For most of us in Singapore, the greatest debt we incur in our lifetime would be our house and we work our whole lives trying to pay for it. Is it really that difficult? I’ve had many readers ask me how I even managed to buy a second property in Singapore when they’re already struggling to pay for their first (and in their minds, the only house they will ever be able to afford). Especially, in the current property market where our standard of living is just becoming higher and higher.
In times like this, let me tell you why a fully paid HDB might not be the best option for you.
I had recently met someone who subscribed to my emails and had taken up the free one hour consultation with me to discuss his situation. We had started sharing our stories for a while when he brought up an especially unique situation. A lot of times, I receive enquiries for consultations pertaining to quite straight-forward cases but this was an interesting one. Thus, with permission, I’d like to share this story with you.
In this particular case, the gentleman has a HDB in a good location which can yield him S$3,000 rental fee (passive income) every month. This unit has a worth of about S$700,000 and requires a monthly instalment of S$500 which can easily be covered by his monthly CPF contribution. If he were to sell his unit, he can potentially receive more than S$500,000.
However, he planned to rent the unit out and use the rental yield for better opportunities. So he sought my advice, asking whether this was a feasible undertaking and exchanging views of better possible options he could benefit from.
Initially, it took me a moment to consider how he could receive his regular passive income which seemed like the way to go. On the other hand, after mulling over it, I realised more than the rental yield, we should be focusing on the capital appreciation of the unit.
Because we were discussing other possible options as well, I had suggested in the event where he wanted both good passive income and receive a solid capital appreciation in the long run, we should be thinking about how we can put in a higher down payment on an undervalued property. Thus bringing down the monthly instalment and consequently, he will get to enjoy higher rental passive income.
Incidentally, at that time, I had also recently came across a great deal at Euhabitat with a unit at only S$630,000 when in the same development, there have been similar units transacted at prices up to S$780,000. Now, this is a prime example of a truly undervalued property!
Thus, when the gentleman had consulted me regarding his situation, I asked him if he preferred remaining with his S$700,000 HDB unit and wait for it to appreciate up to S$800,000 or switch to an undervalued property like the Euhabitat unit and possibly making an additional S$100,000 (because of its undervalue) immediately?
Both will benefit him but in this case, the undervalued property I had highlighted had more room to grow so he would stand to gain more from undervalued unit.
Moreover, all that he needs to do next is to wait for the property to be ready to be rented out in a few months’ time and he can also start receiving his passive income of rental yield. Thus by doing so, I could help him make a paper gain of S$100,000 plus his passive income.
There is no one solution to every question and I reiterate that for everyone, your final decision should reflect your values and individual circumstances. I did manage to suggest a few viable options that he could benefit from and it gave him a clearer idea of his situation from an outside perspective. Ultimately, he must feel comfortable with the decision that he finally makes but it does make an interesting matter to think about. Which brings me to the question:
What would I do given such a situation?
I would off-load my HDB unit for at least S$700,000. Sometimes, sticking with a property might not be the best option and as I have mentioned, I stand to gain more from another property than the current.
I would probably get about $500,000 after deducting the outstanding loan amount.
Now that I have the proceeds from the sale, I would put all of these proceeds into my next purchase with only a 25% loan. Means I will put in a larger downpayment of 75% to reduce my monthly instalments.
This is in order to enjoy the same passive income used to have from the HDB flat.
My monthly instalment will be only S$500 per month and I can easily, settle that with my monthly CPF contribution.
From there, I can rent out the unit to my tenants. How much rental yield I would request will highly depend on the total down payment I would put into the property according to my comfort level.
Keep in mind, for every S$100,000 additional loan quantum, it should bring you S$400 lesser passive income.
Here, the calculation gets a little more complicated and might be confusing thus I won’t get into the details here. However, if you’re keen to understand the figures more, do drop me a message here.
I would also like the opportunity to thank everyone for the support and for the many queries that also help feed my thoughts and give me new ideas. Looking forward to hearing more from you readers!
To really understand my property investment mindset that has allowed me to own 3 properties in Singapore – you can download the Property Investment Framework Guide here.