The standard move for new property investors – who are quite often in the single digit millionaire bracket – is to buy a new launch, one or two-bedder condo unit. This is either flipped as a sub sale unit, rented out, or hopefully sold for gains within the decade. There are, however, single digit millionaire investors who have found another niche: buying old resale properties, with advanced lease decay. This is actually a strategy used to great effect by veteran property investors – here’s how it works:
Chasing high yields instead of resale gains
Consider a new launch property like The Continuum at Thiam Siew Avenue: at the time of writing (2024), the average price for this condo is $2,838 psf. About five minutes’ walk from The Continuum is an old leasehold condo called Dunman View, which dates back to 1997. This condo has an average price of just $1,547 psf.
For simplicity’s sake, let’s take a look at the price of a theoretical unit of around 700 sq.ft. (about a two-bedder) for either of the two. A unit of such a size might be $1.98 million in the new launch, and $1.082 million in the ageing resale condo.
Next, let’s consider a tenant looking around in this location. The two condos are so close, neither has a clear advantage. As such, the only difference to justify the rental rate is one being newer than the other. Assuming the typical rental rate in the area is $3,500 per month, the older condo might be getting about 10% less, or $3,150 per month.
The gross rental yield of a property is the annual rental income, divided by the total cost and multiplied by 100. In the case of the new launch, this comes to ($42,000 / $1.98 million) = 2.12%.
The older condo on the other hand has a gross yield of ($37,800 / $1.082 million) = 3.49%
So if the strategy is not to focus on resale, but to just sit back and collect rent for a very long term (maybe all the way till the condo goes up for en-bloc), the older resale property might make more sense.
The lease decay, coupled with the lack of a freehold premium, means you’re making more money from renting out the older condo unit. This also hinges a bit on tenant behaviour: if someone is just renting for a two or three years, they tend to care less about how new and shiny the unit is; and they definitely don’t care whether the condo is leasehold or freehold. As such, it’s a struggle to justify a much higher rental rate, even if the condo is newer.
The other advantage is the lower cash outlay. Assuming you use the maximum bank loan (75% of the total price), the new launch would have a down payment of $495,000. The older condo unit would have a down payment of just $270,500. With less capital locked up in the older condo, you can invest elsewhere and diversify your portfolio; or just keep more cash on hand to seize other opportunities.
You can also see how this might suit new investors with smaller budgets: the older units are more affordable, and can still generate cash revenue. In fact if the unit is old and cheap enough, and you make a larger down payment, it might be cash flow positive from day one (i.e., the rental income is higher than the various recurring costs).
Also don’t overlook the issue of construction time
It’s often pointed out that a new launch condo has progressive payment schemes, so you don’t pay the full mortgage repayment for a few years. That’s true enough. But a new launch condo takes about three to four years to build. In that time, you have nothing to rent out: all you’re doing is paying back the loan.
An older resale property isn’t just cheaper, it’s already built: you can start renting it out as soon as you complete the transaction and renovations. So whilst the older unit may incur a few higher costs – such as full loan repayments and perhaps a higher reno bill – the immediate cash flow might more than make up for this.
To some new investors, this beats even the early bird discounts offered for buying new.
This isn’t to say nothing can go wrong, or that this strategy is right for everybody
We are making a bunch of assumptions here, such as:
- The older resale property is not in such bad shape, that you end up with a giant renovation bill, or no one wanting to stay there
- Unforeseen circumstances, like the older condo going up for an en-bloc sale within a few years of your buying and renovating it
- The older property is so badly lacking in facilities, the rental income ends up being far worse than expected
We also wouldn’t say that – despite the lower cash outlay – going for older properties is lower risk. In fact the risk can be just as high, because if you make a mistake, and you buy a property no one wants to rent, you’ll struggle to find a buyer. It’s much tougher to offload a 20 or 30 year old condo, versus one that was just built in the last decade.
It’s important to remember that, with older properties, you’re focused on making money from long-term rental, and not resale gains. It’s quite possible that the property will depreciate by the time you sell it.
So this approach tends to favour investors who are in it for the long haul, or want a long-term, income-generating asset. It’s not for everyone, but it’s a niche strategy that has served some patient investors very well.
If you have questions or want clarity, reach out to us on Single Digit Millionaire.
