Recenty, I have been seeing ads on facebook that was saying that “you can own multiple properties with little or no money down.” This is something that is not the usual norm and I decided to take the leap of faith and attended the seminar on what this is all about.
I went to the location and was greeted by loud music with a few pull-up banners with claims of how each and every student took action and acquired lots of properties with no money down and now they are living a life that they have always wanted. Living a life filled with passive income with no worries. Sounds good! Looks like I have come to the right place.
After listening to what they mentioned, it is clear that they do not buy properties with no money down. That statement merely means that if you do not have much money, you can look into your current assets to convert into liquid funds for the purchase. The concept is simple, sell your current property and use the funds to make the downpayment for your next so- called undervalued properties and collect rent. After netting of the bank repayment, if there is any amount leftover, that is your passive income. Sounds simple and straightforward.
If you do your sums correctly, this may work but please take note of the financing costs and CPF accrued interests. Let’s take the following as an example. It was mentioned inside the seminar that CPF money is not considered as money because it cannot be used to buy bread in the event of an emergency for your families. Makes sense but let’s take a look at how this “passive income” game works.
Before you jump into it, thinking that it is a good option, you will need to find out about the following as well:
1. Buyer’s Stamp Duty
2. ABSD
3. SSD
4. Financing Costs
| Property Price | Loan | Downpayment | Loan Tenure | Rent | Monthly
Repayment |
Nett
Cashflow |
|---|---|---|---|---|---|---|
| $1,880,000 | $1,425,000 | $475,000 | 25 Years | $5,400 | $5,976 | $-576 |
| $1,880,000 | $1,045,000 | $855,000 | 25 Years | $5,400 | $4,383 | +$1,017 |
Based on the above, this is an example of a unit in Duo Residences that was bought for $1,880,000, at an approximate $1,940psf. The unit was rented out for $5,400. If financing was taken at 75%, the monthly repayment of $5,976 will not be above the rent of $5,400. If you nett off the MCST fees, it will be even lesser. This is a negative cashflow. If 55% financing was chosen, then it is possible to have a positive cashflow but please think about the amount that needs to be set aside for the 45% downpayment – $855,000. Are there better options available out there?
| Property Price | Size | Loan | Downpayment | Loan Tenure | Rent | Monthly
Repayment |
Nett
Cashflow |
|---|---|---|---|---|---|---|---|
| $838,000 | 2251sqft | $670,400 | $167,000 | 25 Years | $4,000 | $2,842 | $1,158 |
From the above, this is an industrial B1 unit located in Ubi. The numbers looks reasonably ok. There is a net positive cashflow from this exercise. This is before the management fees and property tax. Another perspective is to look at the cashflow based on the cashflow method. The amount of cashflow as shown above for the outflow is the downpayment and the inflow is the rent being collected. Once we work this numbers, we will know the result. Just with $167,000, you get a income stream of $4000! a whopping 28% returns on an annual basis. Thats not too bad! Of course you will need to use a portion of the money to draw down your bank loan. It is still a good option as someone just helped you drawdown your loan! Even if you were to sell away your this property at a later date at the same price, you would have already taken more equity on the property with this loan drawdown.
Regardless of whether it is a commercial, industrial or residential property, it is advisable to look into the numbers before jumping into it. Get overly excited over a property may just cloud your logical mindset of what was originally set up to be done. Focus on what was the original goal and work the numbers. If the numbers do not make good sense to you, give it a pass and move on to the next property.
There are a lot more than what was mentioned. You will need to consider the remaining lease on the property and whether the property will maintain its value or depreciate over time. What is your time horizon for this investment. All these are factors to consider. No doubt that it creates a nice income stream but not all properties will create a nice income stream. You may have a positive income stream but this positive income stream may also be wiped out if the capital depreciates over time.
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