Getting Started On Property Investing

Professional property wealth planning advice can improve investment returns and lower costs.

(As featured in the Dec 2017 Issue of The PropertyGuru Newsletter)

Property Wealth Planning

Increase your probability of success by applying these considerations to your next investment.

Since the beginning of 2017, we have witnessed a robust return of both institutional and retail investors into the Singapore property market. It is no surprise that after four years of muted action following government cooling efforts and where many investors ventured abroad, that this pent-up appetite has returned with a vengeance.

For a new investor, it is crucial to understand the reasons why you place your hard-earned dollars into property instead of other investments.The property market, as with any other markets, is cyclical in nature. But of greater interest to the individual investor is to realise that Singapore’s property market has one of the best long term returns on equity performance out of most investment instruments available. And that has to do largely with the strength of the Singapore dollar, the availability of high leverage, and the attraction of Singapore to the international audience, not just as a region to invest in, but as an asset class on its own.

As a Singaporean and an avid market observer, I have always stressed to my friends that they must invest and remain vested locally, despite the beckoning of overseas properties.Chief among the reasons are that they would be better protected against inflation, which is just as certain as death and taxes, and will be able to see their wealth grow steadily over time through the compound effects of inflation (akin to interest) on their real estate.

As Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”In this article, I will focus on the fundamentals for those who are beginning their journey.Before you embark on searching for your investment property, it is important to have gone through this checklist below.

1. Finances

Prior to looking at any property, you should speak to a property wealth planner about your finances to understand the initial cash/Central Provident Fund (CPF) outlay required. Having an experienced third party do an assessment would help you prevent costly beginner mistakes that could seriously hamper your journey to financial freedom. A responsible property wealth planner would help you assess the minimum cash and CPF required for the down payment, buyer stamp duties, legal fees and miscellaneous costs, as well as advise you on an investment road map for the best acquisition strategy as you progress along and acquire more properties.

2. Loan eligibility

The current Total Debt Servicing Ratio (TDSR) framework makes it especially important for investors to check on their maximum loan eligibility so that there are no nasty surprises after placing a deposit. In this case, speaking to a mortgage banker should be one of your priorities early on.

3. Manner of holding

For investors who already own an HDB flat or private home and are acquiring their second property, a property wealth planner can advise you on the various options available to optimise tax savings (which can be significant) and qualify you for more funding options. This is especially important for those who intend to grow their portfolio of properties and would require access to higher leverage and lower costs.

4. Investment goal and horizon

Having a clear idea of your investment goal horizon helps you filter the segments in which you should focus on.

Examples

– Are you investing in properties to provide a consistent source of passive income? In this case, focus on areas with low vacancy rates and a high tenant catchment pool.

– Are you investing in properties short term to ride the market trend? In this case, are you financially prepared to hold on in case a black swan event occurs?

– Are you investing in properties with en bloc potential? In this case, are you well advised on which properties have genuine potential? Not all old properties have en bloc-ability.

After going through the above points, the following are factors that have served me and my clients well in the past as an investment criteria checklist.

1. Capital growth potential 

One of the indicators of a good property is how it performs relative to the price index of its district. For example, if a particular project has appreciated more than its district in the past one year, it could indicate higher buying demand that is a result of various factors such as distance to amenities, quality and maintenance, design and facilities, etc.

2. Rental yields

Good rental returns are indicative of a sought-after project. It is important to note that despite being in the same vicinity, there are projects that suffer from high vacancy rates and low rentals even when their neighbour enjoys the opposite. Thorough research is critical to making a good judgement call on the investment grading of a project. Study the rental data not just in the project you are interested in but also in the neighbouring projects to uncover any discrepancies. It could help you find better investments as well.

3. Growth story

Infrastructure investments is one of the common reasons why real estate flourishes in certain areas. This happens everywhere in the world and more recently onshore, we can look at values of Sengkang, Punggol and Jurong as examples of how infrastructure investments have impacted property prices. If the area you are investing in has a massive growth story fuelling it, there is a good chance you will enjoy the fruits in the years to come. Do take note though that thorough research is still necessary, and it is imprudent to invest in just anything just because they are located in growth areas.

