Dear Stacked Homes,

I have been a regular reader of your articles. I appreciate your efforts to put in much analysis in answering real issues faced by the community on property matters. 

I seek your recommendations on my situation:

I just entered my 50th year and bought my first condo with a loan for 15 years. I didn’t use cash from hand effectively as condo cash portion was funded by CPF and sales proceeds of HDB.

My agent is proposing to book a studio apartment for 1m as a second property in my wife’s name with the cash earmarked earlier and excess from the sale which is around 600k. My wife is working with around 5k salary.

I’m confused and unable to make a decision.

These were my thoughts:

• Option 1: Don’t buy. Invest the cash.
• Option 2: Buy a resale condo that can pay my loan by itself. Any capital appreciation can be my profits.
• Option 3: Go with Agent recommendations.

Other risks/ commitments I think of are:

• My job is not secure especially with age advancing, medical costs and my children’s higher education (2 kids still in school).

Thanks in advance for your guidance

Regards

---

Hello,

Congratulations on your recent condo purchase!

My name is Daron, and my initial specialisation was in assisting HDB sellers and buyers in the East, leveraging my intimate knowledge of the area as a resident.

However, that has now been broadened to include guiding clients in upgrading and investing in private properties.

It’s immensely fulfilling to witness clients returning years later to sell their properties, knowing I’ve effectively facilitated profitable transactions for them.

As usual, let’s begin by assessing your affordability.

Affordability

For this calculation, I’m assuming that your wife is the same age as you.

Description	Amount
Maximum loan based on age of 50 with a fixed monthly income of $5K, at 4.8% interest	$352,377 (15-year tenure)
Cash	$600,000
Loan + cash	$952,377
BSD based on $952,377	$23,171
Estimated affordability	$929,206

*This is assuming your wife does not have any CPF funds to put towards the purchase

For a $352,377 loan with a 15-year tenure and 4% interest, the monthly repayment is $2,607.

Time period	Rental Index of non-landed private properties	Quarterly % change
2022Q1	120.3	4.1
2022Q2	128.8	7.1
2022Q3	139.5	8.3
2022Q4	150	7.5
2023Q1	159.3	6.2
2023Q2	163	2.3
2023Q3	163.3	0.2
2023Q4	160.4	-1.8

Recent data indicates a slowdown in the rental market for non-landed private properties.

However, even as rental demand for condos returns to pre-pandemic levels, securing a monthly rent of $2,607 for a 2-bedroom unit should not be too difficult, provided the right development is chosen.

As you mentioned, this essentially means that the condo can “pay for itself”.

Consider, for instance, a 2-bed 1-bath unit in Treasure at Tampines. With a purchase price of approximately $970,000, the rental rate can potentially reach around $3,000 per month.

Depending on the interest rates, this could not only cover the monthly repayment but may also cover other expenses such as maintenance fees and property tax.

While the purchase may appear feasible, there’s one crucial question you should address before proceeding.

Even though you have enough funds to acquire a second property, how much of the $600K should you retain in liquidity to comfortably cover potential medical expenses, your children’s higher education, and unforeseen financial obligations?

If you’ve already set aside an adequate reserve for these purposes, that’s great.

However, if the entirety of the $600K constitutes your available funds, investing it entirely in a property might pose risks, especially since you won’t be able to immediately liquidate the investment in an emergency.

Typically, you’d want to hold onto the condo for at least 3 years to fulfil the Seller Stamp Duty (SSD) period.

Furthermore, should you decide to sell, the process — from marketing to completing the sale —could take around 6 months.

Thus, if you lack an emergency reserve, this could be a risky move.

Now, let’s review the three options that you’re considering.

Potential pathways

Option 1. Invest the funds instead of buying a property

Personally, I have around 60% of my funds diversified across 3-4 different avenues to ensure that my money is actively working for me.

Given the nature of my business, which occasionally requires substantial expenditures, maintaining liquidity is crucial.

Therefore, I always keep a considerable amount of cash readily available to deploy whenever necessary.

Naturally, the return on investments may vary depending on your chosen avenue. Property investment offers advantages such as hedging against inflation and leveraging loans (again depending on the interest rates).

However, considering the loan tenure and amount your wife qualifies for, you might need to invest a significant portion of cash/CPF, which limits the leverage on the loan. 

Additionally, property ownership entails higher costs, including monthly loan interest, maintenance fees, and property tax.

In contrast, investing in stocks and shares incurs relatively lower administrative and brokerage fees. Furthermore, stocks and shares offer greater liquidity, allowing for quick access to funds if needed.

