Should you upgrade to a private property ( part 2 )
In part one of this series, we ran through the different questions that you should ask yourself before deciding whether upgrading to a property is right for you.
If you have not read the previous article, I will link it here.
Let us do a little recap on the questions.
Do you aspire to a better standard of living?
Is your current property still in the appreciation stage?
Do you understand the risks involved?
Do you have another investment plan?
Are you putting your CPF to work in the best possible way?
Do you have certainty of future income?
Suppose your answers are positive, then congratulations! You have a clear picture of what to expect from upgrading and fully understand the risk involved.
With Risk Comes Reward
This has got to be worth it!
Since we have talked about the risk involved, now it's time for the reward!
Let's jump straight into it.
Why are property investments still one of the best
Here are some of the features of property investment and how would they benefit you.
Leverage
Low cost of stay
High Probability of Appreciation in a Stable Market
CPF utilisation
Leverage ( Low upfront cost for high quantum investment )
What kind of investment can you borrow 3 times on your money to buy what you want and pay a low cost for it?
Properties.
With the current regulations, an individual can borrow up to 75% of a property's value, provided his income is eligible under the TDSR framework.
Further breaking it down, you will be able to borrow $750,000 on a $1,000,000 property, with $50,000 in cash and $200,000 in CPF.
$50,000 cash for a $1,000,000 property.
Think about it.
With mortgage loan packages going as low as 1.04%, property investments can be very lucrative for the average person.
Although the average appreciation of a good property investment is only about 3%-5%, the quantum makes it all worth it.
Take an average 4% growth, taking away the mortgage interest of 2% after factoring in the market's recovery, and we still have a 2% annual appreciation.
If you were to sell a $1,000,000 property bought today at 2% annual gain after holding it for 3 years to account for the Seller Stamp Duty period, you would have made a profit of $60,000.
A 2% gain on your initial $50,000 cash deposit will only be $3,060.40 after 3 years. A 2.5% compounded gain from your CPF OA account on $200,000 will also only be $15,378,12.
Even if you account for the Buyer's Stamp Duty of $24,600, the property will still make $16,000 more than the returns on your cash and CPF.
This scenario is for an own stay property where you are staying in it.
Let's look at the next factor that will further increase the actual profit you are making on your property.
Lower cost of stay
Own or Rent, You Need A Roof Over Your Head
Everyone needs a place to stay. Be it owning your own house or renting another.
Unless, of course, you are still staying with your parents or another alternative housing where you do not have to pay a single cent.
Otherwise, you should exclude this expense from the calculation of your profit or loss on the property.
Why?
Let's say you are currently renting a house for your family at $2,500 per month for a 3-bedder condominium in Sengkang that is worth $1,000,000.
Would you regard this as an expense? Probably yes.
So why is this different from owning a property?
The cost of stay for your property is not as straightforward, but you can have an estimate by adding everything here.
Monthly Mortgage Interest
Property Tax
Monthly Maintenance Fee
Monthly Insurance (Mortgage/Fire/Contents)
Opportunity Cost of Cash ( If invested in STI ETF )
So for a $1,000,000 property, these are the numbers.
$1,250 ( At 2% mortgage interest rate )
$74 ( Annual Value of $30,000 )
$300 ( Average 3 Bedder Management Fee )
$150 ( All Insurance included )
$208 ( 5% Annual Return for $50,000 )
Total = $1,982
As you can see, the cost of owning the property is 20% cheaper than renting!
On top of that, the property will appreciate in value throughout your stay!
For simplicity sake, we would only exclude the mortgage interest on calculating the profits for the property.
This would make the gain on the property 4% instead of 2%.
Thus, resulting in a profit of $120,000 instead of $60,000!
High Probability of Appreciation
Singapore's property market is tightly regulated and watched by the authorities. All the different cooling measures that the government introduced has already succeeded in stabilising the market.
Many people feel that this is a bad thing that limits the property market's growth, but I see it differently.
Property is a stable investment that is supposed to be held for a mid to long term period for steady and consistent growth.
The medium mortgage interest rate of 3.5% enforced by MAS for loan approvals reduces the risk of an individual's ability to hold onto their property through tough times.
This results in a resilient market that will not be seriously affected by massive sell-offs and bank foreclosures.
Let's look at this chart of the Singapore Property Price Index.
Source: SRX
Through the years, the property market has proved to perform over the long term.
As long as you do the necessary research and enter into the right property, then chances are you will likely make a good profit out of it.
CPF utilisation
We can only utilise our CPF Ordinary Account for a limited amount of investments, for good reason because it is supposed to be for our retirement.
But utilising it in the right property investment can allow us to earn a higher return than leaving it in the account. And this can unlock the funds to grow our cash through the property's appreciation, which we otherwise will not be able to tap on.
Taking the previous example of $120,000 profit, part of it will be in CPF, and the others will be in cash.
But without the CPF, there is no chance of profit at all.
Hidden Potential Hiding in Our CPF Funds
Using your CPF for housing is the investment that you will have the most control over. You can select through your careful research or, with the help of a professional, the best property to go into that will give you the best returns on your investment.
You are also allowed to use your CPF for other forms of investment through trading houses, professional investments companies and insurance companies.
But unlike properties, you will not have control over what the fund buys, which will also subject you to the high volatility of the investments.
Does this make Property Investments a no brainer?
Absolutely not!
Although property investments are one of the best investments to go into, thorough research and planning are required to ensure that you will have the highest possible profit chance.
Many factors will affect your investment choice, which includes but not limited to the following
Investment Horizon, Short (3-5 years), medium (5-10 years) or long (15 years or longer)
Amount of capital at your disposal
Single or Multiple income households
Mortgage loan interest rate
Own stay or pure investment property
Buying a new launch does not guarantee the best profits.
Buying a resale property does not mean that it is inferior either.
Conclusion
Property investments in Singapore is a reliable way to grow your wealth in the long term.
As with any forms of investment, you will have to pay attention to it and make sure that you re-allocate your funds accordingly at the right timing.
Our government has worked very hard to ensure that the property market continues to remain resilient and serves not only as a form of accommodation but also a way for average Singaporeans to grow their wealth in.
If you can use it wisely, it will be one of your biggest ally in your path to financial freedom.