4. Below market value

Where possible, investors should look out for properties below market value so as to begin their investment journeys with what we call “built-in profits”. Granted, it is not always possible or easy to find such properties as they are usually snapped up quickly. It is, however, a good guiding principle to consider before you make any decision on a property. At worst, the one you decide on should be at fair market value and at best, below market value.

As a rule of thumb, the more factors above that your property fulfils, the better its investment potential. I would akin it to this analogy. If it fulfils just one out of four factors, there is a 25 percent chance of it being a good investment. If it fulfils three out of four factors, you have a 75 percent chance of it being a good investment. And so on.

Property investment is a team sport and i highly recommend that investors assemble a team consisting of mortgage specialists and property wealth planners to advise them. The collective wisdom and insights will help you prevent costly mistakes and blind spots in your judgement which could take years to unravel.

All the best and i wish you a successful investment journey ahead.

Monetising Your Property at Retirement

For many of my clients, building wealth steadily and preparing for a comfortable retirement are the two most important financial goals they have set in their lives. As a greying nation, this topic has become more commonly discussed in recent years and is set to be an even more significant topic in the years to come.

Whether clients are living in HDB flats, condominiums or landed properties, there are various ways that they can utilise their home equity saved up over the years to provide for a comfortable retirement.

In this article we will explore the options available to different segments of home owners.

For a HDB flat owner, there are 3 ways to unlock equity for retirement needs.

1. HDB Lease Buyback Scheme (LBS)

Goal: This scheme helps flat owners to receive a stream of income in their retirement years while continue living in their properties.

How It Works:

Owners sell part of their flat’s lease back to HDB in return for proceeds that helps them top up their CPF Retirement Account to purchase a CPF Life Plan which pays them a monthly income for life.

Conditions:

This scheme is available to owners of 4 room flats or smaller who have met their MOP and are at least 64 years of age with no other properties. At least one of the owners must be a Singaporean and monthly gross household incomes must not exceed $12,000. The minimum tenure remaining must be at least 20 years. (Other terms and conditions apply)

2. Right Sizing Your Property with Silver Housing Bonus (SHB) Scheme

Goal: Lower-income households get to unlock equity in their homes to provide them an income during their retirement years.

How It Works:

Owners get to enjoy up to $20,000 in cash when they sell their property and utilise part of their sales proceeds to top up their CPF Retirement Account and join a CPF Life Plan that pays them an income for life.

Conditions:

Owners must be at least 55 years of age, met the Minimum Occupation Period (MOP), have a monthly gross household income of less than $12,000, not own any other properties and purchasing a flat not larger than 3 rooms. (Other terms and conditions apply).

3. Renting out rooms for regular income

Retirees whose children have left the nest can monetise their properties through renting out rooms in their flats. This provides them with a stable and regular income that can provide for a basic quality of life in their later years. A 4 room flat owner would usually be able to rent out 2 bedrooms for an average of $400 each while occupying the master bedroom for themselves. For retirees who have the option to live with their children, renting out their entire flat would usually yield at least $1600 to $2000 per month.

Options for Private Property Owners:

Private property owners whose property annual values do not exceed $13,000 get to enjoy the same Silver Housing Bonus benefits if they fulfil the criteria as above mentioned in Point 2.

For owners with higher value private properties, they may choose to unlock equity in their homes through equity loans or private banking facilities.

Equity Loans:

Equity loans are loans that are taken out when a property has appreciated in value or has its loans paid down partially or fully over time. The beauty of such loans are that they are similar in cost to a mortgage loan (At present writing, 1.4%), and have tenures extending to 75 years of the borrower’s age or 35 years in maximum tenure. This provides retirees with a low cost source of funds that can be deployed to defensive retirement investing strategies to yield higher returns. Take note that banks will have credit checks in place before granting you the loan.

