You have finally reached your Minimum Occupation Period (MOP) for your HDB flat and are considering upgrading to a private property. The next question that will probably come across your mind is how do I pick my next residential property? Countless people, like your friends and family, have already done in before to make good capital value gains, and now you are wondering if it is your turn.
This largely depends on your risk appetite as a property investor. There are certain cases in which I will strongly recommend an upgrade, but there are times when the property investor might be at risk of overleveraging.
Without listening to your current financial standing, it is irresponsible and undermines the message that I am trying to portray through my website. What I can share with you, is the standards that I will take for my clients in regards to promoting a suitable real estate purchase. For an actual review that revolves around these factors, check out my review on Marina One Residences and Parc Central Residences, an Executive Condominium with sales launching in the second half of 2020.
This article is applicable to new launch and resale properties, with a greater emphasis on new launch properties in some sections.
Property Prices
Before going down the rabbit hole, structure your property purchase with a framework. This will help you eliminate the multitude of choices available on the market, and make your search easier. You can start by figuring out an approximate amount on how much you are willing to pay. Are you going for a 3 Bedroom Condo or a 2 Bedroom + Study?
A rough understanding on the price will help you understand how much leverage you can take and the accompanying sacrifice you will have to take – Are you willing to eat white bread or instant noodles for the next few years in order to meet your mortgage payments?
In addition to the property price, consider other miscellaneous costs such as Legal fees, Real Estate Agent Fees, Buyer Stamp Duties (BSD), Additional Buyer Stamp Duties (ABSD) and Seller Stamp Duties (SSD).
Ongoing costs like property taxes, which scales accordingly based on the annual value of the unit and its occupation (Owner/Non-owner) status.
Maintenance fees, which is a monthly fee for the regular maintenance of a shared premise, which can vary from $200-$1000. The difference adds up and can be a very heavy burden to bear.
Type of Loan
The type of loan that you decide to pick can greatly impact your leverage too. Let us see the differences between HDB loans and bank loans.
HDB Loans
HDB loans have a maximum Loan-to-valuation (LTV) of 90%
Going for a HDB loan will seem like a no-brainer right? You have to also consider that HDB loans will have an interest rate of 2.6%, including the accrued interest of 2.5%, which is the amount that you will usually get if it is left in your CPF Ordinary Account (OA). Upon the sale of your property, the amount “owed” to your CPF OA account will be returned back into it at the end of the day.
Let is use this calculator to figure out how much interest do you need to pay, for a property with the following numbers
HDB 4 Room Resale
Asking Price: $400,000
Cash Upfront: 10% ($40k)
HDB LTV (%): 90%
Loan Tenure: 25 years
Annual Interest Rate (%): 2.6
Source: moneysense.gov.sg
Technically, the interest being paid goes back into your CPF OA account, this means that it is a good deal, right? However, take into consideration that you will have less cash on hand and that this can affect your future goals where you require cash on hand.
Let us place this case in an example.
John has bought the resale HDB flat in the scenario above, and after reaching the MOP of 5 years, decide to sell away the property for dreams of upgrading to a Private condominium. He decides to sell the HDB at a price of $500,000 – This price obtained is highly unlikely, will talk on this later, this value is used to reinforce on a point.
Considering that John will have to repay back the loan amount of $489,963.07, he will only have a cash surplus of
$10,036.93!
Remember that John had paid upfront $40k for the HDB flat? This means that he will be left with a cash amount of -$30k!
Referring to the above sales transaction trend, you will see why John had made a huge mistake.
The average PSF of 4-Room HDBs in 2015 was S$423 PSF, and as of the start of 2H 2020, it is S$423 PSF. This shows a 0% increase in price! The example that we used earlier had shown an increase of 25%!
This shows that the discrepancy might have been even more than what we have initially described, based on real-world numbers!
Bank Loans
Bank loans have a maximum LTV is 75% for first loans. The interest rates for loans will vary differently between banks and depending on the rates that you choose. This will usually be either floating or fixed rates. Both have their benefits and setbacks.
In the following example, no CPF payments were made and full cash only for the downpayment and subsequent repayments. The reason being is that if you are to use any monies inside your CPF OA account for the loan, you are still required to pay back 2.5% worth of accrued interest back into your account
HDB 4 Room Resale
Asking Price: $400,000
Cash Upfront: 25 % ($100k)
Bank LTV (%): 75
Loan Tenure: 25 years
Annual Interest Rate (%): 1.7
Source: moneysense.gov.sg
The interest paid as compared to taking a HDB loan is significantly lower, this is due to two reasons. First, the loan amount from a bank loan is lower than a HDB loan. This causes significantly lower interest generated from the principal amount that was loaned.
Second, the annual interest rate is at 1.7% - This amount can fluctuate, but rarely goes above 2%. This amount is lower than the HDB loan rate of 2.6%. This difference will add to a huge sum over time!
