Posted on May 17, 2015 in Articles, Singapore Property Investment by Gerald Tay
Below is an email thread I’ve had with a reader of this site. I changed the name to protect identity. My reply is long.
Read through the email and I bet you will find something that sounds familiar. If you ever want to send me your own questions, do so here.
Email Q & A
Gerald,
To own a second property in Singapore, now we would have to put down 40% downpayment (cash) instead of the 20% in the not so distant past.
Hypothetically, let’s look at a typical Singaporean (like me) who is not making huge money. I am married, single income as my wife doesn’t work, and I know I am losing out big time to my friends who have both husband and wife working. I bought a HDB as a first property because there is simply no sane way for me to buy a condo when I first started out.
Now let’s think about a second property. If I want to go for a somewhat quality property, it will probably cost about $1M. Getting an industrial property probably costs $700k or so for a cheap one, but not sure about quality. So assuming a $1M property, that will require $400k cash. Think about my single income and my expenses. I can realistically save about $20-30k per year if I am very thrifty (no vacation or only very cheapskate vacations). If I go by $30k per year, it will take me 13.3 years to save up for a $1M condo, assuming that prices remain flat. Then maybe the rest of my working years, I will need to pay off my HDB so that I can retire off the rental income of the condo. Best case I can acquire a third property and if interest rates remain low, then I will still be able to retire comfortably.
Is this really the best I can do, or there is some super strategy I can pull off to make life easier? Note that the above scenario requires me to work I think at till 55 years old or more, and whether I can still keep a job at that age is a question mark. So the only consolation is that I can retire worry-free, but never feel rich or live a bit more than comfortably.
I feel that overseas properties have potential but they simply carry too much risk especially when the SGD keeps going up against most of these other currencies. So they are like an air balloon that is losing air gradually over time.
Colin (Reader),
I’ll answer in points from your paragraphs.
To own a second property in Singapore, now we would have to put down 40% downpayment (cash) instead of the 20% in the not so distant past.
That’s true… for now. 40% DP on the second property is only one of the many temporary cooling measures. It’s not structural as the TDSR. (Total Debt Servicing Ratio).
As in the past, the govt. has implemented property measures to either boost or cool the market. For example, the government brought up the Loan-to-Value from 80% to 90% in 2005 to boost the quiet property market. It goes back to 80% after the financial crisis and implemented more cooling measures to cool the market.
When will this 40% LTV be removed? I’m confident to say when the property market is in the next lull again. When exactly? I don’t know and neither will any one else.
I am married, single income as my wife doesn’t work, and I know I am losing out big time to my friends who have both husband and wife working
I don’t know why you feel you’re losing out to your friends because of a single income. In fact I think you should feel FORTUNATE. My wife is also not working and we’re considered single income as well. She spends her time guiding my son in his studies. Above all and most importantly, it’s the role of the parents (at least one) to spend QUALITY time with their children to ensure their well-being and upbringing into society.
My wife and I have seen kids, some of whom are my son’s classmates who are terribly mis-behaved, speaks vulgar language and occupy themselves with IPAD/computer games all day long. The common similarities with such kids are both parents are out working. These parents are not poor but wealth affluent – branded cars and private homes. They work long hours to enjoy conspicuous spending on themselves, rather than spend quality time with their children at home.
If you think you’re losing out to your friends because your friends have dual incomes and able to afford the luxuries of life, then you need to question ask yourself if material wealth is more important or family wealth is more important?
So assuming a $1M property, that will require $400k cash. Think about my single income and my expenses. I can realistically save about $20-30k per year if I am very thrifty (no vacation or only very cheap skate vacations). If I go by $30k per year, it will take me 13.3 years to save up for a $1M condo, assuming that prices remain flat. Then maybe the rest of my working years, I will need to pay off my HDB so that I can retire off the rental income of the condo. Best case I can acquire a third property and if interest rates remain low, then I will still be able to retire comfortably.
$20K-$30K savings a year for someone who don’t earn much is indeed commendable.
If cooling measures are removed, then it is 80%LTV (Loan-to-Value) of $1M. DP is $200,000. Down-payment currently is 15% cash, 5% CPF. In 2005, down-payment was 5% Cash, 5% CPF. (10% down-payment)
If cooling measures are removed, then it is 80%LTV (Loan-to-Value) of $1M. DP is $200,000. Down-payment currently is 15% cash, 5% CPF. In 2005, down-payment was 5% Cash, 5% CPF. (10% down-payment)
I’m not sure how much CPF savings you have or how much is going to pay off your HDB loan. But if you used your assumption of $30k savings per year and use CASH only for your down-payment, then it will take 6.6 years to save up.