For example: by topping up one’s CPF, one can enjoy up to 3.5% risk-free returns from our Ordinary Account and up to 5% from our Special Account. Retirees above 55 can even enjoy up to 6% returns. Despite the common gripes we are used to reading about CPF, the truth is few investments are available to the masses that can provide such high returns whether the global economy does well or not.

Private Banking:

Private banks offer various manners to monetise properties that allows high net worth clients to collateralise their fully paid properties for funds. The options available to such clients vary greatly between straight forward revolving interest loans to complex ones that involve foreign currencies and carry trades.

For example: Investing in a higher yielding foreign currency of 5% while borrowing at 1% interest rates and maintaining minimum float. The nett positive carry provides good returns while still allowing clients to utilise the majority of funds for other yield accretive investments.

In summary, over my years of advising clients on property matters, a common thread exists. Those who have upgraded their properties during their most active work years or have invested in more than one property have more options available to them during their retirement years.

Inflation is as certain as death and taxes – The “fortunate” event that has occured for those who have invested in properties is that the pace of real estate inflation has thus far exceeded the pace of inflation in healthcare, education, food and transportation. This wealth accumulation effect has hence helped many of them hedge against rising costs and provide them greater freedom and flexibility in the later years of their lives.

As published in the Fund and Gains Section (October 2017) of PropertyGuru Newsletter.

Do You Gain or Lose if you bought a Million Dollar Property and sold it at the same price in 5 years time?

PROPERTY INVESTMENTS 101

Successfully investing in properties is not just about the potential capital appreciation that a property can bring. The essence of successful investments is in finding a stable income stream that safeguards your downside risks and helps you make a consistent profit even when market cycles are not in your favour.

 

Do You Profit or Lose if you bought a Million Dollar Investment Property and sold it at the same price in 5 years time? 

Before we go any further, spend a few moments to think about the answer to the above.

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Have an answer in mind? Good! Let’s examine whether your understanding of property investment is complete and correct.


 

First, let’s establish some key factors.

  1. We are talking about a RENTABLE property selected according to the Fundamentals of Good Property Selection (i.e. Right Entry Price, Growth Hotspots, Near Amenities, Transportation Modes, Tenant Catchment areas and Decent Rental Returns)
  2. It IS a rented out property. The following analysis does not apply to a property you live in.
  3. It is rented out for the duration of 5 years at fair market rents. (4% rental yield. (Yes, these aren’t unicorns! Find them at https://www.squarefoot.com.sg/market-watch/rental-yield)

 

Now, assuming that a buyer puts down 20% for this property and takes an 80% bank loan, 

Purchase Price: $1,000,000
Cash/CPF downpayment: $200,000
Bank Loan: $800,000
Buyer Stamp Duty: $24,600
Legal Fees: $3,000

Total Outlay: $227,600 in Cash and/or CPF.

Based on 4% rental yield, he would have collected $40,000 per annum in rent. (Purchase Price x 4% = Annual Rent Collected)

Rental collected over the 5 years will be used to pay for these expenses: 
Average Loan Interest: $997/month
Maintenance fees: $250/month
Property Repair costs: $1,000/annum (A more than reasonable figure)
Brokerage Fees: $8915.80 including GST (5 years of brokerage fees)

Total Rent Collected Over 5 years: $40,000 x 5 = $200,000
Less Interest Expenses: $59,820 (Use a mortgage cal. to derive interest over 60 months)
Less Maintenance Fees: $15,000 ($250/mth x 60 months)
Less Annual Property Repairs: $5,000 ($1,000/year x 5 years)
Less Brokerage Fees: $8915.80 (1/2 month fees per year + GST)

Nett Equity/Passive Income = $111,264.

 

At this point, if the owner sells off the property at his purchase price of $1,000,000, he would have an outstanding loan of $689,955 and incur the following costs:

Selling Price: $1,000,000
Less Outstanding Loan: $689,955
Less Brokerage Fees (2%+GST): $21,400
Less Legal Fees: $3,000

Nett Cash/CPF Proceeds: $285,645 which means he would have made a Return on Equity of 25.5% in 5 years time even if his property had not increased in value by a single dollar. (Remember his starting Cash/CPF used was $227,600)

Not too bad eh?