Still, one can argue that taking a HDB loan is better because the interest taken will go back into your CPF OA, which is technically your money.
In my opinion, I will prefer having that liquidity, at the expense of 1.7%. This is because you can use that same amount of money in other financial instruments.
New Launch or Resale Properties
There are many differences between these two kinds of properties and you can refer to the following articles in regard to my opinions on what will be a good option, and you can decide from thereon.
My personal preference will still be towards resale properties, this is because the price is not set by developers, there is always the potential to find great “diamond in the rough” properties, with potentially lower than market rate offers.
New launch properties do have their own benefits too, such as a higher rental PSF and volume. This is evident from the example shown below, between two projects, The Plaza (TOP: 1979) and Concourse Skyline (TOP: 2013)
Objective of Investment
Buying a piece of real estate is not a decision to take lightly as the decisions you make now can affect your financial standing months and years down. I would consider this to be one of the most important points, as it will provide a framework on the other choices outlined.
Determine what is your current financial standing right now, and your eventual exit strategy and/or end goal. Here are the objectives which I had discussed with seasoned real estate investors. These have different timelines to follow.
These are the most common reasons for real estate investing. Each will have different methods of how you should put your money in, which will determine largely if you should use your CPF OA funds or cash to make payments.
If you require a review of your existing real estate portfolio, call me at +6596329840 or email us at estatemagnates@gmail.com!
URA Master Plan
Having foresight in selecting good properties takes away most of the stress in transacting properties. The URA Master Plan provides you easily the information required as Singapore’s development in the next 10 to 15 years is shown here!
The Master Plan shows the permissible land use and density for developments in Singapore. This makes it easy for HDB upgraders upon reaching their MOP.
If you were to compare the developments above you can immediately deduce the following characteristics of the property.
· Zoning type
· Plot ratio
· The land area of the development
· Surrounding Developments
From 3 out of the 4 points, Sophia hills is a better real estate investment to make. After all, it is zoned Residential whereas The Rise @ Oxley is zoned Commercial & Residential.
A Commercial & Residential zoning is more challenging to obtain a collective sale as businesses operating there might not be willing to relocate and potentially suffer losses.
The land area of the development is also regular and of good size for Sophia Hills, which is more in demand by developers.
Sophia Hills is located closer to Plaza Singapura too, which makes it a far more accessible location then Oxley Edge.
However, the downside is that Sophia hills (1.4) have a lower plot ratio as compared to Oxley Edge (2.8). This is most likely due to important government facilities nearby, and a higher plot ratio might pose a security concern.
With 3 out of the 4 points mentioned above, Sophia Hills “should” be worth more than The Rise @ Oxley, right?
Apparently not! A comparison is done between The Rise @ Oxley and Sophia Hills for 2 Bedroom transactions. All bedroom types are not included to make it a fair comparison, but the price difference between the developments are similar.
From 2018 to 2019, The Rise @ Oxley was sold at a greater average PSF. This could be because of additional reasons such as land tenure and Plot Ratio.
The Rise @ Oxley is Freehold tenure as compared to Sophia Hills Leasehold tenure. This usually causes freehold prices to be higher upon launch (~5 to 10%). The Rise @ Oxley has a higher plot ratio of 4.2 as compared to Sophia Hills, at 1.4. This causes The Rise @ Oxley to be valued higher.
Both points most likely contributed in The Rise @ Oxley having a higher average PSF.
In 2020, you might have noticed that the Sophia Hills was selling at a higher PSF in comparison to The Rise @ Oxley. We will need to obtain more information for the rest of the year before coming to a conclusion, but I believe the spike in average PSF is contributed by the huge increase of units sold in comparison to The Rise @ Oxley.
Property Price Index and Rental Index
Comparing the price movement of the Property Price Index will allow you to see if the asking price of a property is realistic. These indices are useful because they reflect the general market sentiments after any event which shakes up prices.
With the recent COVID-19 situation, you can see that prices have dipped accordingly, does the property that you have in mind reflect this decrease/increase accordingly?
Private Residential Property Price Index
Private Property Rental Index by Type, Quarterly
State of the Property
Do the numbers all make sense? Great! Now it is time to ensure that the property is in good condition. Look through the property in regards to any latent or patent defects which the property might have. This is to ensure that you will not buy into a property that might require more works than you need.
Need further help in checking for defects? We are currently having a special arrangement with Octane Concept Design, which is a renovation company offering free consultative services for Estate Magnates blog readers!
Thanks for reading our thoughts on how to pick great residential properties! If you require more information or our advice on how you should proceed, contact +6596329840 or email us at estatemagnates@gmail.com
The views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee, or other group or individual. The author does not accept any responsibility whatsoever for any harm or loss arising from accessing or relying on information contained in this blog post.
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