Hi Stackedhomes,

My husband and I have been avid readers of your content, and we notice your team has been very detailed in analysing situations to provide sound choices. I hope you can help us as we are quite lost with what to do, and most realtors we speak to have their agendas and I dont blame them. 

I am 33 years old, and my husband is 34. We both are self-employed and do not contribute to CPF, We have a combine income of about $285,000 after tax. We have a new born four months old.

We bought Normanton Park in early 2021, and it TOP recently. However, the home is too small for our helper and newborn, as we did not plan for a child back then. If we sold the Condo, we will have excess $600,000 in cash. So my dilemma is, should I invest the $600,000 into a diversified stock and bond portfolio, and rent a 3br condo or should I buy a resale 3BR condo? 

What I like about having a $600,000 stock portfolio, is the liquidity and the potential income it pays me, and also the potential to compound the money. While I can do the same in the housing market, I feel that interest rates are expensive, and property prices are less likely to increase at a rate to give me financial freedom. 

I would ideally want to live in the bishan-thomson area, because I hope to send my newborn to AITONG SCHOOL which is located at bright hill drive. So if we can take reference to location I think that will be a good place to use as reference to do the analysis. 

My monthly expenses for car is $3000, Household expenses is $1,500, helper is 750, personal expenses is 2,500, and expenses on child is about 1000 , total about $8,750 a month combine, this is about $105000 a year. 

This excludes loan repayment for Normanton Park. Please advise.

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Hi there!

Thank you for writing in and we appreciate your continued support!

We understand the challenge of trying to optimise your cash reserves in the present environment of elevated interest rates, particularly when considering the purchase of a property. It’s understandable that you may be contemplating the most effective means of leveraging your assets to achieve the highest possible profitability. 

Opting for investments in stocks and bonds, rather than real estate, represents a distinct adjustment in your investment approach. Each option carries its own distinct advantages and factors to weigh.

For example, stocks and bonds are well-known for their liquidity and the potential for swift wealth accumulation via market appreciation or interest earnings. On the other hand, choosing to invest in property presents a different set of advantages, including the security of a tangible asset, potential capital appreciation, and the possibility of rental income.

We will start by looking at your affordability before we go into the options you’re considering.

Affordability

You probably know this already, but for others reading this — when it comes to calculating your mortgage loan, there will be a 30 per cent reduction on your taxable income since both of you are self-employed.

Let’s now look at the options you’re considering. 

Options

Option 1. Invest in stocks while renting a 3-bedder

We will start by looking at some differences in investing in stocks and shares as compared to property. 

Both stocks and shares and property investment offer unique opportunities and challenges. The choice often depends on your financial goals, risk tolerance, investment horizon, and personal preferences. Diversification across both asset classes could be a strategy to consider, as it can potentially mitigate the risks associated with either option alone. It's important to conduct thorough research, consult with professionals, and align your investments with your long-term financial objectives.

Considering that you have a newborn and are planning for your child to enrol in Ai Tong School, we are assuming that you intend to remain in the next property until your child completes primary school, which is a minimum of 12 years.

Should you decide to rent instead, you won't need to immediately relocate to a location within 1km of the school, as there are still some ways to go before the P1 registration. During this interim period, you have the option to rent a place elsewhere, which might be more budget-friendly. Given that you have your own transportation, we can presume that a location less accessible by public transport may not pose a significant inconvenience.

Currently, the most affordable 3-bedroom condo available for rent that's of a decent size is listed at $3,600/month at Orchid Park Condominium. So far this year, there have been 35 3-bedroom transactions in this condo at an average rental rate of $3,834, so we'll assume that you manage to rent it for $3,600. We will assume this to be the rental cost for the next five years.

When examining developments within 1km of Ai Tong School, the most budget-friendly option is Bishan Park Condominium. In the last three months, the average rent for a 3-bedroom unit there was $4,850/month. We can assume this rental rate for the seven years from the time your child turns six to 12 years old, as there is a minimum 30-month stay requirement after the P1 registration for children who gain priority admission based on the proximity of their home to the school.

Cost incurred if you were to rent for the next 12 years:

Description	Amount
Renting at Orchid Park Condominium for 5 years at $3,600/month	$216,000
Renting at Bishan Park Condominium for 7 years at $4,850/month	$407,400
Total cost	$623,400

Assuming a 100per cent stock portfolio, let’s assume a Return On Investment (ROI) of seven per cent to project the potential profits if you were to invest the $600,000 in stocks and shares over a period of 12 years.

