I am sure you are very familiar with the idea of upgrading your HDB to a private condo. It is an aspiration of many HDB owners.
Beyond this notion about upgrading, many of us are also working to own not just one but two private properties! There are countless videos and testimonials online to “prove” owning multiple properties is achievable.
The idea is simple: After selling off their HDB flat, each spouse can buy a private property in his/her name without incurring any Additional Buyer Stamp Duty (ABSD).
ABSD rates which is currently at 12% for Singaporeans buying a 2nd property – means it makes little financial sense to hold on to the HDB flat as well. Whatever profit you think you can make – is greatly reduced with an upfront stamp duty at 12%.
With news report and data on older HDB flats depreciating, the idea of disposing a depreciating HDB flat in exchange for an appreciating private property naturally becomes very attractive.
Wealth accumulation through property investment – be it from rental yield or overall capital appreciation – motivates many to work towards their second property.
Before we proceed and start to talk to property agents about upgrading – let’s discuss how feasible this idea is.
Two Properties – 1 for Stay, the other for Rental Income
You can expect financial gains upon the sale of your HDB flat, especially if your flat:
- was only 5-years old
- was sold immediately upon the 5-year Minimum Occupation Period (MOP)
- was located in an attractive area
Sales proceeds can then be used as the initial downpayment for the next one to two private properties. That’s why you hear stories of people selling their flat immediately upon the MOP – they wish to extract the largest possible financial gains.
However, if your HDB flat is older, you may need to temper your expectations. You might not get much profit (especially if you bought a resale HDB flat). Some HDB home owners might even find themselves in an unexpected predicament – to encounter negative sale or no cash proceeds from the sale of their HDB flat.
This situation arises if sale price falls below the amount needed to clear oustanding loans, sales expenses and CPF funds and accrued interests used.
If you belong to this group, you cannot rely too heavily on the proceeds from the sale of your old HDB flat. You need to have substantial savings for the downpayment of your new property.
This downpayment amount could be hefty as the 2018 cooling measures means you can only borrow up to 75% of the total valuation. The remaining 25% will be paid via CPF or cash.
Let’s Discuss Worst-Case Scenarios
While this strategy may work for individuals or some families, there are many other considerations to take into account. Here are some scenarios to take into account:
Scenario #1: Job Loss
Job security is a pertinent issue in today’s age of disruption. Your monthly CPF contributions from your job usually forms the bulk of funds to service your monthly loan payments.
A sudden job loss would result in no CPF contributions, which means you have to service your housing loan using cash (that is if you have insufficient CPF).
This is where you have to ask yourself – Are you in an industry that is subjected to frequent retrenchments during an economic downturn? Or are you confident that you are recession-proof?
You need to calculate how long your CPF account balance or personal savings can last. How long can you afford to be without a job before cash payments are required to service your property loans?
I have seen owners who need not worry about their monthly installments for the next 8-10 years. This is especially for those in their 40s – they have significant CPF contributions or savings accummulated.
But do take note – these CPF monies are also planned for their future retirement.
Scenario #2: Retirement is Tied to Private Property Prices
This is the next issue to address. Basically, you are shifting your future retirement monies from your CPF Ordinary Account to your private property.
Now if your private property appreciates in price – this will be good news.
However if your property prices remain stagnant – or worse it depreciates…This can severely dent your future retirement plans.
Your retirement then becomes very dependent on whether your private property appreciate or at least – maintain its value when it is time to sell.
Scenario #3: Additional Expenses To Consider
A private property has other expenses to consider besides the monthly mortgage.
- management fees (plus sinking funds which increases for older developments)
- rental income subject to income tax
- higher property taxes
- repairs & upkeep of unit
- potential rental income loss in between leases
Staying in a private property will incur higher costs than staying in a HDB flat.
That’s why it is essential that you make the right property choice that is worthwhile and most suited to your profile and risk appetite.
A good property choice is one that makes it worth it to buy and stay in – because the gains you can make is much greater than the guaranteed losses of staying put.
The idea of exchanging your depreciating HDB for a better property that has higher chances of appreciating is a great idea. This is the true meaning of “making your CPF monies work harder for you.”
However, do take note that while higher leverage can also result in fantastic profits – it also comes with risks.
You might also have to give up certain conveniences – for eg. living closer to your parents – in order to achieve this new financial goals.
Keen to have a financial audit on what options are suitable for you and your property portfolio? Drop me a message to arrange a no-obligation consultation session.