Should we buy a shoebox apartment in NE Singapore?

I was talking to someone who said he bought a second property for investment, a shoebox apartment in NE Singapore and said that he should be able to get a bit more than a 4% yield. He seemed quite pleased with himself and said that any yield lesser than 4%, he wouldn't consider.

Singapore Real Estate Exchange said before that 4% represents a psychological barrier when it comes to rental yields for investors seeking income from residential properties. There seems to be some truth in this. However, if we subscribe to the Rule of 15, 4% looks less attractive and does not provide a sufficient margin of safety.

There are many things that should be considered but basing our expectation of future rental performance on what are currently the market rates could lead to disappointment as more supply to the Singapore non-landed residential real estate market is on the way.

With vacancy rate at 7.2%, some experts are expecting vacancy rate to hit 10% by 2016. Wonder why? See this chart:

Source: URA.

A vacancy rate of 10% in the next few years is plausible as the inflow of foreign workers to Singapore has slowed down dramatically while more private non-landed properties are completed.

Experts have observed that there will be more completed condo units in the suburbs in particular and this will depress rents in OCR further.

"Between H2 2014 and 2015 alone, close to 30,000 units are expected to be completed, substantially greater than the previous two years' supply of 23,000 units. Of this, about 56 per cent will be in the suburban areas, and is thus likely to exert a further strain on rents as potential tenants will have greater bargaining power," said Ms Lee Lay Keng.

"The imminent supply glut could lead to a flight to quality, as some tenants will be able to move closer to the CBD for the same rental budget. The result is that the OCR (outside central region) residential landlords may get the short end of the stick," added Mr Nicholas Mak.

Source: The Business Times.

I have an inkling that Mr. Mak is right and it would mean higher vacancy rates in OCR in future. It might not just be a problem of depressed rents in OCR but depressed resale prices as well.

Remember also that ABSD is part of the total cost of buying that second or third property. ABSD, therefore, depresses the rental yield of these properties, all else being equal. The person I spoke with did not consider ABSD as part of the cost of the property. "It is an expense", he said. Sounded like an accountant.

Unless a residential property is able to offer a higher rental yield and, by that, I mean 5% to 6% which doesn't satisfy the Rule of 15 either, it really isn't a very good investment in an environment of worsening oversupply and impending interest rate hike.

In District 19 - which encompasses Punggol, Sengkang and Hougang - 2,300 new units have hit the suburban precinct in the past year.

This will be followed by a further 3,000 condo units over the next 12 months, with the completion of projects such as Sim Lian's 882-unit A Treasure Trove and Keppel Land's 622-unit The Luxurie.

"Because these areas have seen the largest increase in the supply of non-landed units in the past year, they are likely to see the most rental pressure as tenants would have a wider selection of options, increasing their bargaining power," said DTZ research director Lee Lay Keng.

Source: The Straits Times.

I know that a shoebox apartment in NE Singapore now might seem attractive from a price point. However, if we have done our homework, we might feel less confident about its prospects.

Related posts:
1. Rule of 15.
2. Pay the ABSD?
3. Where to buy shoebox apartment?

Curious about how life is like in a shoebox apartment? Read:
Home is a hut in the sky.

Do you know if your parents have (enough) H&S coverage?

There are certain topics that many people avoid talking about at home. 

Money is one such topic.

Sometimes, due to this reticence, we discover too late that someone in the family might be heading for a financial disaster or that someone in the family might not have certain necessary insurance protection.

In such instances, other family members might have to help out financially if they are able to. 

What if they do not have the ability to do so? 

That is one scary thought, isn't it?





This is taken from a recent conversation with a reader:

Hello AK,

It's me again, the one who got in touch with you via Facebook recently :D

I am currently reviewing my insurance plans, fueled by my recent visit to the CPF board for my dad's CPF Life inquiries. 

One thing lead to another and I realized that he only has Eldershield on and no H&S plans at all. Thus I'm inclined to grab one for him.

The plan (hah!) I have for my dad is to have to maximize his $800 cap to pay for his private insurance, with any additional necessary cash top-ups to be done on my end, which can be part of my tax-relief(ed) contributions towards his Medisave.