Time period	Investment amount	Gains
Starting point	$600,000	$0
Year 1	$642,000	$42,000
Year 2	$686,940	$86,940
Year 3	$735,026	$135,026
Year 4	$786,478	$186,478
Year 5	$841,531	$241,531
Year 6	$900,438	$300,438
Year 7	$963,469	$363,469
Year 8	$1,030,912	$430,912
Year 9	$1,103,076	$503,076
Year 10	$1,180,291	$580,291
Year 11	$1,262,911	$662,911
Year 12	$1,351,315	$751,315

Total profits if you were to invest your cash proceeds of $600K while renting a 3-bedder for the next 12 years: $751,315 - $629,400 = $121,915

Because the rental expenses are rather substantial, they significantly reduce the profits generated from your investment in stocks and shares.

Do note that this profit is highly dependent on achieving consistent returns of seven per cent year on year over a 12-year period.

But that's on a 100 per cent stock portfolio. If you have a mix of stocks and bonds, we can assume a lower return (albeit one that's more stable). Let's assume a four per cent rate of return here:

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
Year 11	$923,672	$323,672
Year 12	$960,619	$360,619

These returns would result in a loss of $360,619 – $629,400 = -$268,781.

While predicting the future direction of the stock market is speculative, there’s an inherent risk to maintaining a heavily stock-weighted portfolio. A potential financial downturn in the next decade could jeopardise your investment significantly more than the scenarios depicted earlier.

Although such an occurrence might be rare, it’s not impossible. This risk becomes even more pronounced if you need to liquidate your portfolio during this downturn, for instance, to buy a home. Furthermore, as you age, your loan eligibility decreases, meaning you might not secure as favorable loan terms as you could have earlier.

So let’s explore what happens if you decide to purchase a three-bedder instead.

Option 2. Purchase a resale 3-bedder

There are just a handful of developments located within 1km of Ai Tong School, however, with a budget of $2.1 million for a 3-bedder, your options are further restricted. At the moment, there are two projects with units that fall within your affordability. 

Project	Tenure	Completion year	Unit type	Size (sqft)	Asking price
Bishan Park Condominium	99 years	1994	3b	1,292	$1,850,000
The Gardens at Bishan	99 years	2004	3b	1,152	$2,077,777

Let’s take a quick look at how these two projects are performing. 

Year	Bishan Park Condominium	YoY	The Gardens at Bishan	YoY
2012	$797	–	$954	–
2013	$912	14.43per cent	$1,093	14.57per cent
2014	$870	-4.61per cent	$1,016	-7.04per cent
2015	$888	2.07per cent	$1,024	0.79per cent
2016	$868	-2.25per cent	$986	-3.71per cent
2017	$863	-0.58per cent	$1,015	2.94per cent
2018	$902	4.52per cent	$1,044	2.86per cent
2019	$969	7.43per cent	$1,083	3.74per cent
2020	$1,031	6.40per cent	$1,129	4.25per cent
2021	$1,080	4.75per cent	$1,218	7.88per cent
2022	$1,143	5.83per cent	$1,415	16.17per cent
Annualised	–	3.67per cent	–	4.02per cent

Looking at the table, it’s evident that despite the relatively older age of these two projects, their prices have remained resilient. Their price trends align with the overall market, which experienced a decline following the implementation of three rounds of cooling measures in 2013 but began to recover in 2017.

Their appeal likely stems from their proximity to Ai Tong School and their more affordable pricing compared to newer or freehold developments nearby, contributing to sustained demand.

This also coincides with a recent article we did on older leasehold condos versus freehold ones, in that leasehold developments don’t actually underperform freehold ones of an equivalent age (at least up until they reach a really old age).

However, it’s important to consider that a 12-year holding period is quite long, and by then, these two projects will have aged to over 30 and 40 years old. Given that they are 99 year leasehold projects, it’s not unreasonable to anticipate some degree of stagnation or depreciation in value.

Nevertheless, let’s say you were to purchase a unit at The Gardens at Bishan. There have been three three-bedders that changed hands this year in the development at an average price of $1,912,000. We will assume this to be the purchase price.

Description	Amount
Purchase price	$1,912,000
BSD	$65,200
25per cent down payment	$478,000
Loan required	$1,434,000

Cost incurred if you were to purchase a 3-bedder and hold it for 12 years:

Description	Amount
BSD	$65,200
Interest expense (based on loan of $1,434,000 at 4.6per cent interest, with 30 year tenure)	$703,097
Property tax	$39,720
Maintenance fee (assuming $400/month)	$57,600
Total costs	$865,617

Employing the annualised growth rate of private properties observed over the past decade, which stands at 2.21 per cent, we will perform a basic projection. It’s essential to bear in mind that this projection is based on the general market performance and the figures may fluctuate depending on market conditions.

