• Christine Kang

An Encounter Of Wealth Building Upon Wealth

Introduction


"Investing means taking compensated risk, speculating is taking uncompensated risk", Warren Buffet.


Building Wealth with Warren Buffet


In fact, it is hard to draw a line between the two, unless you are well aware about the "rules of the game" in what you put into your investment portfolio.


Consultation with a professional, whom you trusted in that particular field, is always important to get yourself familiar with the products that you are investing.


Some may argue that they can master the expertise by googling or attending some talks and will be able to subsequently invest based on what they have learnt. But does this really work?



Before you master the intricacies in any types of investments, putting your trust in someone who has been operating in that sector will definitely help in reducing time and losses.

Notwithstanding, it may even help to optimise your profit.


So, is buying properties an investment or speculation?

An Encounter


On a Sunday morning in October 2016, I had breakfast with a circle of friends in a coffee shop after a regular morning exercise.


As the usual chit-chatting was ongoing, Mr & Mrs Teh, who was staying in an old condominium, were talking about selling and moving to somewhere that would be nearer to town to facilitate the daily travelling of their grown-up children to workplaces.


As a professional in real estate, I felt obliged to advise them to hold on to that property, as en-bloc wave was round the corner.

In particular, I understood that their condominium had a high probability. Initially, they were sceptical as they had given up hope waiting for en-bloc sale, due to the prior failures in numerous attempts at that condominium.


In order not to disrupt the casual mood of the Sunday breakfast, I did not deal further into the issue but arranged for a separate session to further elaborate my views for their benefits.


The Meeting


On the day of the appointment, I provided evidences, facts and figures on how land scarce Singapore would be shortage of land supply in the subsequent few years.


And for developers to sustain their businesses, many would have to scout used lands (current property sites) for redevelopments.


After explaining to them on the concept behind how increases in the plot ratio would enable developers to build more units and generate profits from redevelopments, they gained confidence and were hopeful for the en-bloc sales.


To understand more about factors affecting Singapore residential property, can click on the link @ https://www.christinekangproperties.com/post/what-are-the-factors-affecting-singapore-residential-property-market.



En-Bloc


A few months after the meeting, I received news from this couple that their condominium had just held the first meeting to launch another en-bloc attempt.


As this time round, they were very confident that it would go through after learning from past lessons, the couple engaged me to help them search for a home nearer to town.


However, they would only want to commit in the new property after the en-bloc sale was successfully acquired by a developer, so as to avoid paying a hefty sum of ABSD.


They also expressed their intention in selling that property in open market, if the en-bloc sale did not get through eventually.


A Bold Advice


As a current and active real estate consultants, we are usually aware of the facts and figures of the property markets, sometimes even before information is available in the media.


And I had been monitoring the property price movements very closely during that early stage of rising en-bloc fever in 2017, it was very clear that the price direction was heading north and accelerating.


Again, being a professional real estate agent, I felt obligated to advice and convince them against trying to save on the ABSD and forgoing the opportunity to acquire their subsequent property at that lower prevailing value.


I believed that the prices would escalate rapidly once most en-bloc beneficiaries from other condominiums would have gotten their en-bloc proceeds and began buying their new houses.


Furthermore, those with spare cash would start flooding the market much earlier, once the developer had exercised the option to confirm the deal. By then, they would not be able to get a good price or a good unit of their choice.


And would be even worse if to wait until they received the cash proceed after the en-bloc completion. Therefore, the ABSD should not be their key concern.


Buying Third Property

Home Requirements


The couple was convinced to acquire their new property for own stay before other en-bloc sellers flood the market or the prices started shooting up.

The followings were the requirements for their new home:

  • 3-bedder

  • Minimum of 1200 sf

  • Not too far from town

  • Near MRT station

Eligibility Check


Mr & Mrs Teh were 49 year-old and have two properties which were under both names. Property X with prevailing market value @ $1 mil, was fully paid and rented out. While property Y was the own stay property, which still had an outstanding loan of $300k.


I followed up with an eligibility check and based on their existing financial situation, Mr Teh was eligible to loan up to $2 mil. With the loan-to-value (LTV) of 50% for second home loan, they could actually consider a property of value up to $4 mil.


However, they could not match up with the remaining 50% cash requirement.

.

Loan-To-Value before 2018



At that time, there were resale residential properties put up for sale at prices from $1.2 mil onward, which met their requirements.