As much as I want the best for him, question is, given his age and thus the increasing premiums, should I go for the highest possible plan or exercise prudence by going with what I can afford? 

If it's the latter, what's the bare minimum then for me to effectively not worry to a large extent should he be hospitalized?

Hear from you soon, AK :)

Sincerely,

F

What? No H&S plan? Alamak!

Firstly, I must apologise to F because I forgot to mention to him that contributing to his father's CPF-MA does not give him any income tax relief. 

I believe that a voluntary contribution to the CPF-MA gives income tax relief to the recipient only. 

He might want to check with the CPF Board on this to be sure.






My reply to F:

Hi F,

H&S is very important and a must have for everyone. Very lucky that you discovered your dad has no H&S coverage. 

He should definitely get coverage ASAP!

A long, long time ago when I first compared H&S plans, I decided to go with Incomeshield from NTUC and I have stuck with them since, upgrading my plan over the years. 

I got my mom in on this as well and, like you observed, upgraded her plan not too long ago too.

It is true that the yearly premium will get more expensive as we age and for my mom who is almost 70 years old, it is more than $2,000 a year. 

She finds it expensive but I told her it isn't and I will pay for her. I want her to be comfortable if she should be hospitalised and I want to be worry free when it comes to my share of the cost. 

10% of the bill with an annual cap of $3,000? That's OK. :)






Which H&S plan should you get for your dad? You have to compare the different options available and decide for yourself, of course. 

Remember, insurance is there to help us deal with bad things that might happen to us. 

It is to help us to cope with costs which we might not be able to deal with ourselves. 

As we bear this in mind, we also want to keep the cost of insurance low.

Of course, if we can afford to pay for better healthcare for our parents, why not? 

I think they deserve it. 

To make better healthcare more affordable for us, we need a good H&S policy. :) 

The yearly premium is predictable and is something we can budget for. 

The cost of hospitalisation is not predictable. ;)

Best wishes,

AK

I have talked to myself about the importance of having a good H&S plan from time to time here in my blog, of course. 

This is not something new.

However, the conversation with F nudged me to once again remind readers, especially those new to my blog, to have a conversation with family members, especially our elders, to ensure that they have H&S coverage and if they do have coverage, we want to check if the coverage is adequate when considering the types of hospital and ward preferred.





We shouldn't drag our feet when it comes to something like this. 

The weekend is upon us. 

Go talk.

Related posts:
1. Enhanced Incomeshield for my mom.
2. Eldershield: Is it really necessary?
3. Eldershield: What does it shield us from?
4. Save money and have better H&S for parents?
5. Voluntary contributions to CPF.
"My dad is still working and paying income tax. So, with regular voluntary contributions to his Medisave Account from me, he will pay less income tax too. Yes, it is tax-deductible for the recipient only."

6 points in response to Sumiko Tan's "expensive lesson".

I read an article in the newspapers by Sumiko Tan and felt the pain she must have felt. 

It is about her experience of buying an endowment policy and cancelling it, losing quite a bit of money in the process. 







Here are a few paragraphs taken from the article:

"I bought the plan from a financial adviser from a bank I have accounts with. He had cold-called me to arrange a meeting. He was patient in explaining the scheme. The returns looked decent and I didn't ask many questions.

"What really clinched it for me, though, was the shopping voucher... I would get a $1,800 Takashimaya shopping voucher. Shopping here I come, I thought gleefully."






By now, regular readers of my blog would be shaking their heads. Here are three points in response:

1. Always ask questions. 

No one cares more about our money than we do. 

If we don't care to ask questions, no one will do it for us.







2. Of course, don't ever ask a barber if we need a haircut. 

Get second opinions. 

Oh, we will be doing ourselves a BIG favour by making sure they are not from barbers too.







3. Don't succumb to the instant gratification of yield. 

If they come in the form of shopping vouchers, run away in double quick time.

Anyway, the writer, Sumiko Tan, bit the bullet and terminated the policy after agonising over it. 

