Passive Income: Real Estate

I've been thinking about how to earn passive income for a while - I believe that earning money should be separate from the time I invest in it. Here are some of the strategies I've been looking at and thinking of employing, with specific details to help you out. Written with examples for the Singapore context, but the ideas apply anywhere.

I've separated real estate from the rest of investing because it's not quite as easy as "set it and forget it". It requires some active management, more so than just investing, and I also wanted to touch on renting out your property.

Drawbacks

One drawback of real estate is that it can get pricey to start with (aside from REITs). The process to purchase can also take months and involve fees that can erode your earnings. Multiple people will also be involved, such as a lawyer to manage the purchases and any real estate agents involved in the process. Especially in Singapore, taxes are pretty high too. If you want to purchase property overseas, the process can also be more involved than just buying stocks; however, it could be worth the hassle if you have connections to that country. If you also eventually plan on using the property in other ways, such as staying in it yourself, it may also be worth it.

Fundrise looks to be a good way to get started investing in real estate, however it's limited to US-based clients.

HDB or private?

In Singapore there's public housing you can buy for cheaper, however the rules to qualify tend to be more strict.

A few reasons why private seems better for investment:

1. You can't do cash out refinancing with your HDB, which closes off one important way to get a higher return on investment on your property. This is because with the cashed out money from your property with a loan of, say 2%, you could re-invest it in opportunities that could give higher returns on investment.
2. The minimum rental period is 6 months instead of the 3 months for private property, and in order to rent out the property there are some limitations, eg you need to stay in the property for at least five years (minimum occupancy period).
3. HDBs don't grow in value anymore after a certain amount of years.

Capital appreciation (~15%)

Depending on your take on whether Singapore's property market is going to continue to grow at the same rate it has previously, you can consider investing in Singapore property. Otherwise, you may wish to look overseas - it's getting really expensive to own property here. However, right now there's no capital gains tax, so you get to keep all of your earnings.

Renting out your property

There are two ways to do it: 1. on your own, or 2. with a real estate agent. Real estate agent fees are typically half a month's rent for year-long contracts with a minimum of $500, and prorated for shorter contracts. You can claim this fee against your earnings on tax returns. It is of course easier with a real estate agent; one way you could do it is to use an agent for the first few rentals, then move on to renting out on your own.

The below is a simple guide on renting out a property on your own.

Renting out yourself

Preparing the place

Take as many pictures and videos as possible so that the ones who aren't interested can weed themselves out straight away. Decide if you want to allow visitors, cooking, pets and so on. These can affect the amount of rent you can charge for the property. You should also look at similar listings on existing sites to determine how much rent to charge.

Where to find tenants

You can start listing your room about one month before you are ready to rent out your room. You can try Roomies, Carousell, Facebook Marketplace or iLiveSG. Anecdotally, I've had better success with Roomies as compared to the other platforms, in terms of quality of tenants. As a tenant myself, I've previously found a good place via Carousell to live.

On Roomies, you can message tenants first, while on the other platforms, tenants have to come to you. I tend to message many tenants each day on Roomies while I'm looking for someone to fill the spot. You'd typically also arrange for in-person viewing before you and the tenant decide whether to agree to the rent agreement.

It will take about 2-4 weeks to find a suitable tenant.

Tenant background check

You should check the validity of the IC (done easily via ICA website) and obtain a copy of the passport for foreign tenants.

Contract and start of tenancy

You can follow a template from online or previous rental contracts you've signed to handle this part yourself. The deposit is usually one month's worth of rent and typically paid by the tenant to indicate interest in renting the apartment.

At the start of the contract, you should also take pictures of the condition of the room. This is so that you can prove that the tenant damaged the property (if any) and use it as basis to recoup some of that cost from the deposit.

Stamp duty

Either you or the tenant would pay stamp duty via the IRAS website.

3-6 months trial period

Especially if you are staying together with the tenant, it may be helpful to have a 3-6 months trial period where you see if you can handle staying with that tenant longer term.

Ending the lease

You can take stock of the property after the lease ends and deduct the deposit accordingly for any damages beyond normal wear and tear.

Taxes

You can check the IRAS website to see what you can deduct from the rental income. Basically, most expenses incurred in obtaining the tenant can count towards a deduction of taxable income.