Do you want to be a landlord? (Ideas from a Singaporean with a young family in his 30s.)

A conversation on buying properties for investment and some considerations.

Reader:

I have been following your blog for couple of years and thank you for sharing your journey. I will be really happy if I can achieve a quarter of your passive income when I retired (excluding cpf life).

I wish to bounce some ideals off you. Just wish to explore some ideas here while you are talking to yourself. J

I am in my late 30s with a very young family with kids, living in a 4 rooms hdb flat from BTO, north east, reaching mop soon, with 20 years of outstanding loan. 

I am aspired to own two properties, ideally 1 hdb flat and a private condo, with either one as a passive income machine/ appreciation for retirement but given all the current measures in place, it is quite impossible. I believe I have the following options:

Option 1: EC

I am considering an EC but if I were to go down this route, my aspiration will not be achievable due to (1) private property (EC after 5/10 years) must be disposed within 6 months after purchase of a resale flat (2) I will be in my mid/ late 40s when the EC reach mop of 5-10 years, theoretically at that age I would not want to stretch myself financially to get another condo. Having said that, I feel EC is a good investment.

Option 2: Staying Put

Alternatively, I can stay put, maybe clearing my hdb loan while waiting for opportunity to get a private condo but this may or may not happen. The prices is likely to go up once the government remove cooling measures unless we have a recession.

Option 3: Resale

Last option, upgrade into a bigger re-sale flat, perhaps in a matured town. Then again I will have to wait for another 5 years before allowing to get a private condo.

Would you be able to share with me what’s your thoughts are, the pros and cons, and what would you do if you were in my shoes? Would you just invest only in stocks and forget 2^nd property)? =P

AK:
Well, if you aspire to own a second property to have rental income, I would suggest that you take reference from the "Rule of 15" which I have blogged about before. You could go to my blog and do a search for this to read that blog post.

You want to consider also whether you are the land-lording type. Talk to friends who are landlords and hear what they have to say. For sure, it is not necessary for us to be landlords to achieve financial freedom.

For married Singaporeans who qualify, an EC is probably the best low risk method to make some capital gains. They are usually priced some 25% lower than condominiums in the same area. MOP of 10 years and an EC gains full condo status. Of course, you cannot keep your HDB flat in such a case but do you need to?

Of the three ideas you have, I think buying a newly launched EC would probably give you the biggest capital gain in time to come.

Reader:
Thank you very much for sparing some time to respond to my query.

I have re-read your post on Rule of 15, I did some quick calculations, for BTO flat, definitely it’s better to buy, however for EC, it shows it is better to rent but like you said, EC is priced at a discount compared to the condos in the same area as such there will be capital gain upon 10 years MOP. If Rule of 15 indicates EC shows not a good buy then private condo will be worse……

The reasons I wish to own 2 properties is due to 

(1) rental income 
(2) appreciation 
(3) my journey in equity has not been performing as anticipated. I have been reading some books (mainly on FA) and your blog of course but I feel my analysis and timing is always poor, 
(4) I could be wrong but I believe most people make $ from property then they use the capital gain to invest in equity during bad times to achieve financial freedom.

I have not cleared up all my HDB loan (although I can with my life saving) as I am waiting for opportunity in the equity market. But the cost of doing these is quite high even I have the CIMB account 0.8% vs 2.6%, 365 & multiplier account. Similarly, I am doing a $7,000 contribution to my SA yearly, but I have not transferred $ from OA to SA in view that I would get a condo when there is opportunity. No right no wrong here, but right now these are my choice (for now). =P

Our combined income may be hitting the new EC ceiling, what would be your view if EC is no longer an option? Apologies that I didn't mention this earlier. Feel free to comment Shi Fu!

Lastly, I have to thank you for sharing your journey all these while and I enjoy reading every one  of them. Keep it going 

AK:
The Rule of 15 is a good guide when we want to ask if a property is value for money. It is especially true when we are interested in buying one as an investment for (rental) income.

Now, if we are buying with an eye on capital gain, there is more of a speculative flavour. However, if there is a chance for arbitrage which is what newly launched ECs could provide, then, those who qualify might want to take a chance. ;)

I do agree that private condominiums in Singapore mostly do not offer value for money now. I believe that prices could continue to come under pressure for many more years. This is not to say that we cannot find good deals now.

You might remember another blog post I published titled "Affordability and value for money" or something like this. You might want to do a search in my blog for it.

It is true that we can make a lot of money from properties compared to equities but it is also about getting in at the right price. In this respect, it isn't very different from equities. :)
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Compared to investing in equities, an investment property is a much bigger one time commitment which would probably involve a relatively large amount of leverage. So, don't rush into a deal. Think carefully.

It is not only about affordability. It should also be about value for money.
Related posts:
1. To rent or to buy: Rule of 15.
2. Affordability and value for money.

3. Disastrous property investments.

Aim to pay off home loan and hit the MS ASAP.

The title of the reader's email was "CPF Haywire". So, imagine my trepidation as I clicked on the email.

Hi AK!

I've been reading your blog here and there and my eyes go haywire... so many nuggets of gold! Kam Sia very much for your contribution to society.

I just bought my first HDB and OA start from scratch. I calculated I'd have about 10k in a year. 

In order to meet the MS when i turn 55 in 15yrs time (about $244k if at 3% yearly right?), would you suggest that every few years to transfer a bit (thinking about 10k) from OA to SA for the compounding effect to be greater and yet leave some in OA for financing the 30yr loan? 







I have about 4 years worth of monthly deductions from CPFIS (principal amount), and this is my backup plan to tap on in case I lose my job.

