News

Hi team, I’ve always liked the way your team analyzes enquiries. Hope you’re able to provide some insights into our query below.  My wife and I are looking to invest our cash/cash equivalent on hand and are wondering what’s the most optimal option for our current situation.  Some information are as follows: We’re thinking of using only cash equivalent/CPF for the purchase of an additional property investment with below considerations, what do you think is the most optimal option for us, thanks in advance! Wife prefers to keep our BTO if possible.  Hope to own a 2nd property for investment purpose.  Hope this property (including rental income and capital appreciation) will be in line with typical stock appreciation – acts as a diversification from just stock holding. If holding of BTO together with private property purchase isn’t possible, own stay condo is preferably central with >1,200 sq ft and has minimum 3 rooms.  Hope to take 1,200 sq ft in the Central Region.  For calculation purposes, let’s say you were to purchase a unit at $3.2M.  Considering that you’ll have $1,108,000 of CPF funds and cash after selling your flat, subtracting the $931,600 required for the purchase of the 3-bedder leaves you with $176,400. This remainder can be allocated as a reserve fund, for renovations, or you can pay up more to reduce your loan. If you choose to invest the entire amount buying a 3-bedder, your loan amount would decrease to $2,223,600. With a 28-year tenure and a 4% interest rate, the monthly mortgage repayment would be $11,012. Given your combined monthly income of $26,700, minus $5,000 for expenses (I’ve adjusted for the previous mortgage estimated at $2K/month), the $11,012 mortgage repayment would consume 50% of your remaining monthly income. This percentage is relatively high compared to the average household mortgage repayment versus income (which is around 28% according to a 2022 survey done by UOB). So since you’ve mentioned a desire to keep the loan under $1M ($500,000 for each of you), this would mean increasing the required CPF funds and cash to $2,331,600, which exceeds your total CPF funds and cash savings by $1,223,600. By keeping the loan to $1M, this would be your revised affordability. *Without liquidating your stocks With a $2M budget, you can still get a 3-bedder unit in the Central Region but do note that your options will be limited and the majority of these units are either in boutique developments or are older 99-year leasehold projects.  Just to be thorough, I will look at the costs involved if you were to buy a $3.2M property and also a $2M property.  Assuming a 2.9% growth rate, in 10 years, the potential selling price is $4,258,962, which amounts to $1,058,962 of potential gains.  Assuming a 2.9% growth rate, in 10 years, the potential selling price is $2,661,851, which amounts to $661,851 of potential gains.  In this scenario, unless you opt to lease out the additional bedrooms, your profits will depend solely on the property’s appreciation, making the selection of the development even more important. Additionally, the returns are diminished as you lack rental income to balance out the expenses. Looking at your individual affordability after selling your flat, you can each buy a private property. With a considerable cash reserve, your budgets can be easily adjusted by reallocating the cash. However, acquiring a 3-bedroom unit in the Central Region, as discussed in the preceding scenario, may present limited options. Exploring properties in the Rest of Central Region (RCR) could offer more alternatives. This approach aligns with your objective of owning 2 properties while also facilitating the segregation of your primary residence and investment property, thereby offering greater flexibility. As your wife is eligible for a higher loan, let’s presume the own stay property is bought under her name at $2M. Costs incurred As for the investment property, I will assume a purchase price of $1.5M with a 3% rental yield. Costs incurred As before, assuming a growth rate of 2.9%, these are the potential gains for both properties in 10 years. In this scenario, the combined monthly mortgage repayment stands at $12,227 for both properties. After factoring in the rental income of $3,750 (based on a 3% rental yield), the monthly repayment reduces to $8,477. This constitutes 39% of your monthly income (after allocating $5,000 for other expenses), a notably lower percentage compared to Scenario 2. Let’s do a quick summary of the 3 scenarios. If owning 2 properties is a priority, then only Scenarios 1 and 3 can meet that goal. However, given the hefty amount of ABSD payable in Scenario 1, it is not a route that I would recommend.  Considering that both of you are still young, earn a healthy income, and possess strong finances, it would be more advantageous to leverage your BTO flat and upgrade to a private property with better capital appreciation potential. If you prefer, you can always liquidate these assets and right-size to an HDB flat in the future. Purchasing a 3-bedroom condo is feasible if owning just one property suits your needs. However, as seen in the table above, unless the selected project exhibits a higher appreciation rate, the potential gains are likely to be lower, given the absence of rental income to offset expenses. Furthermore, acquiring a $3.2M property would result in your monthly mortgage repayment consuming 50% of your monthly income, which isn’t as prudent.  Of the three scenarios, I would recommend the last option: selling your HDB and acquiring two properties. This strategy allows you to capitalise on the equity in your flat, segregate your primary residence from your investment property, and avoid the need to pay ABSD. Although securing a unit in the Central Region for your primary residence may not be feasible, you can certainly find suitable options in the city fringe within your budget. Moreover, this approach reduces risk by generating rental income, thereby lowering the percentage of your monthly mortgage payment relative to your income to 39%. It is essential to note that if you opt for this route, it may not be feasible to keep the loan under $500K each, as doing so would significantly reduce your budget. If taking up two loans above $500K concurrently puts too much pressure on your finances, you could consider buying one property under one name first, but keeping the other name free to purchase another one down the road should the opportunity arise.  We hope that our analysis will help you in your decision-making. If you’d like to get in touch for a more in-depth consultation, you can do so .