The head of a typical HDB flat household speaks (Part 3).

In part 3 of our correspondence, we talked about investing in real estate for rental income:





Hi Ak

Another friend of mine (same age as me)is so concerned with unemployment before 50 yr old, that he keeps urging us to buy a condominium and then collect rental income on it. 

He already owns an apartment in KL, and claims that he is successfully collecting rent of it. But he always avoid my question when I ask about currency & political risk of owning foreign properties. 

Now he is aiming for his 2nd rental property in Singapore. He said that prices are coming down and good time to buy in 2015 or 16. But again he avoid my question when I ask him about maintenance costs affecting rental yield and the oversupply of condos/ foreign labour cut back in Singapore which makes it risky strategy.

When I suggest buying S REITS as an alternative, he said it's not worth doing it until he has a million dollar capital base.

He also say meeting minimum sum in CPF is no big deal for him..

I am highly suspicious of his recommendation.

Good if I can hear your objective view on owning a physical property vs buying REITS. 

Thank you

C

My reply:

Hi C,

Well, there will always be risks in investments. Risks cannot be avoided but they can be understood and even managed.

Your concerns with regards to buying a property overseas for rental income are valid. I hope that your friend is still doing OK with the RM's decline in value against the S$.

Anyway, is it better to buy properties than to invest in S-REITs? The topic is well discussed by many people before. Personally, I feel that both are good investments as long as the price is right. Quite simple, really.

I don't know what your friend has in mind but if it is something vague like buying properties in Singapore in 2015 or 2016 is a good idea because prices will come down, I think he needs to do a bit more research and analysis.

Personally, I feel that any property investment must be able to provide at least a gross yield of 5% to 6% to make it worthwhile. This is a primary consideration for me and I blogged about the Rule of 15 before. Then, there is a whole gamut of other considerations which I have blogged about in a piecemeal manner before too.

Ultimately, I would say to do what you feel comfortable with. There are so many paths to financial freedom. Choose a path you are not only comfortable with but one which you are sure will bring you to where you want to go. :)

Best wishes,
AK

Related posts:
1. Rule of 15.
2. Journey to financial freedom is not a race.
3. Buying a property in Iskandar, Johor.
4. Don't think and grow rich. 3 points to note.
5. The head of a typical HDB flat household speaks (2).

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

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

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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
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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.

The head of a typical HDB flat household speaks.

I enjoyed the following email because it seems to be from a guy who is the head of a typical HDB flat household in Singapore. Married with 2 young children, he is trying his best to make sure he is financially secure in his golden years.

From what he has shared in his email and with certain assumptions I am willing to make, I feel that he will be quite comfortable in his retirement. I am sharing our correspondence here:
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Hello AK

Greetings. 

I have been reading your blog for about one year now. Truthfully I think you have been doing a good job in sharing your money saving and investing experience. 

I am 39, married with 2 young children. We just paid off our HDB flat and happily debt free, for now. We are not high income but live simple life. We take public transport to work and our friends (who stay in EC condo & drives a luxury car) make fun of us for staying in a dilapidated flat, but your blog keeps me motivated to achieve Financial Independence (FI) soonest I can. Nothing matters, except to achieve FI for us.

You inspired me to use cash and transfer from OA to max out my CPF - SA, which is on track to hit $161,000 by Dec of 2015 based on my monthly income contribution. 

Judging by our incomes, we'll be lucky to each have about $500,000 in cash savings (not counting the flat)  by the time we turn 55.

I know you a big believer in buying S-REITS and stocks and I agree with you too. The only small issue here is that I have to spend quite a bit of time studying and hanging out with my family, so with limited time to study and select stocks, would you recommend that I just dollar averaging into STI ETF from now until I am 55 years old? Do you know people who have successfully build up a retirement nest egg with this ETF strategy ? The other issue is that ETF does not give out much dividend as compared to REITS.. 

Grateful if I can hear from you, thank you very much

Sincerely,

C

When our home is fully paid, we have control AND ownership.
Before it is fully paid, we have control but NOT ownership.
We cannot say we own our apartment until it is fully paid for.

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My reply to C:

Hi C,

Welcome to my blog and I am glad you have found it useful. :)

Next, congratulations on being debt free! It is a good feeling, isn't it? I don't think your friends staying in an EC and driving a luxury car are debt free. They could be, of course, but if they belong to the same cohort and have similar level of earned income as you, the probability is lower.

If your friends are still servicing a mortgage and car loan, you are being very nice not to laugh at them for being still in debt. OK, AK is being naughty here. Bad AK! Bad AK! ;p

Now, let me say that having $161,000 in your CPF-SA by end of 2015 is an accomplishment at age 40. By age 50, you would have $241,500 and by age 60, if you were to leave your funds in the CPF-SA and, of course, the mandatory CPF-RA, you would have $362,250. This is assuming that there is no more mandatory contribution from 2016 and this is also not taking into consideration the extra 1% paid on the first $40,000 in the CPF-SA. $500,000? I think you have nailed it with this strategy.

Oops, I forgot about your savings in the CPF-OA which will build up from age 40 to 55 (or 62 if you choose to retire later). ;)

As for investing in the STI, you want to read the guest blogs by Matthew Seah. Just go to my blog's left side bar and look for his name under the section that says "Guest Bloggers". Matthew wrote about options provided by POSB and OCBC.

For people who do not have the inclination nor the time to actively monitor their investments in the stock market, index investing is a pretty good choice. However, do take note that the stock market goes through bullish and bearish phases too. So, it is important that you are able to sit out bearish phases and not break into a sweat.

The trick is only to invest with money you can afford to lose and not to use money earmarked as emergency funds or for any other purposes. You do not want to have to liquidate at the depths of a bear market.

Investing will always have an element of risk. Look at the Japanese and the Americans and how their countries' economies went into a tailspin in the past. Investors saw years of gains wiped out. This is why I think that the CPF is an important cornerstone of retirement funding adequacy. It is not only risk free, it is free of volatility.

Continue with a financially prudent lifestyle. Make more money. Spend less. Keep a big enough emergency fund (and I think this should grow in size as we grow older). Invest the rest but always keep a war chest ready to buy more during bear markets. Quite simple. :)

Best wishes,
AK
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We should never laugh at people just because they are staying in homes less "prestigious" or if their mode of transportation is not as flashy. 

There are many HNW individuals in Singapore who stay in HDB flats and take the public transport.

Don't judge a book by its cover. Better still, don't judge. Just a reminder to myself, of course.

Related posts:
1. In my 40s, married with kids? What to do?
2. An essential habit to becoming richer.

One of the most noble things we can do.

In recent conversations, I revealed that one of the things I have been thinking of doing is to set up a foundation to help financially disadvantaged students in future.

 

In the meantime, I have been making regular donations for many years to help fund bursaries for deserving undergraduates in National University of Singapore where I spent 4 years of my life.

I believe that helping financially disadvantaged students so that they and their families will have a brighter future is one of the most noble things we can do. So, if you can afford to do so, you might want to find out more about NUS Annual Giving and how to make a donation: here.

Related posts:
1. Counting our blessings.
2. We can help to lessen the pain.
3. The world is full of nice people.