Like you I choose to be conservative with my CPF and not take any chances in the stock market (aside from the only investment I made before purchasing the flat on the advice of my insurance agent) so my aim is to finish my loan ASAP and be able to hit the MS for retirement payout. 

Would you suggest to make partial payments every few years to lessen the years of loan or to stretch it out to 30 years?

I'm aware about tax reliefs or incentives doing VC, MS top-up, contribute to SRS but am not considering these because I have limited cash on hand.

I have 6 months emergency fund and every month I save some (for holidays, etc) and invest some for dividends (Spore ETF, REITS). Its not much because I started late in life (wish can turn back time to tell my bochap younger years to buck up!) and I'm hoping that I can still 'fix things' to ensure I have an okay retirement. 

Do you have any advice on what else can I do to improve my financial situation?

Many thanks,

OhwhatcanIdo

AK replies:
Hi,

Welcome to my blog. :)

I hope you did not buy an ILP from your insurance agent. There is no way to guarantee that you will get back the same amount you put in if you need the money.

I say this because you are looking at it as a backup plan in case you lose your job.








Money in an investment should not be looked upon as money in your emergency fund.

Of course, I will have some other stuff to say about ILPs but you can do a search for these blog posts in my blog.

I shall talk to myself now:






1. I just bought a HDB flat. I want to make sure that I have enough in my OA to service 12 months of mortgage. If I am 40 or older, 24 months would be prudent because it could be more difficult to find a job. The rest of the money I have in my OA, I can transfer to my SA.







2. I bought some investments with my OA money. The money invested could have serviced 48 months of mortgage payment. I should look at possibly liquidating the investment if there is a gain or if it breaks even as my motivation was never to invest with my CPF-OA money. Then, I would have more money to transfer to my SA.







3. If the interest rate on my housing loan is less than 2.5%, it makes sense not to pay down the loan with CPF-OA money as the CPF-OA pays 2.5% in interest. I might want to consider the POSB HDB Home Loan.







4. I might want to contribute to SRS and use the money to invest for income. I will save on income tax and still be able to invest. Have my cake and eat it? Sure.

This talking to myself illness is getting worse by the day. Cham.

Best wishes,
AK






Related posts:
1. POSB HDB Loan.
2. How much to have in emergency fund?
3. OA to SA transfer before buying a flat?
4. SRS: A brief analysis.

A chat on inflation and cost of living (UPDATED JULY 2018).

This was a chat I had with a reader who is also a very concerned parent.

T
do we see a 3% increase in basic necessities costs? 

Perhaps 1-1.5% is more reasonable?


AK
core inflation. That would be 2 to 3% per annum. 

Recently, we have been experiencing deflationary pressure but even so, food prices saw inflation of 2.2% or so, year on year. 

Oil prices being so low now contribute to deflationary pressure but I don't this this will last more than a year or two. 

I hope that the Singapore dollar stays relatively strong and that we don't see inflation at 5% again just like a couple of years or so ago.




T
(Referring to the CPF) 3% incremental retirement sum will amount to 445k retirement sum 34 years later.... 

Oh wow... It will wipe out a lot of middle income ppl's Sa! 

Seen from the perspective of a 21 yr old male who just entered the workforce at 21 yrs now in 2015

AK
Inflation is a monster but we rather have that than deflation. wink emoticon 

 things will get more challenging in the years ahead. 

I remember a bowl of Lor Mee was 50c when I was in Primary One. 

Fast forward almost 40 years, it is $3 a bowl today. 

I think the price has gone up by more than 3% per annum. 

It is not an easy job to keep cost of living down. I don't want to be the government.







T
Cost of living will definitely go up over a period of 30-40 years.... 

Think the bigger challenge would be ensuring wages keep up.... 

During that time of 50cent lor mee, wages were probably around the 300-500 mark I guess



AK
I too young to know what wages were like. 

I think everyone must be financially prudent. 

What we have control over, we must make the best of things.





T
I worry abt the daughter's future.... 

I can instill financial knowledge into her from an early age but I'm afraid cost of living goes up too fast

AK
We probably have less control over our wages or prices. 

However, we have control over what we spend on and how much we save.




T
Yup... That I totally agree.... 

If cost of living goes up much faster then wages, it does not really make sense for the future generation to live like a hermit just to plan for retirement... 

What kind of life would that be?

AK
It really depends on our expectations and if we are willing to manage them, I feel.




T
I already lead a life sorta like a hermit just so I can afford my daughter's future academic needs and my own retirement needs.... 

I think I'm not at your level yet but I'm spending less then 600 per month on my own food, transport and personal needs so I think I'm on the right track.

Anyway I just wanna let u know I learnt quite a lot just from your posts.... 

Once I have my emergency fund set and a war chest ready, I'll start investing.....

Maybe the details of which stock which REIT, gearing and debt etc I still don't understand... 

But I learnt a lot from the concepts behind it. The concept of delayed gratification. Saving 100% of your income etc.

We are approaching a time in history now that simply earning a salary and saving will not be enough for even a simple retirement. Investment knowledge is important.








AK's closing comments:
I hope that Singapore doesn't become another Hong Kong or Taiwan where young graduates cannot afford to buy an apartment. 

I hope that Singapore doesn't become another Japan which suffered not one but two lost decades.

I am sure many Singaporeans have the same worries. 

(Source:
https://www.straitstimes.com/asia/east-asia/taiwan-youth-struggle-to-find-well-paying-jobs)
.............




.............
We do what is in our power to make sure that we are able to weather the storms which could come our way. 

We should not think that we would always see fair weather.

When we are prepared, we would have less to worry about.





Related post:
Don't think and grow rich.