The purpose of this projection is purely to provide a general reference so that you can better understand which strategy is best suited for you, rather than focusing on potential capital gains of individual developments.

Time period	Property price	Gains
Starting point	$1,912,000	$0
Year 1	$1,954,255	$42,255
Year 2	$1,997,444	$85,444
Year 3	$2,041,588	$129,588
Year 4	$2,086,707	$174,707
Year 5	$2,132,823	$220,823
Year 6	$2,179,958	$267,958
Year 7	$2,228,136	$316,136
Year 8	$2,277,377	$365,377
Year 9	$2,327,707	$415,707
Year 10	$2,379,150	$467,150
Year 11	$2,431,729	$519,729
Year 12	$2,485,470	$573,470

Total losses if you were to purchase a 3-bedder and live in it for the next 12 years: $865,617 – $573,470 = -$292,147

Given that the interest rate is higher than the rate of appreciation, the total cost is more than the profits made. Let’s look at how the interest rate will affect the potential profits.

Interest rate	Cost incurred	Gains/losses
2.5per cent	$529,158	$44,312
3per cent	$607,214	-$33,744
3.5per cent	$686,626	-$113,156
4per cent	$767,295	-$193,825
5per cent	$932,007	-$358,537

We can see that it’s only when interest rates decrease to 2.5 per cent that you begin to observe some profitability.

It’s worth noting that historically, interest rates do not tend to stay high for extended periods of time. They’re usually met with some form of economic slowdown which calls for lower interest rates. Here’s a quick look at the historical Fed Funds Rate in the last 20 years:

Do also note that we’ve used a conservative interest rate of 4.6 per cent based on on-the-ground information from banks in calculating your affordability. However, we’re aware that today, you can get a fixed 2-year rate for around 3.4 per cent.

On a $1.434 million loan, this translates to around $4,000 of interest payments per month which is close to your rental cost. So even in the current high-interest rate environment, the interest cost is close to the cost of renting — albeit around 10per cent more.

As such, it could be prudent to wait until interest rates are lower.

Another aspect to consider is the growth rate of the project. If it exceeds 2.21 per cent, as we’ve seen in the table above with both developments having outperformed this rate over the last decade, there is potential for profits even with higher interest rates.

This may be the case for older leasehold condominiums near Ai Tong. Considering the popularity of the school and how built-up the area already is, the lack of affordable condo supply may very well ensure that both Bishan Park Condominium and The Gardens at Bishan remain highly relevant.

Looking at the area, you’ll see that most homes within the 1km radius are landed homes (very low-density). The radius does not cover a wide number of HDBs as well which tend to be very densely populated. Overall, this could explain why both old leasehold condos (and perhaps other condos in the area) were able to outperform the general property market in the past 10 years.

However, as previously mentioned, 12 years is a substantial time frame, and considering these are 99-year leasehold projects, it’s prudent to anticipate that prices may plateau or decrease as they mature.

Alternative option

An alternative you can explore is to purchase a unit to rent out, while renting somewhere that is within 1km of Ai Tong School. Seeing as your holding period is relatively long, buying a freehold/999-year leasehold development could be a good option given that their prices generally tend to hold up in the long run. 

Here are some available freehold/999-year leasehold units that fall within your affordability:

Project	District	Tenure	Completion year	Unit type	Size (sqft)	Asking price
Hillview Heights	23	Freehold	1996	2b2b	958	$1,650,000
The Sunny Spring	14	Freehold	1998	3b	1,195	$1,880,000
The Tessarina	10	Freehold	2003	2b2b	926	From $1,888,000

Let’s say you were to get a 3-bedder at The Sunny Spring and stay there for 5 years before renting a unit that is within 1km of Ai Tong School. From January till date, there were four 3-bedroom transactions in the development with an average price of $1,715,222. Let’s assume this to be the purchase price. Over the last 3 months, from May to July, the average rent for a 3-bedder in the project is at $4,266, which we will use as the rental price. 

