Own Two Properties With A Combined Income of $5000?
Asset progression is in fact, easier for many HDB owners than they realise. Yet many HDB owners choose to keep their flats without understanding the implications.
If you haven't read my previous post, "Should You Keep Your HDB?", you may want to read so that you understand the context of this new entry.
While it is not difficult to go for asset progression for the purpose of wealth creation and accumulation of savings, much deliberated planning is required.
Detailed financial calculations...
Thorough assessment on eligibility...
Location of the property...
Entry price of the property...
Surrounding amenities and properties
Potential upside...
Rent-ability...
Transformation of the environment...
Accessibility...
Children's education...
Timeline for moving out and moving in...
Renovation plan...
Exit plan...
And the list goes on...
These are just some of the elements to consider. Without proper planning, please... don't let go of your HDB in a moment of adrenaline rush.
Today, there are many facebook advertisements, flyers and other forms of publicity promising the following or alike:
"How can you own two properties with a combined income of $5,000, without using your savings, and yet still have a 5-digit reserved fund and passive income every month?"
Is this really possible?
The reality is this... only an extremely small handful of people could do it. And even if they manage to own two properties with a combined income of $5,000, they will have absolutely weak holding power. The risks are tremendous, and if anything happens, they will not be able to sustain the properties. They may end up selling off one or both of the properties, resulting in a loss.
Don't let GREED overtake you. You must be master over your decision, instead of being mastered by your decision.
Don't just take my words for it. Allow me to do a simple financial calculation. In property investment, facts and figures MUST be the key deciding factor, not adrenaline rush. Yes, no matter how beautiful the house appears to be, it must first boil down to financial figures.
A combined income of $5,000 between the husband and the wife (without any outstanding car loan, credit card loan, personal loan) will have the TDSR (Total Debt Servicing Ratio) of $3,000.
The maximum loan amount will be $668,085 if the loan tenure is 30 years. The loan amount will drop if the loan tenure is shorter, and if there are other outstanding loans.
Supposed the husband and the wife want to buy a new 3-bedder private condo in OCR (Outside Central Region), it would cost them more than $1 million, unless they buy a resale condo that is older and cheaper.
It is a great challenge to buy a 2-bedder condo instead, since the owners are likely to stay in a 4-room or 5-room HDB with their young kid(s). They need three bedrooms. Furthermore, a 2-bedder is not the best when it comes to exit plan.
Taking $1 million (one of the lowest prices, as most new developments are above $1 million) as an estimated price of a 3-bedder condo, the downpayment will be $50,000 cash and $150,000 cash/CPF.
In order to own two private properties, you have to sell your HDB. Few HDB owners have fully paid their HDB flats, and even if they do, there is still CPF accrued interest, which potentially reduces the final cash proceeds from the sale of the HDB flat.
If we take $150,000 as the final cash proceeds, you can use $50,000 to pay for the partial downpayment of the 3-bedder condo, and keep $100,000 (5-digit lump sum) as reserved funds.
For the remaining 15% of downpayment of $150,000 of the 3-bedder, you can use your CPF monies from the Ordinary Account and the total CPF refund from the sales of the HDB flat.
Downpayment is settled! Yay!
Don't celebrate too early.
For $1 million property, the maximum loan that a bank will loan is 80%, which is $800,000 for this case. However, due to the combined income of $5,000, the bank will only loan you $668,085 (see the calculation above).
You will still have a shortfall of $131,915. This has to be paid either with cash or CPF monies.
Do you have this cash amount in your savings?
Do you have this CPF amount in your spouse's and your CPF Ordinary Accounts?
Remember: If you touch any of your cash savings, the marketing gimmick has failed to deliver...
"How can you own two properties with a combined income of $5,000, without using your savings, and yet still have a 5-digit reserved fund and passive income every month?"
For a maximum loan of $668,085, the price of the property you can really comfortably afford is $835,106.25. Anything beyond that will be stretching your limit, unless you have alot of CPF monies OR you have very high cash proceeds from the sales of your HDB, i.e. $200k and above.
Do a search on propertyguru with this budget of $835,106.25 and you will realise that you can only afford old resale condo (3-bedder) such as La Casa and Northoaks at Woodlands.
My question is,"Would these resale condos have much capital appreciation in the near future?"
If you say, "I wish to buy new condo instead."
My question is, "Are you willing to downsize from a 4-room or 5-room HDB to a 2-bedder instead, if you have a kid or more?
In fact, many of the new condos are already selling above $900,000 for a 2-bedder.
These are some things that many property agents won't reveal to you in their marketing.
Now, taking $5,000 combined income as the guide, what happens if you own a car and you pay $800 for the car loan every month?
Your maximum housing loan will drop from $668,085 to $489,929!
How are you going to afford a $1 million property?
We have not even talked about owning a second property that you saw from the facebook advertisement!
