I get the feeling that most of us don't like the idea of renting a place to stay in Singapore. Why pay rent and not own the place? We are helping the landlord pay his mortgage on the property!
However, a question then is what if we were to buy our home only to find out that we bought it at a price too high? That has happened to many people before, I am sure. Then, in such an instance, the person who chose to rent instead of buying would have done better.
How not to pay a price too high?
I am sure that there are many things to consider but there is a nice little rule that can make it easier for us to make a decision on whether to rent or to buy.
"Rule of 15" says that if we could buy a home at a price that is 15 times or less the annual rent a similar property would fetch in the area, it makes more sense to buy than to rent.
So, if a two bedroom condominium is selling for $1.5m and the gross annual rent a similar property in the same area is $60k, it makes more sense to rent than to buy. Annual rent of $60k x 15 years = $900k.
We can also use this simple rule of thumb to help decide if we would like to put up a property for sale.
If we look at it in terms of rental yield, this rule is basically saying that if the gross rental yield of a property is 6.66% or higher, it makes sense to buy and if it is lower, it makes sense to rent.
For a while now, we see people buying real estate in Singapore and being quite happy with rental yields of 2+% to 3+%. This is acceptable really only because of the abnormally low interest rate environment. It won't last.
The "Rule of 15" is a rough gauge but it is a sensible one as it suggests that a 6.66% gross yield, whether we are owner occupiers or real estate investors, is what we should be looking for to survive more normalised (i.e. higher) interest rates in future.
Definitely, it does not take in all factors which are necessary for consideration but it is a nice preliminary check on whether we should buy or rent a home.
Leverage up and buy investment properties.