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The head of a typical HDB flat household speaks (Part 2).

Thursday, January 1, 2015


In part 2 of our correspondence, I see a millionaire next door in the making:
---------------------------------------------------------

Hi Ak,


Since you ask,
A few thoughts to add on my original email-

(1) My friend is single income & same age, he has to support his wife (a stay home mom) and one young kid. His annual income is less than me & wife combined annual income. 

(2) His estimated total condo & car loan (with interest & maintenance) is $X,XXX,XXX ... projected to finish his total loan when he is around 50.

(3) He spends about 8.5 yr of his annual salary to service his condo and car loan. For us, we are cheapskate, we spend only 2.5 yr of our combine income on our flat. 

(4) My wife and I are debt free, except ongoing costs of raising 2 kids. Again we stay simple , they attend close by neighborhood school, no tuition, no karate or ballet classes. We have no TV, read to our kids and only borrow books from library. Our outings are mostly to botanical garden and other public parks (no entrance fee). My wife calls me cheap. 

Oh no my flat ceiling is leaking again, got to go patch it up...

Talk to you soon, hope to hear from you. You are my financial hero. Your reply make my day ! 



--------------------------------------
My reply:

Hi C,

Your friend has to understand that his home is a consumption item. I do not know if he has given some thought to planning for his golden years but being in debt till age 50 due to consumption items is likely to set him back.

However, your friend could monetise his condo after staying in it for a minimum of 10 years. The chances of a nice capital gain is actually very good. ECs are usually priced 20% to 25% lower than surrounding private condominiums unlike new launches of private condominiums. So, they provide a margin of safety.

To be fair, your friend could have some plans up his sleeves and he could do very well in his career in future. We wish him the best, of course.

Your lifestyle is simple and it is good to keep it that way. We should remember that how much money we save is more important than how much money we make. I believe you are a millionaire next door in the making. ;)

Best wishes,
AK
-------------------------------------------
We can be a millionaire next door too if we choose to be a PAW. 

What is a PAW? 

See related post number 1 below.

Related posts:
1. The Millionaire Next Door.
2. The head of a typical HDB flat household speaks.

11 comments:

pf said...

Good stuff. Life really different if marry early and get cheap flat.

Whowillbe said...

Hi AK71,

What I liked about you is that you try your best to give a holistic view like your comments on ECs giving good capital gains.

Let me chime in. I previously mentioned that I stay in a non HDB flat. Well I actually stay in an EC. Your comment on being EC a good choice because it's priced 20-25% than condos is true because you get to experience condo living at a lower price however when it comes to resale prices, not many of these ECs can fetch the same resale prices as the condos. They will still be cheaper relatively. An exception that I could think of is Bishan Loft.

So depending on when C's friend bought his EC, it can be a wise choice or an unwise one. It's about value and market timing isn't it? I personally believe that when prices are down, it's a good time to upgrade, when prices are frothy, it's time to downgrade.

Guess I will share a bit of our journey. When we bought our place 10+ years ago. I was still studying. We knew each other very long already and we know that we will get married soon after I graduate. However the sotong me kinda got so busy with my studies that I forgot getting a place will take some time especially if I wanted a new HDB flat.

So one day, my ex-gf saw an advert for an EC development and she ask me whether we should go take a look. My first thought was no. I told that total interest payment can be quite hefty since quantum is higher than HDB and loan is from bank. However that also got me thinking about our marital home.

Die I thought... Buy new will take a few years (actually I did not know then that HDB has 10+k of unsold flats that were already built, people could just do a walk in selection) and also I was thinking of staying near either of our parents which meant resale but then resale also meant higher prices.

So in the end I went one circle and decided to surprise the ex-gf by bringing her to see showflats.

The showflats were actual units on the 2nd floor. This tells you how slow the market was moving. About 15% unsold units and the developer just gave a second discount.

We liked what we saw. We also liked the surroundings even though it was a non mature estate. We also like that size of the apartments. Very spacious and as big as EAs.

I did a quick mental calculation. I knew that the resale prices of EAs in that area were around 350-360k.

The unit we were interested is will be 510k after grant.

If we buy a resale EA and then with the additional renovations to make it to EC specs will most prob cost around 30k.

So I'm effectively making an additional ~120-130k for something that is essentially a condo.

So it felt like the EC was a value buy. We went ahead.

With the rise in prices, the capital gain in EC way outstrip that of an HDB but still less than for a condo.

BP said...

No tv?... That a bit extreme to me.

Anyway being frugal is good, but not to the point of depriving the children of tuition(if needed) and ECA helps in overall development of the child.

AK71 said...

Hi Whowillbe,

I try to be objective although my assessment of any situation is probably only partially so since it will be affected by what little I know. This certainly is the case when it comes to ECs which I have no practical experience with. So, it is good of you to weigh in on the matter. :)

My understanding that ECs have a built in MOS is simply from the perspective of numbers. They are usually priced 20% to 25% lower than surrounding condominiums. After 5 years from TOP (i.e. the MOP), we are allow to resell to other Singaporeans. After 10 years, we can resell to foreigners too and ECs are no different from private condominiums in status then.

