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Buying properties with short remaining land leases.

Thursday, July 6, 2017

I was looking to buy a shoebox condo until I read your blog. 

I turned 35 recently and will try to get my own BTO 2 rm HDB flat. 

This will help me achieve financial freedom earlier. :)

However, a friend (same age) just bought a 40 yro HDB flat. 

He didn't think age was important but I told him about the lease decay issue. 

He cannot sell the flat right away because of the MOP. 

Do you have any thoughts on this?


I will share what I feel are situations when it might make sense to buy properties with relatively short remaining land leases.

1. If we are making it a home with no intention of reselling or leaving a legacy, make sure that the remaining lease is enough to last us till we are 90 years old. 

People are living longer and we are expected to live till almost 90 these days. 

In fact, to be safe, let's make it 95 years old. 

So, if your friend is 35 and bought a resale flat that has 60 years left to the lease, that is not too bad. 

Well, let us hope he doesn't live to be a hundred. 

Alamak. Bad AK! Bad AK!

2. If we are buying a property with a relatively short remaining land lease as an investment, the rental yield should be far higher than a property that has a longer remaining land lease or is sitting on freehold land.

So, if a property has 50 years left to the lease, it should, simplistically, have a rental yield that is way higher than that of a comparable property with a 100 years left to the lease. 

Otherwise, everything else being equal, it would mean offering a significantly lower price for the property with a shorter remaining land lease.

(There is lesser room for error buying a property with a much shorter remaining land lease. A one year vacancy for a property with a 50 year land lease is 2% of its productive life gone while it is 1% for a property with a 99 year land lease.)

Of course, point number 2 should be relevant to someone considering point number 1 as well. 

It will help to ground us in our decision making process and, hopefully, not pay ridiculously high prices for properties.

Guide for Resale Flat Sellers and Buyers.
Related post:
Buy 99 years LH or FH properties?


AK71 said...

Owners of private homes with dwindling leases have limited options — they can either rent out the units, or typically sell at a loss. The best scenario is a collective sale, but such an opportunity may not always be available. Pearl Bank, for instance, has undergone three en-bloc sale attempts in 2007, 2008 and 2011, but all failed.

Finance professional Brandon Huang, 37, grew up in Pearl Bank, and his parents still live there. He felt that far from being assets, properties with leases that are running out could become a liability. “My parents want en-bloc sale, of course. The property is really old, the lease is running down, making it less easy to finance for prospective buyers,” he said.


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