I could feel the angst in her writing:

"What I had regarded as welcomed enforced monthly savings suddenly felt like a debt I owed the insurer. I felt burdened. I hate being in debt.

"I decided to bite the bullet and backed out, and said goodbye to the two months worth of premiums.

"... at my age and given how I'm childless, waiting 23 years to experience its full benefits is foolhardy. I wish I had realised that earlier.

"It was an expensive lesson, but next time, I will read all the documents, compare products and ask more questions first.

"Needless to say, I also don't get the Takashimaya shopping voucher."






There is sadness but there is also a sigh of relief. 

I believe she did the right thing if for no other reason than the fact that the purchase robbed her of her peace of mind. 

Of course, she will be doing the right thing in future after this experience.






I would like to share 3 points a friend shared with me before:

Point number one:


Fallacy:
Insurance is for savings and investments.

Truth:
Insurance is a risk management tool.







Point number two:

Fallacy:
Be insured for the highest sum we can afford.

Truth:
Get sufficient coverage. Don't over insure.







Point number three:


Fallacy:
All of us need all the different types of insurance.

Truth: 
We go through life stages and needs will change.







All very pertinent points and we will do well to remember them.

Here are some blog posts related to the points raised above:

1. Nobody cares more about our money than we do.
2. The instant gratification of yield.
3. Disastrous investments in the property market.
4. A true story about insurance and grapes.
5. Free "e-book": Retiring before 60 is not a dream.

Read the full article by Sumiko Tan: here.

Aiyoh, so tempting lor.

Alamak. What am I going to do?

AK likes freebies but are these really free? Or are they a return of capital? Hmmm...

Take a break with AK and recharge our spirits.

I like Japanese anime and I shared some soundtracks here in my blog before. It has been quite a while since the last time I did this.

The last couple of soundtracks I shared were from Sword Art Online and Log Horizon. That was more than a year ago. Since then, I have watched Sword Art Online (Part 2) and Log Horizon (Part 2).

A few days ago, I decided to watch again an anime I watched a few years ago. It is a very heartwarming anime which I enjoyed but time has dulled my memory of the story. Well, watching it again and enjoying it as much as the first time I watched it shows what a wonderful piece of work it is.

In case you are interested, the name is "So Ra No Wo To" (The Sounds of the Skies). Even if you do not usually watch Japanese anime, I think you will enjoy the melodies of the following songs and find inspiration in the words of the second song:





Prendre le bien, le mal et sans trier, accepter.

I find the anime spiritually uplifting and it fills me with hope that the world could become a better place for all of us to live harmoniously together in future (which is what the anime is about, ultimately).

A reader who is quite an accomplished musician recently asked me if I played music? I said I tried but the interest didn't last very long. I was a bit like Sherlock Holmes trying to learn the violin.

He said I can listen to music, then. That, I can certainly do. He sent me this clip:



Hope you enjoyed this as much as I did.

Related posts:
1. Sword Art Online and Log Horizon.
2. Fairy Tail.
3. Full Metal Alchemist.

To make 20% per annum, we could lose our capital.

The low interest rate environment has been going on forever in Singapore and many savers are frustrated. 

Some of them could end up putting their money in ventures they know little or nothing about to get higher yields.

Remember, unlike a commercial bank which assumes responsibility for our savings deposited with them, the middle man in the example above has no such responsibility.





If a bank makes a bad loan decision, they have to bear the responsibility. 

The middle man in a crowd funding situation has no such responsibility. 

The risk is borne by the crowd (i.e. the lenders).





It would, therefore, be interesting to know if the middle man is putting a meaningful amount of money where his mouth is or is he just interested in the commission the deal could generate for him. 

So, if it should be a bad loan decision, he would feel the pain too just like a bank that made a bad loan decision would.






If the business is so lucrative and so promising, why can't the borrower get a loan from the local banks? 

To pay 20% per annum to lenders, surely, is a lot higher than what the local banks might charge in interest.

Of course, in a crowd funding situation, the crowd are lenders. 

They are not investors. 





They will not have a bigger share of earnings if the business venture should turn out to be very successful but, if the business should fail, they would definitely feel the loss.

