for rental yield, rather than gains. Due to the low quantum of a one-bedder, rental yields tend to be higher than average.
Let’s look at the numbers right now:
As of end-May 2021, the average price of a one-bedder, Singapore-wide, was $1,002,392.
At the same time, rental rates for one-bedder units averaged about $2,533 per month, or $30,396 per annum.
From this, we can see that the gross rental yield of a one-bedder would be around 3.03 per cent.
For the sake of comparison, let’s now look at three-bedroom units (I use a three-bedder because this is the most common definition of a regular or “family size” condo, at around 950 sq. ft.):
We can see that at the end of May-2021, the average price of a three-bedder was about $1,818,416.
At the same time, rental rates for three-bedders averaged $4,232 per month, or about $50,784. This makes for a gross rental yield of only around 2.79 per cent.
I know the two figures seem quite close, but when you work out the net rental yield, the difference is even more significant. This is because the maintenance fees of a condo are based on share value – the bigger your condo unit, the more you pay every month.
A shoebox unit, even in a new launch, can have maintenance fees of around $150 to $200 (varies, depending on the development). A three-bedder unit, on the other hand, can have maintenance fees of around $400 or more per month. After you work out the net rental yield, you will also need to factor in property taxes and stamp duties, which are significantly higher for larger condo units. Ultimately, the rental yield of a small shoebox unit is almost always ahead of its larger counterparts.
Where shoeboxes don’t do as well, however, is in terms of capital appreciation:
For gains, we’ll look at the prices over a long term (15 years), which is a typical holding period for many investors. Over this stretch, three-bedder condos have jumped almost 80 per cent in value, whereas shoebox units have appreciated by only around 63 per cent.
This is largely because shoebox units are harder to sell. Consider that many condo buyers are upgrading from HDB – these are mostly family buyers. They cannot possibly squeeze their whole family into a shoebox unit.
This reduces the potential buyer pool – those who purchase shoeboxes tend to be retirees, or other investors (although other investors might decide they want a new launch one-bedder, rather than your second-hand one. They have no shortage of new offerings every year).
As such, most investors choose a shoebox for the two following reasons:
Investors who seek resale gains tend to prefer larger units. In addition, buyers who want legacy value (i.e., they want a home to leave to their descendants) will also prefer larger units.
Understanding the investment strategy behind two-bedder units
Two-bedders have rental yields that are roughly comparable to family-sized condos, but have outperformed both in terms of appreciation. Take a look:
As of end-May 2021, the average price of a two-bedder was $1,340,954.
At the same time, rental rates averaged $3,242 per month, or about $38,904 per annum. This comes to a gross rental yield of about 2.9 per cent, more or less comparable to a family-sized unit.
However, two-bedders have shown good appreciation over the years:
Two bedders have risen in price by 87.7 per cent over the past 15 years, doing better than even three-bedder counterparts.
The reason mostly comes from versatility:
First, a two-bedder can be big enough to be used as a home. For example, say your first home is a one-bedder. If you decide you want to settle down, you may be stuck: you can’t apply for an HDB flat while holding on to the one-bedder. But at the same time, it’s too small to act as a family home.
A two-bedder, however, can be a home for a young couple; at least for a number of years.
Second, two-bedders can sometimes have higher rentability than shoebox units. This is because a tenant can take on a roommate. By splitting the rent, the unit may actually become more affordable to both of them, as compared to renting units separately.
Third, you can sometimes persuade a tenant to pay a little more, for a bigger space. But it’s much harder to convince them to rent a shoebox, when they’ve made their decision that it’s too small.
As such, I tend to advise most new investors to consider at least a two-bedroom unit, if it’s within means. A shoebox unit may seem cheaper; but unless your main objective is a high yield or a low commitment of capital, it’s a bit less versatile as a property asset.
How do you compare and choose between one or two-bedder units?
The process has some similarities to other properties, but with some differences. Here are the steps involved:
This is the primary concern, for any investment property. Not all tenants look for the same amenities.
