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...