You may be asking why this happens..

Well, simply put, these are 2 factors that savvy property investors understand and use to their fullest!

  1. OPM (Other People’s Money) – Basically a bank loan helps you own a property sooner with minimal cost of funds. Yes, loans are not necessarily a bad thing!
  2. Positive Carry – Where the returns offset the cost of funds sufficiently to produce a positive yield.

So.. Did you get this right? I certainly hope so!

The Right Real Estate Education is the first step to increasing your wealth building abilities!

Rarely are there investment instruments for the masses with such sturdy safety nets, and generous leverage that enables you to accelerate towards your retirement planning goals.
Do you agree or disagree? Let me know your thoughts in the comments below and remember to share this article with your friends if you have benefited from learning this! 😊🍻

 

 

Deferred Payment Scheme – An Explanation on how they work for property investors

If you have been actively searching for an investment property in the past year, you should have come across several developers offering different Deferred Payment Schemes (DPS), a popular marketing scheme that was previously abolished in October 2007 due to the upswing in the economy and the property market.

The return of DPS is yet another interesting and creative loophole that developers are using to incentivise buying in projects that have been slow to move, or burdened by the upcoming Qualifying Certificate (QC) and Additional Buyer’s Stamp Duty (ABSD) penalties for not selling all units within a stipulated period.

In the past, such schemes were only offered in new project launches, and payment of up to 90 percent of the purchase price could be deferred until the Temporary Occupation Permit (TOP) date.

The latest versions of DPS are different from what they were previously, as they are now only allowed after the Certificate of Statutory Completion is issued, and the project is delicensed and no longer under the purview of the Controller of Housing.

What are the benefits of buying a DPS project?

The essence of a DPS lies in when the option needs to be exercised, and how long the completion period is deferred for.

Typically, a buyer would pay a 20 percent down payment (five percent in cash and 15 percent in cash or Central Provident Fund (CPF) savings) for a new unit, pay for stamp duties within two weeks of exercising the option to purchase, and start paying progressively increasing instalments within six to nine months as their housing loan starts disbursement. A buyer would also not be able to re-assign their option to purchase to another buyer without incurring the Seller’s Stamp Duty (SSD).

In a resale purchase scenario, a buyer would also pay the 20 percent down payment, pay stamp duties within two weeks of exercising the option to purchase, and draw down on the remaining 80 percent loan within 10 to 12 weeks. This means that he or she would begin servicing their monthly instalments upon completion as their loans are fully disbursed. In addition, a buyer would be able to resell the option prior to exercise if there were a provision of “And / Or Nominee(s)” in it.

The beauty of DPS lies in the flexibilities developers have upon delicensing their projects. Payment schemes can be tweaked to incentivise different groups of buyers with different needs.

Case study: Singaporean owner-occupier seeking to upgrade

John Tan faces difficulty in upgrading his family home as he has an outstanding loan for his current property. According to the Monetary Authority of Singapore’s (MAS) financing guidelines, he would need 25 percent in cash for the down payment, another 25 percent in cash or CPF savings, and be eligible for only a 50 percent maximum loan. He would also be liable for ABSD.

In his case, a DPS where the developer allows a longer deferred completion period would address his obstacles and reduce his down payment to 10 percent in cash, offer him the flexibility of moving into a new home early, ample time to sell his previous home and therefore qualify for an 80 percent loan.

One example of this is the DPS introduced at CapitaLand’s The Interlace and d’Leedon projects.

Case study: Property investor keen to get into the market and feels there is potential upside in the next two years

Dylan Lee would like to buy into properties with ready cash flow, but feels that the ABSD could be revised in the next two years. He however, does not want his funds to remain idle in the meantime, and wants to start deploying them to work.

