Back in August 2016, I met up with this couple who had fully paid their HDB flat in less than 10 years.
They bought their first flat at $400k back in 2008 and now in 2016, it has been fully paid off.
We met up to discuss the process of how they can move forward to buy their next property with his current savings on hand.
The couple has amassed very disciplined and decent savings of almost $200k and wanted to use this amount of money to buy the next property to stay.
The plan is to rent out the current HDB flat to collect rent so allowing them the monthly HDB rental cashflow to pay for the new property. Sounds familiar?
Based on my 10 years as a property agent, I can tell you this is the most common plan that a lot of Singaporeans have.
What if I tell you – this might not be the best plan in today’s Singapore property context?
Let have a look at what will happen if the couple decides to proceed with this plan.
There will be a payable Additional Buyer Stamp Duty (ABSD) of 7%. For a $1 million property, they will need to pay an additional $70k.
This is a painful amount. Imagine the amount of time that is needed to save up this $70,000 and use it just to pay tax to the government.
For comparison, it can probably pay for the university tuition fees of 2 of your children.
But wait! Are we forgetting the monthly cashflow we get from renting out the HDB flat?
Assuming the couple rents out the entire HDB flat at $2000 per month, it will take about 35 months to gain back the $70,000. That is almost 3 years!
Also at the same time, it is 3 years of paying out of your own pocket for the monthly mortgage fees of your new property.
The Main Killer To The “Keep My HDB to Rent Out” Plan
The main reason is this terminology that a lot of HDB owners are totally unaware of.
CPF Accrued Interest. This is the main reason that totally killed off their plan and forced the couple to consider other plans instead.
When a HDB property is sold, the sales proceeds will be used to refund the principal amount used as well as the accrued interest into their CPF Ordinary Account.
Let’s just imagine that today, you have already spent $400k from your CPF account to pay off your HDB flat.
ASSUMPTION: On the first day we get the flat, we assume we pay off the full $400K using CPF. If you sell on the 10th year, you will need to return back $112k CPF Accrued Interest more on what you have draw out. The total amount will be $512k.
Using an interest rates table, the usage of $400k multiplied by 1.025 for 10 years and you will get the same amount.
|Year||Accrued Interest Per Year||Total Interest||Balance|
So imagine this – your cash proceeds is never going to be as high as you think it could be.
Yes all the money still belongs to you as it is returned back to your CPF account.
But the CPF accrued interest will easily wipe out any cash gains you think you have.
Ok, then I won’t sell off my HDB flat then!
Assuming you decide to keep the HDB for rental, you do it for the long term.
You accept that $70K is your cost for keeping the HDB flat.
You decide to keep the flat for 30 years.
Guess what? At the end of 30 years, the accrued interest will now be $439k.
|Year||Accrued Interest||Total Interest||Balance|
So 30 years later, in order to make cash from this HDB flat you will need to sell at $839k and above.
Is this really possible? Today if the HDB is 20 years old and 30 years later, it becomes 50 years old.
Can you imagine what will happen to the Singapore property market when a 50-year old HDB flat can sell at $839k?
Most likely this will not happen – no matter how optimistic you are.
Ask yourself – would you prefer to keep something newer that will easily appreciate faster?
Or would you still keep a 50-year old HDB flat?
Let’s Fast Forward To You 30 Years Later
Imagine if you sell this 50-years old HDB at only $500k, you would have lost $339k. This would have been your opportunity costs.
Let’s look back at the yearly $24k cash you have collected from the rental of your flat.
About $10k goes to pay off your yearly CPF accrued interest. So now you have $14k/year remaining.
At $14k/year, you will need 5 years to make back your ABSD.
For the rest of the 25 years at $14k/year, you will make $350k.
However in terms of CPF, in the end you will lose $339k.
(FYI: Yes you can choose to APPEAL to CPF Board to NOT pay the $339K accrued interest by asking for a waiver. Based on today’s context, CPF will look on a case-by-case basis. But in 30 years’ time? We won’t be sure.)
Now looking back at this set of calculations – is this really a good investment?
I really don’t know. The perspective depends on how you want to view your CPF, your future home and financial standing in 30 years time.
Maybe putting the $400k inside CPF for 30 years and getting back $839k sounds less risky and less headache for me.
But we must give credit to the CPF system. Only with this system, we can afford to buy a house.
The main question is this: Are we making full use of this system that can have a big positive difference to our end results? A more financially secure retirement and better lifestyle?
The main reason how this couple got to know about this issue is because they chose to meet me to understand their current situation and what are their options available.
I do provide FREE consultation for couples who want to make changes to their property portfolio but are not sure how to go about it.
Imagine you making a decision today NOT to do anything and fully pay off your HDB flat — and thinking you are very safe & free from debt.
30 years later, you choose to sell your house you bought for $400k to cash out for retirement
And then you notice you might need to pay $839k back to CPF.
This is the type of issue that needs careful consideration from knowledgeable property consultants.
Feel free to contact me to understand your current situation now so you can get CLARITY on what to do next.
Only after with the knowledge, then you will know how to protect your assets.
You don’t know what you don’t know.
Sit down and do a thought experiment. Think ahead 30 years in the future. What will that future be like?
And if it relates to your property investment, it is best to sit down and plan ahead with an experienced consultant who has done many similar transactions before.
I like to use the analogy of rock climbing. I have seen how this sport has evolved from extreme sports to becoming mainstream thanks to increasing standards and regulations.
When you go rock climbing, you will find a professional to guide you and all the climbing gears needed to protect you. You won’t just find a rock cliff and start climbing wouldn’t you?
When it comes to property, we also need to consult the professional. This will be a painful experience if you don’t know what to do.
Feel free to contact me if you have questions or wish to review your property portfolio.
P.S You can read another perspective in this Mothership.sg article here.