On the other hand, let's say that you manage to buy the first property without using your cash savings. How are you going to buy the second property without using your cash savings again?
Yes, it is still possible if the sales of your HDB flat results in close to $200,000 cash proceeds or more. But let's take a look at the following:
The monthly instalment for your first property will be about $3,000. With a combined income of $5,000, the allocated CPF monies in OA accounts will be $1,150 (assuming you and your spouse are 35 years old and below).
You still have close to $2,000 to pay in cash every month for the FIRST property. If the facebook advertisement refers $5000 as combined NET income, you will have $3,000 left for your family per month. Some advertisements refer $5,000 as combined GROSS income, which means that you will be left with $2,000 for your family per month. Is $2,000 enough for your personal and family expenses?
Granted, you can use the 5-digit lump sum from your HDB sales proceeds to pay for the monthly instalment. That's if you still have a 5-digit lump sum left after the cash downpayment for the first property (and we haven't included the second property). Taking $100,000 as a reference, it can tie you over 4 years plus, or even longer, if you use it with CPF monies and part of your monthly salary.
But what if you lose your job during this period? You'll need that lump sum (and your savings) to service your housing loan, your daily and family expenses, etc. You have to pay more for your housing loan, because you no longer have regular CPF allocation without employment.
Talk is cheap. Let's put in the figures.
Monthly instalment for housing loan: $3,000
Estimated personal and family expenses: $3,000
Car loan (if any): $800
Total: $6,800
With $100,000, it can only last you one year and two months.
Remember: We are talking about HDB owners who have HIGH cash proceeds after selling their HDB. Many, unfortunately, do not have $200,000 cash proceeds from the sales of their HDB.
Some may share that owning a second property will help you reduce your monthly instalment, because you can use the rental money to cover the monthly instalment for both properties. This is only possible if your rental yield is high for the second property.
Take a look at the present and near future rental market and you will know that it is unlikely for the rental market to recover so quickly.
Furthermore, what if you can't find a tenant?
What if the rental market is so competitive that you have to reduce your rental price expectation?
What if your rental money can't even cover the monthly instalment of the second property?
We have not even talked about the monthly maintenance charges from both properties. They must be paid in CASH.
With detailed calculation and analysis, the hard truth is this... not many can comfortably afford the following:
"How can you own two properties with a combined gross income of $5,000, without using your savings, and yet still have a 5-digit reserved fund and passive income every month?"
It sounds very attractive. It looks very promising. Yet there are many risks involved. It really depends on your risk appetite. In my careful and detailed analysis, MOST HDB owners are UNABLE to achieve that.
Disclaimer One: There are of course, other ways to get a higher loan, but it is not the purpose of this blog post. Getting a higher loan also results in higher monthly instalment.
Disclaimer Two: As mentioned earlier, a very small handful of HDB owners are able to achieve it.
My concern is when some property agents spur you on to make that decision without sufficient sharing of calculated risks involved. If your combined income is much higher than $5,000, I would encourage you to go for asset progression and own two or multiple properties.
But if it is only $5,000-$6,000, I would encourage you to weigh very carefully. You have a family and you need to be responsible for your decision.
I have a family too. So I fully understand the responsibility. We do not want to over commit our finances and allow our decision to become a burden to our family.
Today, there are some property agents who will ask you to sell your HDB flat. But ironically, they don't sell theirs. They understood the risks involved. If those risks are negligible, why are they not selling their HDB flats and buying two properties? If they (who are in SIMILAR financial situation as you) don't make the same move they encourage you to make, be very concerned.
It is always important for property agents to 'WALK the TALK', instead of simply 'TALK the TALK'.
In a nutshell, property probably involves the biggest financial figures in your life. Without proper planning, please... don't let go of your HDB in a moment of adrenaline rush.
You have to ask yourself some of these questions:
1) How would this decision impact my family and me?
2) Is every risk involved presented to me?
3) Have I done all the necessary financial calculations and detailed analysis?
4) Would I be overstretched in my finances, resulting in stress and disputes in the family?
The hard truth is this... NOT every household can go for such asset progression. But for those of us who can progress our asset and make decent profits, go for it. It's proper stewardship of finances. A simple re-structuring of your property portfolio can refine your family life and reshape your future.
Personally, I have sold my HDB flat to progress with my asset. I believe in walking the talk. Ultimately, if what I am sharing is not true from day one, I would have just remained status quo.
My family and I have weighed the costs and calculated various risks involved before making that move. Hence, it is vital for you to weigh the cost too, before making any move.
For more information on asset progression and calculated risks, as well as to receive a free assessment on wealth creation and financial multiplication, click here.
In my next post, I will share on why buying a resale HDB has similar cash outlay as buying a new condominum. Unknown to many, you will actually pay similar downpayment and similar monthly instalment.