The prevailing ABSD rate in 2017 is shown in the table:

With a property of $1.2 mil, which Mr & Mrs Teh could loan up to $600k (due to LTV 50%), the amount of cash they would need for the remaining payment was computed as follows:


  • BSD = $30,600 (3% x Selling Price - $5,400)

  • ABSD = $120,000 (10%)

  • Minimum cash payment (25%) = $300,000

  • Remaining cash/CPF amount (25%) = $300,000

  • Legal fee = $3,000

  • Total = $753,600


After setting aside the half minimum sum from Ordinary and Special Account, Mr Teh still had $50,000 in his CPF account that could be used for the new property.


Therefore, after deducting the $50,000 CPF savings, a loan amount of $600.000 and a total cash outlay of $703,600 were required for a property pricing at $1.2 mil. As such, the total loan they would need to service, inclusive of their existing property Y ($300,000), would be $900,000.


CPF Amount: $50,000

Total Cash Outlay = $703,600

Total Loan Servicing Amount = $900,000


The couple were very comfortable with the above initial financing computation, house hunting began immediately.


Home Hunting


A few apartments at fringe of the city were viewed, but as a home stay unit, inputs from their children were equally important. Although the apartments viewed fit their requirements, travelling time by downtown line to reach town area was still a key concern.


More searches for units near town that fulfill their requirements were done. I managed to find a rare 1044 sf 3-bedder in town and surrounded by 6 MRT stations, serving multiple MRT lines that facilitate travelling to all parts of Singapore.


After the viewing, Mr & Mrs Teh felt that the 1044 sf unit with bay window was a bit too small for their home stay though the location was good and their children were willing to sacrifice space for convenient location.


No commitment was made and further research was underway. That development was closely monitored, hoping for bigger units to be put up in the market.


Fortunately, luck was on our side. After a few days of waiting, a 1345 sf unit without balcony space was put up for sale, but it was asking for $1.7 mil.


New Situation


The equation had changed from the initial computation for unit pricing at $1.2 mil. With an asking price of $1.7 mil for the new property Z, an additional $500,000 would be needed.


Financing Computation


For the extra $500,000, the couple would need to loan another $250,000 and an additional cash of $309,600 computed as follows:


Additional Cash

  • BSD = $9,600

  • ABSD = $50,000

  • Cash 50% = $250,000

  • Total = $309,600

Hence, the total cash outlay and loan amount would be:


CPF Amount: $50,000


Total Cash Outlay = $703,600 + $309,600 (additional cash required)

= $1,013,200


Total Loan Amount to Service = $900,000 + $250,000 (additional loan required)

= $1.15 mil


As the couple do not have sufficient cash/ CPF for the required 50% cash outlay, Mr Teh then toyed the ideas of using his property X to obtain a term loan (Mortgage Equity Withdrawal Loan) to help finance the cash outlay or to decouple property X to save on the ABSD.


With his thoughts in mind, I worked out details of the following options to facilitate their decision making.


Option 1:

Obtaining a Mortgage Equity Withdrawal Loan (MWL) from Property X to provide for the required cash outlay.



As the couple had another existing home loan from property Y, they were subjected to the prevailing LTV rate of 50% for 2nd or more loan.


After deducting the $250,000 CPF monies used for property X, they were eligible to borrow up to $250,000 under the MWL from Property X.


CPF Amount: $50,000


Total Cash Outlay: $1,013,200

Total Loan Servicing Amount: $1.15 mil + $250,000 (MWL)

= $1,400,000


The MWL amount would not be sufficient to cover the additional $309,600 cash required to purchase property Z @$1.7 mil.


Moreover, it would take a long time (about 2 to 4 months) to obtain an approval for MWL due to more stringent credit checks by the bank.


Essentially, unlike a home loan, CPF could not be used to repay the term loan or MWL, which meant that their subsequent cash flow would be affected.


Option 2

Decoupling Property X to Mrs Teh, so property Z would be bought under Mr Teh as 2nd instead of 3rd property. (Mrs Teh did not have regular income, so taking a home loan would be difficult if new home would be under her name).


Although there was no more existing loan for property X, Mr Teh's CPF usage with accrued interest for property X was amounting to around $250k. There was a requirement to refund $250k using cash into Mr Teh's CPF account, after transferring his 50% ownership to Mrs Teh.


Nevertheless, this amount refunded to CPF could be used to fund property Z subsequently.


Not forgetting, there was also a need for Mrs Teh to pay BSD and ABSD for the 50% value of property X ($500k) to be bought over by her. It would still be considered as her 2nd property - 7% ABSD.