Investing in alternative avenues also enables you to allocate a portion of the $600K as emergency funds. Conversely, investing in property often requires allocating the entire $600K towards the purchase.

In any case, for my calculations, let’s assume that you already have an emergency cash reserve set aside and are comfortable investing the full $600,000.

I will assume a conservative Return On Investment (ROI) of 4% annually and a holding period of 10 years.

Time period	Investment amount	Gains
Starting point	$600,000	$0
Year 1	$624,000	$24,000
Year 2	$648,960	$48,960
Year 3	$674,918	$74,918
Year 4	$701,915	$101,915
Year 5	$729,992	$129,992
Year 6	$759,191	$159,191
Year 7	$789,559	$189,559
Year 8	$821,141	$221,141
Year 9	$853,987	$253,987
Year 10	$888,147	$288,147

Option 2. Buy a resale condo and rent it out

As discussed earlier, it’s feasible in your circumstances to acquire a condo that can essentially cover its expenses.

If liquidity isn’t a concern for you and you can comfortably allocate the $600K towards a property purchase, then this avenue is certainly worth considering.

One crucial guiding principle in property acquisition is to “Start with an end in mind,” which entails purchasing a property with a clear understanding of potential future resale or rental prospects.

For instance, in locations like Thomson Three Condo, I consistently find that 7 out of every 10 viewers are attracted by the 1 km proximity to Ai Tong School.

Therefore, if you were to own a bigger unit with 3 – 4 bedrooms there, and assuming the school remains in place, you can anticipate a consistent demand from parents seeking this proximity for their children’s education.

Alternatively, in your situation, it’s advisable to seek a property where you can readily identify potential renters.

For example, developments like The Glades, Casa Merah, and Grandeur Park, which are located near Tanah Merah MRT, are known to be highly sought-after rental locations for expatriates working at Changi Business Park, pilots and cabin crew (due to their proximity to the airport), and individuals working in the CBD seeking more affordable rental options compared to city-centre accommodations.

For our calculations, let’s assume your wife maximises her affordability to purchase a unit priced at $929,000, achieving a conservative 3% rental yield, and holds the property for 10 years.

Description	Amount
Purchase price	$929,000
BSD	$22,470
Cash	$600,000
Loan required	$351,470

Description	Amount
BSD	$22,470
Interest expense (Assuming 15-year tenure at 4% interest)	$101,669
Maintenance fees (Assuming $250/month)	$30,000
Property tax	$33,440
Rental income	$278,760
Agency fees	$12,660
Total gains	$78,521

I will also use the average growth rate of non-landed private properties over the past 10 years of 2.9% to do a simple projection.

Time period	Property price	Gains
Starting point	$929,000	$0
Year 1	$955,941	$26,941
Year 2	$983,663	$54,663
Year 3	$1,012,190	$83,190
Year 4	$1,041,543	$112,543
Year 5	$1,071,748	$142,748
Year 6	$1,102,828	$173,828
Year 7	$1,134,810	$205,810
Year 8	$1,167,720	$238,720
Year 9	$1,201,584	$272,584
Year 10	$1,236,430	$307,430

Total gains: $307,430 + $78,521 = $385,951

Option 3. Go with your agent’s recommendation

I’m assuming here that your agent’s suggestion is to consider purchasing a new launch, as you’ve listed it as a separate option from Option 2, which involves buying a resale condo. 

Currently, in the market, the most affordable 1-bedroom unit in a newly launched development would typically cost around $1.2M, exceeding your wife’s affordability of $929,000 by approximately $300,000.

However, if your wife possesses CPF funds that can be utilised for the property (which I haven’t factored in), depending on the amount available, this option could become viable.

While you can’t immediately rent out the property, the progressive payment scheme makes the monthly repayments during the construction phase more manageable.

Additionally, maintenance fees and property tax aren’t payable until the project obtains its Temporary Occupation Permit (TOP), thereby keeping initial expenses low.

While I cannot definitively determine the feasibility of this option without your wife’s complete financial details, I’ll still proceed with the calculations assuming she has adequate CPF funds to cover the shortfall.

Furthermore, I’ll assume a holding period of 10 years and that the unit will be leased out upon obtaining TOP, yielding a 3% rental return.

