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Shoebox Apartments – Be Aware Of What You Are Buying
Back in the days when a ride on a feeder bus cost just 15 cents, we can find huge spaces in HDB flats with rooms that can fit a king size bed, CRT television sets, a big dressing table and a physical elephant too.
But these days with such a huge manpower influx that has supercharged a population increase, space has become an elite luxury in land scarce Singapore.
Properties prices are now so much higher per square foot while apartments are getting smaller.
But surely there must be a line whereby buyers will stop and think: “Wait a minute”.
As reality has played out, this line does not seem to exists.
More people are now harping on the factor of “affordability” being the main reason why people are eating up these shoebox apartments like butter toast. But nobody can assume that buyers of shoebox apartments are clueless.
Although affordability is a big reason for purchases, buyers have after all made the decision to buy knowing how much more they are paying per square foot by comparing prices of shoebox apartments and units with a more respectable space.
Generally speaking, rentals and prices per square foot rises when apartment sizes go down.
Another key reason why shoeboxes are being gobbled up like a Japanese buffet could be that buyers are not really aware of what exactly they are buying.
If you are buying one, you should make an effort to have a feel of how much space a 500 square feet apartment really feels like.
500 is a prudent number. Most of such units being sold are less than 500 square feet.
A number of new launch show flats do not build shoebox units for viewing.
When you indeed run into a launch with shoebox apartments built for viewing, you must also be aware of the expert home design concepts being used to maximize space which makes the apartment appear visually bigger than what it usually is.
Common things that can induce these visual effects include:
1) using full length mirrors for every wall
2) using ceilings higher than what will be actually built
3) living areas extended to balconies with only a white tape on the floor indicating the actual size
4) using glass wall instead of a solid wall for show flats
5) using tape as an indication of walls in actual units
If you have traveled to some parts of Tokyo or even Hong Kong, you might have seen what some of the small look like.
And if you had the luxury to spend a night in one of these cramped apartments, it must be a humbling experience indeed. Now imagine spending at least 6 months living in one of these cramped apartments.
From an investment standpoint, the numbers could be attractive.
As mentioned earlier, higher rental per square foot can be generally expected as sizes decrease. You will also get to own a property at an affordable price point.
And if you managed to snag a unit in the city area, you can also expect rental premiums to be higher than those outside the city.
But don’t forget the demographics of the tenants you will be targeting.
Too many people are jumping into private properties for investment just from reading reports in newspapers on how well properties are performing. Many of those don’t even know how a property rental yield is calculated.
Getting a shoebox unit in town could sound like a good investment. But in the end, it all comes down to numbers and whether tenants are willing to pay your price.
Tenants who are insistent on living in the city are probably on good paying jobs that are based in the city. They would most likely have a housing allowance as well if they are foreigners.
If you price yourself too highly, these tenants could find better value from a long term arrangement with one of the many hotels around. They will get all the hospitality and extra services that a hotel provides.
On top of that, flexible leases may allow them to save on rental when they are traveling.
And depending on where they come from, they could be used to apartments with a much larger space compared to Mickey Mouse shoeboxes.
And when you price yourself too low you might find that you will not have enough cash flow to even repay your mortgage.
In this case, you can only hope and pray that you can make that back from capital appreciation through the property value.
But selling that off in future to realize the paper gains is also a big challenge. Read more about this in another article on shoebox apartments.
Have we talked about the competition?
For property watchers genuinely concerned about the well-being of shoebox buyers, the best case scenario is that all buyers are singles who have signed on the dotted line happily looking forward to a long term stay in a cramped apartment.
But if half of these purchases are investors, you could be looking at fierce competition for the already smaller pool of tenants willing to rent small apartments.
You are also competing with bigger apartments for tenants, mind you.
When someone has an income comfortable enough to live in the city, you can almost assume that they also have a considerable disposable income to spend.
If an expat working for an MNC with a housing allowance of $8000 is looking for an apartment in the city, do you think he is more likely to rent your shoebox apartment for $3000 or take up a more decent living space for $5000?
If your smaller apartment suite or SOHO unit is in the heartlands, you could be looking at even more competition as HDBs come into play.
If you are unaware, a significant number of HDB owners have upgraded or upgrading to private properties. And they do not sell off their HDB flats. No, they keep it and rent out to collect passive rental income.
When an expat with a housing allowance of let’s say $4000 looking to rent an apartment in Seng Kang-Punggol, do you think you can sway him over for $2500 for your shoebox apartment instead of a 4 room HDB flat for the same price?
It’s already not as easy as most real estate gurus preach to make money from properties. Add that up to the unproven shoebox apartments in Singapore, you have a challenge up ahead to make it work for your bank account.
Be aware of what you are buying and don’t act like you know what you are doing when you do not.
Image Attribution: z287marc