Initial Cash Required

  • Refund for CPF usage with accrued interest = $250,000

  • BSD + ABSD for 50% of property X = ($9,600 + $35,000) = $44,600

  • Legal Fees for decouple (Seller and Buyer) = $3,000 x 2 =$6,000

  • ABSD saved from property Z = - $51,000

  • Total = $249,600


CPF Amount: $300,000 (plus $250,000 refunded to CPF)


Total Cash Outlay = $1,013,200 + $249,600 (Initial Cash) - $250,000 (additional CPF payment)

= $1,012,800


Total Loan Servicing Amount: $1.15 mil (Loan-To-Value for property Z was still 50%)


As the yield would be only 3% in savings (ie. $51,000) from the difference in ABSD rate for property Z (ABSD for second and 3rd property are 7% and 10% respectively), it would not reduce much on the cash outlay for the purchase of property Z.


In fact, after paying all legal fees, and BSD and ABSD by Mrs Teh on property X, the reduction in cash outlay for this option would only be $400.


Option 3

Paying off existing loan of $300,000 for property Y, so loan for property Z would be the first loan and the LTV eligibility could be increased to 80% of $1.7 mil ( ie. $1.36 mil).


Cash/ CPF Required

  • BSD = $45,600 (3% of Selling Price - $5,400)

  • ABSD = $170,000 (10%)

  • Minimum cash payment (5%) = $85,000

  • Remaining cash / CPF payment (15%) = $255,000

  • Legal fee = $3,000 + $500 (for loan redemption) = $3,500

  • Redemption of Loan for Property Y = $300,000

  • Total = $859,100

CPF Amount: $50,000

Total Cash Outlay: $809,100

Total Loan Servicing Amount: $1.36 mil


Recommendation


After laying out all the options, Mr Teh agreed with my recommendation to go for Option 3, as it would cater better to their financial conditions, with a cash outlay of $809,100 and a total loan amount of $1.36 mil. They managed to raise another couple of thousands by liquidating part of their other investments.


I also suggested for them to buy property Z under only Mr Teh's name, so as to save on the ABSD for subsequent property purchase.


To protect the couple's interest, I needed to strike a balance between bargaining for a low pricing and compromising the chance in acquiring their choice unit.


Eventually, I managed to negotiate down the price slightly to $1.65 mil and the deal for property Z was sealed.


Happy Buyers


Recommend a Friend


A few months after purchasing the unit, Mr Teh's friend came to know about his new acquisition and was fascinated with the low psf of that condominium in town area.


Eventually, I managed to get an investment property in the same development for his friend and rented out with a yield of more than 3.5%.


Rise in ABSD


On 6 July 2018, 3 months after Mr Teh's friend bought the unit, the new ABSD rate was announced to stabilise the rapid rising property prices in the market.


Both Mr Teh and his friend were glad that they were not subjected to the additional 5% ABSD rate increment.


Increase in Property Value


Eventually, Mr and Mrs Teh's property Y condominium had successfully cleared Strata Title Board for en-bloc sale in July 2018 and they received their cash proceed at the end of first quarter of 2019.


By then, the private residential price index had moved up by about 12.1 index points, which translate to 8.7% increment and was good enough to cover the difference in ABSD paid for property Z.


Another Attempt


As the couple still wanted to try their luck on another en-bloc potential with their cash earnings from property Y, I helped them to acquire another old apartment.


It was purchased with tenancy under Mrs Teh's name, as her first property, after taking up my suggestion to decouple herself from property X.



Conclusion


Insofar, the clients mentioned above have benefited from the properties they invested. In particular, Mr and Mrs Teh have acquired two properties after selling one property Y through en-bloc.


They went further to decouple another existing property X to save on the ABSD before buying their third property under Mrs Teh.


It is therefore crucial to customise a package for my client to suit their financial conditions and the prevailing market situation at that particular time.


Trust in your Real Estate Consultants is always an important factor, to enable them work together with you for an optimum solution to achieve your property acquisition objectives.


In conclusion, property investments is a risk-mitigating investment to allow further growth in our wealth and position ourselves closer to financial freedom.


Nevertheless, it entails careful planning and calculation. It is also necessary to seek advice from a real estate professional before embarking on such an important commitment.


If need help, call me @ +65 94742623 for a non-obligatory discussion and advice.

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I am an Engineer by training and have developed an analytical mind over the years. Simplifying clients' complex investment portfolio into practical options to grow their property wealth has therefore, become my forte. With an exploration mind, I love to travel and try different types of cuisine over the world. Writing and using of words do not really click well with me, though I still possess sufficient vocabulary for simple articles. I hope this article can help you open up another chapter in your property investments. Else you can give me a call or chat over zoom session for some ideas.









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Christine Kang

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