When presented with a business proposal, always look at the risks involved. 

Don't think of only the possible monetary gains.




Related post:
Questions to ask when tempted by high yields.

"Unemployed but still need insurance because of my child."

Reader says...

I am 48 this year. I have a child, a girl age 9. 

I have lost my job for almost a year. 

I also have a life whole life insurance policy that is over 20 years. 





As I have no job at the moment, I am thinking of terminating it to help my cash flow.

You may say that my girl and my spouse need the death coverage but I am currently also paying for a term insurance of $1 million on my life with only death benefit. 

I feel that this should be sufficient for my family should I leave this world before them.

If you were in my shoes, what would you advise yourself? Thank you.

AK says...

I believe you have thought this over carefully.

I would also suggest that you find out how much a term life insurance for a smaller amount of say $500,000 might cost for your age for the next 12 years. 

This is an idea with your girl in mind. 





She will be age 21 in 12 years' time and will probably be able to take care of herself by then.

Ask about a reducing term which is less costly.

 A reducing term basically sees coverage reducing over the years. 

In this case, 12 years. 

Of course, the cost of such an insurance policy should also reduce over the years. 

You might even decide at some point that you don't need that $1m term life insurance.







"I am still of the opinion that we need insurance but we do not want to overpay for insurance. If I had known this in my younger days, I would not have bought whole life insurance or endowment products when I was in NS and as a fresh graduate."

Source: Comments Section of "Free ILP or Term Life?"





Related posts:
1. Free ILPs or Term Life?
2. Consider terminating whole life policies.
3. Why buy term? How much to buy?

How did STE who is married with children retire at age 44?

It has been a while since STE last wrote to me. STE is now enjoying his early retirement and has generously decided to share some thoughts with us here:

Hi AK ,

Yes , is me , STE. I have stop working since end last year and still on “sabbatical leave“ till now (it might become a “permanent leave without ending date“ haha ..

Escaping from 9-5 working environment is really something different and is a big change for me and my life style. Now, I have more time with my kids and doing more exercise (be more healthy now, I guess less stress also partly contributed to my better health, I used to have migraine and gastric for long time, but after almost 6 months after staying at home and doing nothing, all these medical symptoms seem gone. :)

Well, I thought of sharing my latest financial portfolio and some thoughts on investment strategies. 

My friends wonder how am I going to survive without a job for past 6 months. the answer is, yes, “Passive income through long term investment.“

Allow me to tabulate my “passive income“. Since day 1 of my investing journey, I like dividend very much, you may notice from my earlier post, the share I brought in early days on Malaysia stock market for counters like “Perlis Plantation / BJ TOTO/ PB Bank / Oriental Holding / Tan Chong / Malakoff /BAT etc “ were those with high Dividend Yield and good fundamentals.

Dividend Matters:

To show the importance of Dividend in process of wealth accumulation through investment, I would like to append below table. YTD accumulative Dividend and Qtrly dividend I received. I kept record on all the dividend I received since day one of my investing journey.

• Current Qtr dividend range from $40-50 K and total accumulated dividend is hitting $ 1 MIL soon
• About 42 % of total profit from our portfolio came from Dividend Income .
• Notes : Jump in dividend collected since 2009 was due to fund transferred from my Malaysia’s share portfolio and house since we decided to convert our citizenship. I was really "Lucky" as mentioned in my previous post on your blog.
• Notes : Quarterly dividend seems smooth out from early 2015 after Asia Pay TV change to pay their dividend on Qtrly basis.

Does size matter? Definitely. To have such amount of quarterly dividend, one needs to have quite substantial amount of portfolio but look at the chart, everything must start with “small steps“  and remember “Rome was not built in a day“. "Gamba Teh"!

What is your CAGR  and “power of compounding “ …

I think all the serious investor need to know what is their own investment CAGR. Well, our portfolio manage to achieve 11.13 % for past 17 years. Gone through various market cycles … dot com/ SARs/ 911/ GFC / etc. I hope my portfolio could sustain in next crisis.