Unless surrounding condominiums are 999 years leasehold or FH in nature, I don't see why ECs should resell at a discount 10 years after TOP unless they are lacking in one way or another.

Of course, as the buyers of the ECs could have paid much lesser compared to buyers of surrounding private condominiums, they could price their units lower and still make more in percentage terms. So, they could "undercut" the competition.

I like your observation regarding renovation that is required in a BTO flat. Often, people forget that renovation cost should be included in the total cost of a flat. In fact, I just had a discussion on the matter in FB a few days ago.

Jack James: I would rather buy a 3 rooms flat and knock out the wall and made it really spacious (many bachelor did that as well)

Assi AK: I am not allowed to buy BTO 3 room flats. Otherwise, I would consider that.

Jack James: Resale HDB la !

Assi AK: Resale flat is marked to market. I don't want to pay almost $400K for a resale 3room flat that was built in the 1980s. Then, to make it nice and modern, I know friends who paid $50K to $60K for renovations. -.-" Of course, in the end, we don't own the HDB flat. We are just a lessee. Doesn't sound like a good deal to me unless the purchase price is below market rate which means buying a BTO flat.

Jack James: I bought mine 4 rooms flat , 1999 years built , best location at Jurong East , 90 Sqm , S$355K , high floor . Spent S$36K to renovate the entire unit like a show unit in year 2009. By the way , lease , leasehold , freehold , all doesn't bother me , it's just a term. My neighbor just sold his at S$490K last 2 months . So that's the current price now.

Assi AK: So, you are 25% in the black. Gong xi gong xi

Jack James: you should say 38% in the black instead ?

Assi AK: 25% because you spent $36K to renovate the place. Total cost is $391K. No?

Jack James: Errr.... Renovation actually doesn't add any value .

Assi AK: Yup. But it does add to the cost.

Jack James: When valuer come to your house , you spent S$100K to renovate , they also don't bother .

Assi AK: Yes. So, I don't like to spend a lot of money on renovation and buying resale usually means renovation cannot be avoided.


So, the advantage of buying a new condominium or EC is that many things are already included and we don't have to spend a lot of money after collecting the keys before moving in.

Moved in after 2 weeks and $8,000.

Photos of my old place:

Photos of AK's home.

Yup, $8,000 was all I spent on "renovation" before I moved in. AK, the giam siap fellow. ;p

Whowillbe said...

Hi AK71,

Yeah I only spent 3k on renovations. 😃

AK71 said...

Hi Whowillbe,

Wow! Really? That is amazing!

My "renovation" included:

1. Curtains, blinds, bay window tops.

2. LCD TV, fridge, washing machine.

3. Sofa, TV console, dining table/chairs, a queen size bed + mattress, a single + mattress.

4. Lights.

I thought $8,000 for all these was quite little for a 980 sq ft apartment.

Your place is as big as an EA! $3,000 is amazing! :o

Whowillbe said...

Hi AK71,

Aiya. Sorry I blur. Because we wanted to save cost, so we got handled the different service providers by ourselves.

3k was for our contractor and painter. They did light box, ceiling to floor mirror wall feature, painting services, electrical works, light installation.

We spent about 7.5k for day bed, queen size bed, dining table, big L shape sofa, coffee table and tv console, fridge and washing machine.

About 1.5k for blinds and curtains.

The reason why I only mentioned 3k is because that's the cost which will vary depending on the condition of the apartment.

Total about 12k.

The other expenses is bo bian. Oh to be fair, I did not need to buy the cooking hob and hood.

Something interesting is that we don't have a TV. Not having a TV actually helps in purging our souls of all the materialistic ideations. Lol!

Our place is 142 sqm.

Cheers.

AK71 said...

Hi Whowillbe,

Proportionally, $12K for a 142 sq m apartment is about the same as $8K for a 980 sq ft apartment (which should be about 91 sq m) but you didn't buy a TV. Cheat! LOL!

Yes, not having to spend much money on the kitchen actually helps to reduce costs a lot. My new place's kitchen has everything built in, including the fridge.

Of course, once I remind myself that I paid ever so much more for my shoebox apartment than you did for your 142 sq m EC, I pulls me back from a state of smugness. ;p

I know what you mean about watching TV. I watch a lot more TV now than I did in my old place. I guess it is also because I have a bit more free time now. Oh, dear. Degenerating. -.-"

bluelite said...

i think a 8k or 12k reno not included as part of cost of ppty is still quite aright, compared to a 50k to 60k reno.

and if we include reno into the cost of a ppty shldnt den we include mortgage interest as well?

AK71 said...

Hi bluelite,

What we want to include in the total cost of our property depends on what we are trying to do, really. Accounting can be quite creative. ;)

So, for example, should we include the cost of the furnishing when calculating gross yield? Well, some landlords do. They would then end up with a more conservative gross yield.

If borrowed funds were used in the purchase of the property, then, there would be financial costs. This is not a one off but is paid monthly. So, it will affect the net yield.

pf said...

If u wanna include mortgage interest, maybe also include the interest forgone in cpf that u hv to pay back to cpf if the ppty is sold, if cpf is used for the ppty.

By then some may think no ppty wld be worth to buy.

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