Investing in properties is one of the most efficient ways of growing your nest egg. The problem is, property in Singapore is really expensive, and there are too many rules and regulations to sift through.
At some point in your life, you may wonder, can you ever afford to own more than one property? Or are you stuck with just your HDB forever. The question then is, how far are you willing to go? Are you willing to sacrifice in the short term, in order to achieve your long term goal? This article isn’t for those who come from rich families, or who earn a huge salary every month. This is for the middle-income sandwiched class.
If you make very little money, you would probably never be able to afford a 2nd property. It’s okay. Just get the biggest HDB you can afford. This way, when you retire, you can sell off your HDB and buy a smaller one, (or a 30 year lease Studio Apartment from HDB, or a private apartment/house in Johor) and retire off the proceeds of your flat.
But why would you need to own more than one property anyway? It’s a form of investment that gives you more bank for your buck (leverage), it’s a way to grow your money, but ultimately, your properties can do more than that for you. After your mortgages are paid off, these properties will give you income for life, for your retirement, for your children’s education, for the wants in your life.
Most people will buy a HDB as their first property, which makes perfect sense, as they are more affordable. Then they will slowly save up for their 2nd property.
There are several considerations you have to note, due to the ever changing rules and regulations concerning property in Singapore.
1) If you are currently using your CPF to service a mortgage, you must set aside half of the prevailing minimum sum (your CPF SA can be used for this) before you can use the balance in your Ordinary Account for subsequent properties. Because of this ruling, I advise using just one party’s CPF to service the 1st property mortgage, leaving the 2nd party’s CPF free for use on subsequent properties.
2) If you have an existing mortgage, you have to put down a 40% downpayment – 10% of the downpayment must be in cash.
3) If you manage to pay off your mortgage before buying your second property, the downpayment is reverted to 20% – 5% of the downpayment must be in cash.****
4) In order to achieve this, you have to make some sacrifices, which include staying in an ulu area, and sharing your house with housemates.
5) Not have kids till you get your 2nd property.
Here’s a hypothetical solution.
For illustrations purposes, let’s look at a working couple – Guy makes $4500, Girl makes $4000*. And because their combined income is below $10k, they are eligible to apply for a new HDB flat, and pay just 10% downpayment through their CPF. Let’s assume that only the girl’s CPF is used to service the mortgage, with the excess being paid in cash.
4-room flat in Woodlands
90% Loan: $270,000
Monthly Installment: $1081
(30 yr HDB loan @ 2.6%)
Because they are buying a new flat, they will not be eligible to get another property for another 8 years (3 years construction time + 5 year MOP).
The guy would contribute about $945/month to his CPF Ordinary Account.
The girl’s $920/month contribution to her CPF OA will be used to service the mortgage.
The couple saves $1000 each per month (ie. a total of $2000 monthly)
The couple rents out their 2 common rooms for $650** each.
Condo (2nd property)
40% downpayment: $400,000
(10% must be in cash = $100,000)
Using the above parameters, at the end of 9 years, total cash saved would be $290,808 and the guy’s CPF OA would have accumulated $102,060***, giving a total of $400,068. This amount would then be sufficient to put down a 40% downpayment for a $1million condo.
Voila! You now own a condo. The next question to consider is whether you intend to reclaim your whole flat for your own, or to move into your new condo.
Because only 60% loan was taken, if you choose to rent it out, it should sufficiently cover the monthly mortgage. Current rental rates for condos costing $1million is close to $4k/month. This would bring you a nett income of slightly over $1000 monthly. When your condo is finally paid off, all future rental income would be yours.
If you choose to stay in the condo however, you can rent out the whole 4 room flat for approx $2,400 (2012 rental rates, higher if adjusted for inflation.) Because Girl is still servicing the HDB loan through her CPF, this $2,400 is pure profit. Assuming a 30 year loan with 3% interest, monthly mortgage for the condo would only cost $2,530. With Guy’s monthly CPF contribution and monthly HDB rental collected, it is more than sufficient to cover the mortgage without having to fork out any more cash.
So there you go. That’s one way to own more than one property in Singapore.
If you find 9 years too long, then tweaks must be made to your budgetting, so that you can set aside more savings each month. Instead of $1000, save more. Forgo owning a car, which would cost you more than $1,000 a month in installments, petrol, insurance and road tax. If the couple saves just $1,000 more a month, they would be able to purchase a condo immediately after their 5 year Minimum occupation period is up.
After the 30 year condo mortgage is paid up, the couple would be able to retire and live off their HDB income, which even though is a small sum compared to the salary they were drawing, is much much more than what CPF Life would give them each month.
* For the purpose of illustrations, salary will be fixed for all the years. In reality, you would have an increment each year.
** Rental figures are on the conservative side. If renting a room to more than 1 person, and providing an air con, rental would be higher. Also, rentals for the purpose of the above calculations is fixed at $650. In reality, rental rates will increase yearly due to inflation, so this figure is on the low side.
*** This CPF total sum does not account for the 2.5% annual interest earned, so actual figure will be slightly higher.
**** Before you buy your 2nd property, consider this: In some cases, 20% of the downpayment is more than the amount needed to pay off your HDB loan. Do the math. It might make more sense to pay off your HDB loan so that you would only need a 20% downpayment for your condo, instead of a 40% downpayment.