In his case, a DPS that allows him to own a property with minimal cash down, a deferred exercise and completion date means he could possibly pay less ABSD if the rules are tweaked in the near term.

As an investor, he would also enjoy the flexibility of being able to sell the property anytime during these two years without incurring any SSD.

As such, a project like The Peak @ Cairnhill I and II, with its own version of the DPS, is suitable as it allows investors to take possession and rent out their units and exercise the option only 18 to 24 months later. The option between the developer and the buyer also has a nomination clause that allows the option to be exercised by another buyer should the market improve and the initial investor decides to sell.

This unique arrangement means that an investor experiences a higher return on equity before the completion, as he can start collecting rental income by putting down only 20 percent in cash and having no instalments to service for that same period. At the same time, the rental returns also lower the absolute entry price of his property, giving him an extra safety net.
That said, buyers would be prudent to do their due diligence on whether a project offering a DPS is marketed at a reasonable price today. Some projects have fewer discounts due to this scheme, and it would be wise to make a comparison between the normal payment scheme and the DPS. If the discount range is significant and the financial aspects make sense, it could be a wise choice to go with the norm instead.

Alternative Financing Strategies for Property Investors

It's always an awesome feeling to see my writings published and read by keen real estate investors and fellow industry agents! A Huge Shoutout and Thank you to the Team (Sandy Goh, Sabrina Tan, Romesh Navaratnarajah, Denise Djong, Agnes Goh!) at PropertyGuru for the coverage! 

Here's the full unabbreviated article below! 

Foreward

Singaporeans love properties. Let's face it. We love the idea of speculation, of long term capital growth of our savings and dream of one day retiring upon the comfortable monthly rental paychecks that we receive from our tenants. And once our time is up, this dream fulfilling portfolio can be passed down generations after to provide inflation beating income that our loved ones can comfortably rely upon. 

This passion for property might be an understatement for some families i know of who own rows of shophouses and acres of land in downtown Singapore and yet are always suffering the itch of accumulating more. Not that it is a wrong mindset though. After all, these families were first hand eyewitnesses to how, over the course of our 51 years as a nation, their parents and grandparents have seen their wealth skyrocket by buying into our national soil and airspaces early on in their lives. This belief becomes in-built in our culture and property becomes the natural vehicle many of us aspire to put our hard earned wages into. 

The appetite for property investments though can be both a blessing and a curse. While a healthy appetite for properties can stimulate the economy through job creation and infrastructure spending, over consumption can wreak financial havoc upon individuals and spiral easily into a nation wide crisis. Something that we witnessed not too long ago in the Subprime crisis in the US.  

Hence that is in part, the reason for the current climate of cooling measures we all face today. 

With the various restrictions imposed on us by the Monetary Authority of Singapore for the purchase of properties, alternatives have been commonly sought by investors keen to get started on their investing journey.

 

In this article, we will examine 3 common alternative property financing strategies that different types of investors can ponder upon to aid in building their own dream fulfilling portfolios. 

 

Co-Investment Strategy

Many singles may have insufficient funds to buy their first property, and so one potential strategy is to jointly co-invest with another single friend. They can combine their cash and Central Provident Fund (CPF) savings to start investing immediately, instead of waiting several years to accumulate more savings while facing the prospect of a shorter loan tenure.

The main issue with co-investing is that if either party were to get married, they would not be able to apply for a Build-To-Order flat or executive condominium unit, unless they dispose of their investment property at least 30 months beforehand.

If they were to buy a private property as a matrimonial home, they would have to set aside half of the Full Retirement Sum ($83,000 at the time of writing) in their CPF Ordinary and Special Accounts before the excess savings can be utilised, and will not qualify for an 80 percent mortgage loan if they have an outstanding loan. They will also be liable for Additional Buyer’s Stamp Duty.

Also, this method is only suitable for life-long good friends whom have been through much ups and downs with you as you would require their consent and blessing too should you need to sell the property in the future. Take special note that in the event you were to settle down within the next 3 years and need to offload this investment property, you will also be liable for Seller Stamp Duty and not to mention, a potentially very upset buddy. So tread carefully if you decide to do so.