Since market’s long term return on investing was around 8-9%, sorry, I have taken some of your money from market. Based on quotes from the book  “The incredible shrinking Alpha“, ”Alpha is a Zero-sum game (before cost ), meaning that for some investors to generate Alpha, they must exploit the mistakes of others“.

Picture worth more than thousand words :

Other than two investment strategies I have shared previously ie "Margin of safety" and "Mean Reversion vs Market Cycle", I would like to share few pictures which I deem important for all serious investors.

< On Market>

< Andre Kostolany: "Psychological create 90% market ">

"I can calculate the movement of the stars, but not the madness of men.” , Sir Isaac Newton

"Investors want certainty, and we cannot give them certainty. We can give them high probability; we cannot give them certainty" by Charles William Hamilton

Note: Of course, one needs to know how to avoid the “pit fall“ of investing in “hot or hype“ stocks from time to time.

< Sun Zhi : Know yourself , Know your enemy (market ), hundred battles, hundred wins.> 

< On Forecasting :>

Warren Buffet : “Forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”

< Short term vs Long term >

• Short term is full of noise and volatility, only long term will show result.

When we invest in property or setting up own business, we could afford to wait for years to see the result, but our expectation change when we invest in stock. We buy today and hope the price will increase much tomorrow.

Patience. Wait for the durian to drop.

< Investing during Crisis time >

Investing in crisis time can be really rewarding and it has shortened my journey to Financial Freedom. I still hold most of stock I bought during crisis which gave me double digit Yield on cost.

Warren Buffett: 
The incorrect lesson often preached that volatility is a proxy to Risk is dead wrong. Volatility is far from synonymous with Risk. Volatility can create opportunities or risk at the same time.

I am holding approximately 20% cash now. I was 100% fully invested 2 years ago. Since then, I have taken some money off the table and keeping my dividend received as War Chest as well.
I always look at CPF money as “investing in triple A rated bond“. I’m not using any of my CPF money to invest at this moment but I will use that once crisis hits same as during GFC.

AK’s idea of maximising our CPF-SA account is absolutely right. $25K of interest p.a (both me and my wife ) is really a good money to accumulate in next 10 years before we hit 55 . By then , we would have more than $1 MIL in our CPF accounts combined. This is another cushion in case market crashes drastically. Not forgetting the "power of compounding ", the CPF returns around 3% average (combine OA/SA/MA) is good money in the long run.

Last but not the least, on <Money Management and Life style >

As I mentioned in previous blogs, our lifestyle is rather simple and I’m staying in a HDB flat and eating at hawker centres or cook our own meals. With current our dividend income, we still could save up to 60% from total dividend amount. I think that is another cushion in case market crashes and dividend drop by half. I guess we still can survive .

Even before we talk about investing, living below our means and saving the difference for investing is the most important or key to Financial Freedom .

Cheers to all and I hope all could have smooth and wonderful journey to achieve your own financial freedom (and knowing how much is enough in your life).

NOTE: I think some readers did ask me on what books I recommend to read in previous blogs where I failed to answer that time. Below is a list of books I would recommend for all the serious investors. One may notice that I would recommend more Market History and Psychology as compare to Economics or pure Finance / Stock analysis. As I mentioned before, Market is 90% of people and 10 of Economy. And History repeats itself without fail.

- END -

I am sure we get a bit tired of hearing the same old stuff from AK all the time. So, thanks to STE for sharing. Much appreciated. Some points STE made are great reminders for me too.

So, make some time to meditate on what STE has shared with us and maybe read a few of the books he has listed too. Go to a nearby public library or do a bit of charity by buying pre-owned copies from BetterWorldBooks.

We also want to remember what Charlie Munger said before:

"It takes character to sit there with all that cash and do nothing. I didn’t get to where I am by going after mediocre opportunities." Charlie Munger

Oh, most importantly, congratulations to STE on his early retirement and improving physical health!

Related posts:
1. "Patience is the hardest part..."
2. Mystical art of wealth accumulation.
3. STE's story: Millionaire Next Door.
4. STE's story: Investment strategy.
5. STE's story" Personal finance.