But that excludes stamp fees ($24,600) , renovation costs if any and 6 months buffer for emergency uses since property is illiquid. So let’s take 7 years of hard savings.
Can I tell you if in 7 years, property prices will go up, sky-rocket or go down? My answer is no. Nobody can predict anything in future.
The problem in buying residential property is unlike buying commercial/industrial – they loan you money according to your age. (Cap at 65 years currently. Cap at 75 years previously in 2012)
You’ll be 7 years older and that will increase your monthly mortgage payments, thus reducing your rental income (if it covers). Do note this affects everybody including myself as we age over the years. - Unless you put down a higher down payment.
Investing in residential property has its disadvantages as well. But commercial/industrial is not for most Average-Joe buyers due to its complex nature of managing business tenants and context wise, different from residential.
Your best goal for now is to focus on getting that one good rental property first for retirement, rather than trying to think how to own 2 or more properties. Crawl, then learn to walk, then run. It sounds exciting to own many properties but trust me, it’s not as exciting as they paint it. Reality is real, distortions are selling dreams.
Is this really the best I can do, or there is some super strategy I can pull off to make life easier? Note that the above scenario requires me to work I think at till 55 years old or more, and whether I can still keep a job at that age is a question mark. So the only consolation is that I can retire worry-free, but never feel rich or live a bit more than comfortably.
I have no super strategy to offer you and make your life easier. But I can offer you a framework – A system which to start. If someone promise you with some super secrets to invest in property with no money or little money down and you buy it, you’re the FOOL. The someone is going to be rich off you and you’re going to be poorer.
There are ways to invest with no money or little money down, but it requires tremendous expertise and knowledge to even pull off such a stance. It’s not as easy as what those snakes oil salesman say. For example, you need to learn how to set up your own investor consortium. Pulling investors together to invest, setting up agreements, managing your different groups of investors with different needs and profile, etc – All of this requires sales skills, presentation skills, people skills, market expertise, in-depth knowledge of property etc. In short, you have to convince investors to BELIEVE in you and your capabilities.
So you convince others to put in their money, while you contribute sweat equity. But this is highly unlikely unless they trust you so much for you not to put even a single cent into the investment. You still have to put in some money to show you’ve skin in the game.
I know, because I have done it. And I can tell you and I’m not being modest here, I’m an extremely good salesman myself having run successful DIRECT sales teams in the past. Yet, I failed many times before getting my first investor consortium set up in 2012, followed by the second in 2013. The idea of an investor consortium started in 2010. It took me 3 years of hard work and convincing (sleepless nights at times) to get everyone together. Again,as you can see, simply talking about it is pointless. Actions speaks to get your goals to bear fruit. .And that’s where most people fail here.
Feeling rich is dangerous. That’s where most people get themselves trapped in the rat-race. How do you define you can retire worry-free? Free of debts? Not exactly. Unless you pay full cash, your rental property still carries a loan you need to pay off even though you’re receiving rental income.
A rental property requires management. One is not able to travel the world or do nothing believing the property can go “auto-pilot’. It cannot. You need to manage it regardless. It gives you income but that does not give you an excuse to go sun-tan in Hawaii drinking Malibu for a year! That’s fantasy, not reality, my friend. Unless you’re willingly to pay someone else to do it, but what are the costs? There’ll be little or no profit left for you.
You can be worry-free if you have millions or billions with zero debt on hands – unless you have an inheritance from your lost aunt. Even millionaires and billionaires are never worry free. Their businesses are million and billions dollars in debt.
What you can do NOW?
1. Improve your finances/income. Run a part-time business, work harder to increase your pay (i don’t know about this…), SAVE more (but there’s a limit)
2. Cut away all unnecessary and expensive luxuries (cars, bigger homes, restaurant meals, branded goods)
3. Spend time reading books (economy, non-fiction, properties, sales, etc), instead of logging to Facebook, TV and sleeping away.
4. View many properties and get very good at one type of segment. (either residential, commercial or industrial) Preferably start with residential since it’s closer to your heart.
5. Decide how much passive income you need for retirement and work from there (Never underestimate!)
6. Get your wife and family involved in your investment decision if you can.
Clarity equals courage. I think I am pragmatic, with a deep sense of purpose. I believes one has to see the world as it is, not as one wishes it to be.
I’m also affected by the cooling measures like you and everyone else. Fate deals us a certain hand of cards, but it is up to us to make a winning hand out of it.
Source: http://www.crei-academy.com/email-from-reader-is-there-a-super-strategy-to-make-life-easier/
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