• Vivian Chong

Why Your Home Is Not Your Asset?

Updated: Aug 9



"Your home is not an asset."

This quote was taken from the book "Rich Dad Poor Dad" by Robert T. Kiyosaki, written in 1997.


Is your home an asset? According to the author, an asset puts money in your pocket. Liability takes money out from your pocket.


As such, an owner-occupied home is not an asset as it goes not generate income. It is in fact a liability, as you need to service the mortgage.



Let me share with you a true case scenario.


Mr and Mrs Lim sold their HDB flat in 2005 for $400,000. They upgraded to a 3 bedroom condominium for $1m. After staying there for 5 years, they sold their condo for $1.5m and upgraded to a bigger 4 bedroom property at $1.8m. In 2014, they moved again to a landed property for $2.5m.


We met up recently. The couple are both 45 years old now and they want to know if they should cash out on their landed property. They are also concerned if they should upgrade again and take out a bigger loan at their age.


Let us first look at the inflation rate of Singapore’s private properties over the past 10 years.

Source: SRX


Over the past decade, prices of private properties increased by 3.78% per annum. This means prices increased by 37.8% over the past 10 years. A property costing $1m would have been $1.38m at the end of the decade.


In the case of Mr and Mrs Lim, they made a profit each time they sell their property. However, the property they sold is the one their family is occupying. Thus they need to buy another one to replace the old one each time they sell. This also means buying at a higher price, and thus taking on a bigger loan.



Does this makes their home an asset since they are not generating income? Technically this house is a liability as the couple is taking on bigger loan each time they sell the previous one. Is this the best investment strategy?


SOLUTION


Let us refresh the details in the case of Mr and Mrs Lim.


Mr Lim is 45 years old. He is earning $20k per month. Based on his age and income, he is eligible for a loan of $2.07m.


Mrs Lim is 45 years old. She is earning $18k per month. Based on her age and income, she is eligible for a loan of $1.86m


Their existing landed property is valued at $3m. Outstanding loan is at $1.4m. Mr Lim’s accrued CPF used is $300,000, while Mrs Lim’s is $200,000.


Monthly instalment for the property is $7,000.


If they sell their existing property, their cash proceed is $1.1m.



SELL 1, BUY 2


We proposed Mr and Mrs Lim to consider buying 2 properties. This is so they can stay in one, and rent out the other for passive income. Let us see how this can be done.


Property 1


Mr Lim will purchase a 4 bedroom condominium at $2m. This is for their own stay.


Purchase price     : $2,000,000
5% cash            : $100,000 (Cash)
20% CPF or Cash    : $300,000 (CPF) + $100,000 (Cash)
Loan               : $1,500,000
Monthly Instalment : Approx $7,600 (20 years loan @ 2% interest)
                   : Approx $5,500 (30 years loan @ 2% interest)
 
Other Costs
Stamp Duty         : $64,600 (CPF or Cash)
Legal Fees         : $3,000 (CPF or Cash)

Property 2


Mrs Lim will purchase a 3 bedroom condominium at $1.5m. This is to rent out and earn passive income.

Purchase price     : $1,500,000
5% cash            : $75,000(Cash) 
20% CPF or Cash    : $200,000 (CPF) + $100,000 (Cash)
Loan               : $1,125,000
Monthly Instalment : Approx $5,700 (20 years loan @ 2% interest)                                                                   
                   : Approx $4,200 (30 years loan @ 2% interest)
Expected Rental    : $4,000 
Monthly Cash       : $200 

Other Costs
Stamp Duty         : $44,600 (CPF or Cash) 
Legal Fees         : $3,000 (CPF or Cash)

For property 1, Mr and Mrs Lim decide to go for the 20 years loan. Their monthly instalment increased from $7,000 to $7,600.


For property 2, they decide to go for 30 years loan. Their cash outlay for monthly instalment after deducting rental income is $200.


The total cash outlay to offset the purchase price for the 2 properties is $375,000. The total cash for stamp duties and legal fees is $115,200. This adds up to $490,200. Deducting this amount from the cash proceeds from selling their existing property, they have a cash savings of $609,800.


By using this method of Sell 1 Buy 2, Mr and Mrs Lim is able to leverage on financing to purchase 2 properties. This give them the flexibility of keeping their home for own stay, while choosing to continue with rental or selling the other property when prices gone up.

Metup with another client of mine. Lets call them Mr and Mrs Lee.


Mr and Mrs Lee bought their HDB flat in 2002 when they got married. It was at a time when prices of HDB flats were relatively low. After staying there for 18 years, they would like to purchase a second property for investment. However, they are reluctant to sell their existing flat.

To buy a second residential property, the couple will need to pay Additional Buyers Stamp Duty (ABSD) of 12%. For a property which costs $1m, this would mean $120,000.



SOLUTION


Let us refresh the details in the case of Mr and Mrs Lee.


Mr Lee is 42 years old. He is earning $20k per month. Based on his age and income, he is eligible for a loan of $2.2m.


Mrs Lee is 40 years old. She is earning $18k per month. Based on her age and income, she is eligible for a loan of $2.8m


We propose Mr and Mrs Lee to consider commercial property as it does not attract ABSD. There are a few types of commercial properties which they can consider, namely office, shophouse, mall and industrial space.


The couple has cash budget of $700,000. After some discussion, they decide to invest in a shophouse.

Purchase price     : $3,000,000
20% downpayment : $600,000
80% loan : $2,400,000
Monthly Instalment : $8,900 (30 years loan @ 2% interest)
Expected Rental : $7,000
Cash Outlay : $1,900
 
Other Costs
Stamp Duty : $84,600 
Legal Fees    : $3,000 

By investing in commercial property instead of a second residential property, the couple avoided ABSD. Commercial properties also do not have Sellers Stamp Duty (SSD). Mr & Mrs Lee has the flexibility to sell the property anytime they want.


However, one thing to note is that buyers have to pay GST on the purchase of the commercial property. This can be avoided by forming a company which is GST registered so as to claim back the GST that was paid.

Related Reading


1) CPF Usage For Property

2) Why You Should Stop Using CPF For Property

3) Should You Keep Or Sell Your Ageing HDB Flat?

About The Author


Vivian is an experienced real estate agent who has been in the industry since 2002.

Over the years, she has transacted numerous property deals including HDB and private properties. She is well-versed in policies and regulations involving the sale and purchase of residential properties. She has also handled many transactions involving complicated situations like contra, divorce, administration / probate cases, and decoupling / part-share purchase.


Vivian is also a mother to 2 boys. Being a real estate mom allows her to spend more time with her children as they were growing up. Both boys are avid footballers representing their schools and clubs. She loves watching their games and hardly miss a game whenever they play.

Vivian is an active real estate salesperson and team leader. Call her at 98577714 for your real estate matters, or if you are looking to join the real estate industry.

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