For example, in prime areas like Districts 1, 9, or 10, it’s less important whether your condo unit is near the MRT. This is partly because the area is already central, and partly because these areas picked by more affluent expatriate tenants – they will likely cab, or have private transport (tenants living on Sentosa Cove, for instance, are usually expected to drive everywhere).
On the other hand, if your tenants are students, MRT access – as well as being near their school – is going to be a major concern.
(On that note, two-bedders tend to work well for student demographics. This group is budget conscious, and having a room mate is a major cost savings for some of them. Some female students feel vulnerable living on their own, and will want a female companion to reside with.)
Also, disamenities can sometimes be advantageous for certain tenants. A nearby hospital may be taboo or noisy for some – but hospitals employ many foreign workers, who may appreciate residing nearby. Likewise, living near the airport may be noisy; but aviation workers may see it as an advantage.
For these reasons, knowing who you’ll rent to – and what’s important to them – should be the starting point for comparison.
The ideal unit count for most investors is around 500 to 600 units, with not more than 400 units being a mix of one or two-bedders.
If the unit count is very small (e.g., boutique development with less than 100 units), rental rates and prices tend to become volatile due to low transaction volumes. Also, maintenance costs tend to be quite high, as there are fewer units to split the costs.
If the unit count is too large – such as with mega-developments with over 1,000 units – competition becomes intense. When you want to rent or sell, chances are there are multiple units in the same development, or even same block, that are competing with you.
Using the URA Master Plan, look out for nearby plots of residential land that are vacant. The more of these there are, and the higher the plot ratio, the tougher the eventual resale prospects.
When new condos are built close to yours, they add competition for tenants. The worst scenario could result in tenants being poached when a new development springs up, closer to the MRT, mall, or other key amenity.
There’s also the risk that new developments will block your unit’s view, or bring noise pollution from construction; this can drive away tenants or lower rental income, for two to three years.
(Construction of new schools, malls, or MRT stations can also do this – but at least those amenities will help your rent and property value later.)
If you need help reviewing the URA Master Plan, do drop me a note, and I can walk you through it.
As a loose rule of thumb, buy either very low or very high.
The lower three floors can be noisier and have less of a view; but some tenants like that they don’t need to wait for the lift. Some will also want a pool view, especially if the condo is already obstructed (it’ll be better to have a view of the pool than to look at the back of someone else’s unit). Top floors, while more expensive, provide more privacy. In some developments, the view makes it worth it.
Mind you, this is just a guideline, and will vary greatly for the specific development.
For facing, the most important consideration is to avoid the East-West alignment. This tends to be the hottest, and creates the most sun glare (although some foreigners actually like the sun).
A north-south orientation is always ideal, although this sometimes results in obstructed views.
Please don’t compare asking prices or rental listings. These are not an accurate indicator, as it’s usually expected that they’re bargained down a bit.
You can check the transaction data for free on the URA website. Alternatively, let me know which development you’re looking at, and I can pull up the information for you.
For one and two-bedder units, layouts are of utmost importance, given the limited space. In general, avoid units with odd corners, and long walkways or corridors; these tend to just be wasted living space.
For two-bedders, go for a dumbbell layout, with the bedrooms connected by a living room in between. This removes the need for a wasted corridor.
As space is at a premium, you may also want to check what’s outside the unit. Sometimes, certain units get a bit more corridor space than others; this allows for a little more outdoor storage.
Do also look for a good floor-to-ceiling height. For reference, the average ceiling height is 2.7 metres – developers going for a loft feel will aim for about 3.2 metres.
Given that one and two-bedder units are small, the added ceiling height can add an important element of spaciousness. Sometimes, it’s the main distinction between your unit and a neighbouring project.
Do contact me for a walk-through, before you settle on your investment property
We can get a bit more specific, and I can help to show you alternatives nearby, or perhaps even in the same development. Sometimes, a 30-minute conversation can result in decades of financial pay-off.
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