We had a recent opportunity to speak to a client who is exploring the idea of investing in a second property in Singapore. He’s a typical Singaporean, meaning, married with kids, lives in a HDB 4 room flat in Punggol and is keen to explore the path of property investing. We are not property investment gurus but we do know a bit of the property market in view of the past experience we had.
We had a few meetings and discussed diligently into his finances and we came to a conclusion that he will need to sell his existing HDB in order to free up his untapped equity in his HDB. He has a healthy cash savings and quite substantial CPF savings. This is still not good enough for him to make the second purchase in view of the recent cooling measures that were introduced on 5th July 2018. There were a few factors that affected him.
1. He has an outstanding home loan on his current home. This prevented him from getting a 75% max home loan. This means that his leverage is reduced to 45%. The difference will need to be topped up with with his CPF or cash and he will need to set aside at least 10% in cash for his down payment
2. ABSD – He will have to pay the Additional Buyer Stamp Duty other than the usual stamp duty. This takes another hit on his 2nd property purchase.
3. We explored the possibility of him redeeming his existing home loan. This is possible but once his home loan is redeemed, he will not have enough to pay for his down payment and ABSD.
4. The only option is that he will need to sell his existing HDB before making a purchase. In this way, he will be able to save on the ABSD and also better leverage on his home loan quantum as well.
5. What project to buy into? We suggested that he looked into his current neighborhood in view of his kids are studying around there. Having primary school kids is one big serious consideration in view that you want to consider the travelling time and safety aspect. Having a kid to spend 2 hours travelling to and fro from school affects the time they have for revision and studies. We suggested new launch projects within D19. Price point was attractive and projects are selling at prices lower than a lot of other projects. The only issue we had was that the project will not be ready till 2022. This became a discouraging factor in view of the following:
1. Waiting time – Where do I stay in the meantime?
2. Rent – renting is paying for someone else’s property and I am not comfortable with that.
Singaporeans typically are not used to the idea of having to rent a place while waiting for their properties to be ready. They feel that it is a cost to them and they cannot utilize their CPF for such expenses.
They would prefer to get something that is about to TOP or in the open market. In this way, they can channel their funds into the purchase and gain equity. Is this the best way? No straight answer as different people will think differently.
Let’s take for an example: Kingsford Waterbay, a condominium project in D19 was launched at a PSF of approximately $1,150.00. That was about 3-4 years ago. Today, the last unit was sold at approximately $1350psf. The price difference is a whopping $200psf. Is it a lot of difference? You do the math and you decide. Based on a simple calculation of a 850sqft 3 bedroom unit, the price difference between now and then is approximately $200,000. That is profit – either to you or the developer. If you bought a unit 3 years ago, it’s yours to keep but if you bought now, then it is the developer’s or the resale unit seller’s pocket. Still don’t get the picture? Because of the refusal to accept rent options, this profit is definitely someone else’s instead of yours.
Rent of 4 room HDB flat : $1800 per
It works out to be $21,600 per annum.
Supposedly a rent period of 3 years, it works out to be $64,800.
Sounds like a big number? Not really because if you were to minus the profit of your 3 bedroom unit in Kingsford Waterbay, you would still have made a whopping $135,200 over the 3 years and the rent is actually being paid for by the new home owner who bought over your unit in the project because they could not wait and could not accept the face that they have to pay for rent! So who paid for the rent? You or the buyer? The return on equity works out to be very attractive as well because you only set aside 25% of the selling price as a down payment – $277,500. The returns are $135,200!!! It’s approximately 50% returns over 3-4 years and it’s not bad for such an investment. Of course the numbers are based on hind sight but if you pick the correct projects, this is very true. Historically, we have seen what does commercial painting mean and this happening quite a fair bit. We don’t have much of examples to show now but maybe after we do our research deeper, we should be able to see some figures for comparison.
When seeking for opportunities in real estate, it is always advisable to look beyond skin deep because you may miss out on opportunities. On the surface, it may seem like it’s just another property to buy in but do you know what opportunities lies beneath? You need to speak to your consultant or agent to find out more. Go deep into the market, understand the opportunities and see the risks involved as well.
If you have a property agent or consultant that you work with and he or she is able to assist you in the calculations and help you to make some money, keep him or her and work closely with them. The relationship that is built is a lot more than the commission alone. It is the understanding that he or she has about you and that is knowledge which is unique to them.