Description	Amount
Purchase price	$1,200,000
BSD	$32,600
Maximum loan	$352,377
Cash and CPF required	$880,223

Stage	% of purchase price	Disbursement amount	Monthly estimated payment	Monthly estimated interest	Monthly estimated principal	Duration	Total interest cost
Completion of foundation	0.00%	$0	$0	$0	$0	6-9 months (from launch)	$0
Completion of reinforced concrete	0.00%	$0	$0	$0	$0	6-9 months	$0
Completion of brick wall	0.00%	$0	$0	$0	$0	3-6 months	$0
Completion of ceiling/roofing	0.00%	$0	$0	$0	$0	3-6 months	$0
Completion of electrical wiring/plumbing	0.00%	$0	$0	$0	$0	3-6 months	$0
Completion of roads/car parks/drainage	0.00%	$0	$0	$0	$0	3-6 months	$0
Issuance of TOP	14.36%	$172,320	$700	$574	$1,274	Usually one year until CSC	$6,888
Certificate of Statutory Completion (CSC)	15.00%	$180,000	$1,432	$1,174	$2,606	Until property is sold (57 months)	$66,918

Description	Amount
BSD	$32,600
Interest expense (Assuming 15-year tenure at 4% interest)	$84,372
Maintenance fees (Assuming $250/month)	$19,500
Property tax	$33,600
Rental income	$234,000
Agency fees	$9,810
Total gains	$54,118

Using the same 2.9% growth rate to do a simple projection.

Time period	Property price	Gains
Starting point	$1,200,000	$0
Year 1	$1,234,800	$34,800
Year 2	$1,270,609	$70,609
Year 3	$1,307,457	$107,457
Year 4	$1,345,373	$145,373
Year 5	$1,384,389	$184,389
Year 6	$1,424,536	$224,536
Year 7	$1,465,848	$265,848
Year 8	$1,508,357	$308,357
Year 9	$1,552,100	$352,100
Year 10	$1,597,111	$397,111

Total gains: $397,111 + $54,118 = $451,229

What should you do?

Let’s do a quick summary of the three options.

Potential pathways	Value of investment	Costs incurred	Potential gains
1. Invest the funds instead of buying a property	$600,000	–	$288,147
2. Buy a resale condo and rent it out	$929,000	Not including rental income: $200,239 Including rental income (Gains): $78,521	$307,430 (Excluding rental income)
3. Go with your agent’s recommendation (new launch)	$1,200,000	Not including rental income: $179,882 Including rental income (Gains): $54,118	$397,111 (Excluding rental income)

It’s natural for projected gains to increase as the investment value rises, but the actual growth rate will vary depending on the specific investment product.

So in this case, we’re not comparing apple to apple when looking at the three options. 

With Option 1, you’ll enjoy greater liquidity and have the flexibility to allocate a portion of the $600K as emergency funds if needed.

I did not consider brokerage fees but it is likely that if any costs are incurred here, it’ll be the lowest among the three options.

However, you’re relying solely on the appreciation of the investment for gains. In contrast, with property investment, you have the potential for two income streams: rental income and property appreciation.

In my calculations, I used a conservative 4% ROI, but if this figure is higher, the potential gains will also be higher.

When purchasing a property, although your wife won’t exactly be leveraging the loan, it still serves as a hedge against inflation.

Opting for a resale property allows for immediate rental, effectively having someone else “pay for the property” on your behalf.

Due to the lower loan quantum, even with a conservative 3% rental yield, you’ll see profits in 10 years.

However, this option offers less liquidity and requires investing the entire $600K. It’s a suitable choice if you already have reserve funds set aside since you brought up concerns about job security, potential medical expenses, and your children’s education fees.

Putting all your funds into a property could be risky, not only because it takes time to access emergency funds, but also because if you need the funds during a market downturn, it could lead to greater losses.

The feasibility of Option 3 depends on the amount of CPF your wife has. Like Option 2, this pathway requires investing the entire $600K and offers less liquidity.

Many investors purchase new launch properties intending to flip them after 3 years, but there’s the risk of meeting unfavourable market conditions, forcing you to sell at a loss if you are not able to hold onto the property.

The profitability of this option is also dependent on the project you purchase. For example, if there is a high supply of 1-bedroom units in the area, it may be challenging to exit in the future and you’ll also face stiffer competition for tenants.

With the progressive payment plan, your loan will be disbursed later since your wife is taking up a loan of less than 30% of the property’s value, resulting in lower interest expenses compared to buying a resale property.

However, you’ll miss out on rental income during the construction phase, resulting in lower gains (including rental income) compared to a resale property.

ALSO READ: Why choosing the right condo matters: A real-life story of two $1.8m investments with drastically different returns

This article was first published in Stackedhomes.