 

Equity Loans

Equity loans, sometimes called Term Loans or Gearing Up, are commonly used forms of financing that allows a property owner to withdraw equity that has built up over time from his property and use it for his short term cash flow needs such as acquiring of inventory or upgrading of machinery. Some would use it as a low interest credit line (Rates are similar to mortgage loan rates) to pay off higher interest loans such as credit card and car loans. 

The official stance on Equity Loans is that they are not allowed to be used for property investments. However, it is commonly known among savvy investors and without a doubt, the authorities themselves, that this is not actively enforced. 

Individuals and families with property portfolios with low or no leverage typically employ this strategy in order to free up equity and recycle them into other investments. This helps them to optimize their Return on Equity (It's a REALLY Important factor. Discussed in another post. Go read), take advantage of low interest rates and redeploy the funds into higher yielding assets. 

The caveat of using Equity Loans as an alternative financing approach is present and investors do face a risk from breaching the terms of the loan agreement. Apart from that, it is important to highlight that CPF cannot be used to finance the monthly mortgage of the term loan and that the purchaser would need to do so entirely in cash (Yes, no CPF can be used in this case.). 

 

Assets Pledging

In the past, asset based lending were rife and investors who could show a couple of hundred thousands in the bank were eligible for multi-million dollar loans. All without the need for ascertaining their loan servicing ability. All these were put to a halt with the introduction of the TDSR measures in June 2013. The days of easy credit were over and investors griefed. Assets pledging are categorized into 2 types. Liquid assets such as Sing Dollar deposits and savings and others such as stocks, bonds, foreign currency deposits and gold. 

This strategy of property financing works when the buyer has no or insufficient income to support his loan application. In such scenarios, although he may be cash rich, the lack of an income proves to be an obstacle for banks to grant him a loan. Hence, asset pledging helps to augment his income to levels that are acceptable by TDSR criteria and qualify him for purchasing a property which he otherwise might not be able to. 

Assets that are pledged for at least 4 years are taken at 100% of its value while if it is pledged for any less than 4 years, an immediate haircut of 70% of its value is applied. 

As a guideline, for an unemployed person, for every $100,000 loan applied for, $36,000 in liquid assets has to be pledged for 4 years or $120,000 if it is pledged for less than 4 years. 

Hence, to employ this strategy, a buyer would have to have a significant amount of savings, assets or financial support. 

To summarize, optimizing use of funds and structuring of financing strategies is an area that investors should continually explore to put their savings to work as early as possible. There are various creative methods that are shared at investment networking events that would be too intricate to be described in detail in this short article. Property Investment is a life long journey of learning and fine-tuning of strategies which pays huge dividends for the avid investor. I wish you all the best in your journey and may your investment portfolio prove lucrative and sustainable.

CPF ACCRUED INTEREST

CPF Accrued Interest – Will it REALLY come back to haunt me if i use it to finance my property?

CPF Accrued Interest – Will it REALLY come back to haunt me if i use it to finance my property?

Recently, i have read articles citing the negative impact that results when CPF is used to finance a property long term. The articles call for HDB owners to sell their homes and restructure into private properties before they enter into a ‘negative’ sale scenario where low/no cash proceeds are returned to their pockets when they sell. 

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10 Years Comparison of Common SG Investment Choices

“History does not predict the future. However, to ignore history is to ignore the lessons and experiences that come with them and so often foretells much of what is to come.”

I preface this sharing with the quote above as recently i did a study on what the returns are for common investments and savings choices of Singaporeans over the last ten years.

The reason being, as a realtor, business owner, a property investor and a soon to be dad, i knew my time was getting more precious and scarce and i wanted to know how to make my money work the hardest for me so that i can put more eggs in THAT basket and step out of guesstimates, predictions, industry hype etc. After all, forecasts from economists and so-called experts are wrong most times (My own included).

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