Description	Amount
Purchase price	$1,715,222
BSD	$55,361
25per cent down payment	$428,806
Loan required	$1,286,416

The cost incurred if you were to purchase a 3-bedder and live in it for five years before renting it out and renting a place near Ai Tong School for your own stay:

Description	Amount
BSD	$55,361
Interest expense (based on loan of $1,286,416 at 4.6per cent interest, with 30 year tenure)	$630,736
Property tax	$71,468
Maintenance fee (assuming $400/month)	$57,600
Rental income (for 7 years at $4,266/month)	$358,344
Agency fee (payable once every 2 years)	$18,428
Rental expense (for 7 years at $4850/month)	$407,400
Total costs	$882,649

Similarly, we will use the annualised growth rate of 2.21per cent to do a simple projection:

Time period	Property price	Gains
Starting point	$1,715,222	$0
Year 1	$1,753,128	$37,906
Year 2	$1,791,873	$76,651
Year 3	$1,831,473	$116,251
Year 4	$1,871,948	$156,726
Year 5	$1,913,319	$198,097
Year 6	$1,955,603	$240,381
Year 7	$1,998,822	$283,600
Year 8	$2,042,996	$327,774
Year 9	$2,088,146	$372,924
Year 10	$2,134,294	$419,072
Year 11	$2,181,462	$466,240
Year 12	$2,229,672	$514,450

Total losses if you were to purchase a 3-bedder and live in it for five years before renting it out and renting a place near Ai Tong School for your own stay: $882,649 – $514,450 = $368,199

Here, apart from the interest expenses, there are additional costs such as agency fees, and the property tax obligation is higher when the unit is rented out. Furthermore, if the rental income doesn’t fully cover the rental expenses, it will necessitate a monthly top-up. Unless the rental income can sufficiently offset the property tax, agency fees, and your rental expenses, it could result in greater losses compared to Option 2.

In this scenario, you’re banking on the property’s capital appreciation to help offset these costs. To ensure a fair comparison, we’ve applied the same annualised growth rate as Option 2, but let’s examine how this growth rate affects the overall gains or losses.

Annualised growth rate	Capital appreciation	Gains/losses
1.5per cent	$388,850	-$551,680
2.5per cent	$685,570	-$254,960
3per cent	$846,327	-$94,202
3.5per cent	$1,015,902	$75,372

At a growth rate of 3.5 per cent, you’ll begin to realise some gains. Hence, with this choice, making a well-informed property selection is of utmost importance.

What should you do?

Based on our calculations, investing the $600K in stocks while renting a property appears to yield the highest profits over a 12-year period.

However, again, it’s important to note that the potential returns from stocks will vary, depending on your risk tolerance. Investing in a more stable portfolio, and hence achieving a lower return results in a loss that’s closer to what you get if you bought a 3-bedroom today. It might even be worse if the condo outperforms the general property market as it has over the past 10 years.

So when it comes to whether you should invest in stocks/bonds and renting versus buying today, it boils down to a couple of things:

1. Will your portfolio outperform the property market net of cost?
   • Nobody can tell you where the stock market is going, but assuming you do manage to achieve a seven per cent return year on year, it would make financial sense to kick back and grow your investment there while renting. Are you willing to take this risk? If the returns are lower as you mix bonds inside, then the cost may not be that much different.
2. Where will interest rates go?
   • A lot of the cost associated with property lies with the cost of borrowing. If interest rates over the 12-year period average just 2+per cent, then we would prefer to purchase the property since this is lower than the cost to rent.

Then there are other intangibles to consider:

1. Do you ever want to own a condo at some point?
   • Bear in mind that delaying your condo purchase may only set to price you out in the future. While we cannot predict where the market is headed, the long-term trend has always been on the uptrend. Another thing to note is that as you age, the loan tenure falls resulting in a lower loan amount that you can take. Unless your income grows, you may find yourself priced out of the market over time.
2. How important is the sense of security?
   • For some individuals, the ownership of tangible assets like property provides a greater sense of security. Having to deal with a landlord could be stressful. Imagine fighting over who pays for what if something breaks down. Or having to move out because the landlord decided to raise their rent after 2 years.

We also explored the option of purchasing a property for rental while you continue to rent a place near Ai Tong School. This option is good if you wish to secure a home today with the potential of renting it out in the future to cover costs while you rent a place within 1km to Ai Tong.

It does make sense if interest rates are lower. However, our calculations use a conservative interest rate which resulted in the biggest loss among all the options.

So with all that being said, we think that the best approach now would be to rent for the time being so that you can move into a bigger place now without committing to a high-interest rate loan.

This allows you to sit on the sidelines given we’re at a market high and signs are pointing towards more supply coming up to alleviate the demand from the past few years. 12 years is a long time, and there are many unknowns, so it could be better to rent for the short term now while observing how the markets move before you make yours.

If your priority leans more towards space over amenities, you might want to consider cost-effective options like HDBs. This strategy would also free up more funds for investment in a diversified portfolio of stocks and bonds. Later on, this investment could assist you in purchasing a private property when interest rates are more favourable.

The primary risk with this strategy is the potential rise in property prices. While the future remains uncertain, current high interest rates suggest that a price stabilization in the short term is more probable.

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This article was first published in Stackedhomes.