Sell your HDB and buy 2 private properties?

I come across numerous property agent advertisements on “asset progression” by leveraging on your existing HDB while getting “cash savings”. In the following blog post I aim to illustrate how such asset progression works and provide a more complete picture what such investment entail through a case study of Mr Tan and Mrs Tan.

Mr Tan and Mrs Tan bought a BTO in Punggol for S$300,000 in 2013 and the HDB recently cross the minimum occupancy period mark. The HDB could be sold off at $500,000 in the resale market. With the sales proceeds and cash savings accumulated over the past years, Mr and Mrs Tan financial situation are as follows:

Savings prior to sales of HDB:

  Mr Tan Mrs Tan Total
CPF – Ordinary Account $100,000 $100,000 $200,000
Cash $50,000 $50,000 $100,000
Total $150,000 $150,000 $300,000

 

Proceeds from sale of HDB

Sales proceeds $500,000
Less: Outstanding loan $(150,000)
Refund to Mr Tan CPF $(75,000)
Refund to Mrs Tan CPF $(75,000)
Cash proceeds $200,000

 

Savings after sales of HDB:

  Mr Tan Mrs Tan Total
CPF – Ordinary Account $175,000 $175,000 $350,000
Cash $150,000 $150,000 $300,000
Total $325,000 $325,000 $650,000

 

With the windfall from the sale of HDB, Mr Tan and Mrs Tan bought a condominium each under their own name. Lets assume Mr Tan bought a 3 bedroom condominium for own stay at Punggol while Mrs Tan bought a $700,000 1 bedroom condominium in Toa Payoh for rental income. We also assume Mr Tan and Mrs Tan are able to obtain the maximum loan amount of 80% of purchase consideration for their respective purchase.

Purchase of condominium

  Mr Tan Mrs Tan Total
Consideration $1,200,000 $700,000 $1,900,000
20% down payment $(240,000) $(140,000) $(380,000)
Bank Loan $(960,000) $(560,000) $(1,520,000)

 

After paying the 20% down payment from their savings after the sales of HDB, their savings are as follows. I have assumed they utilised all their CPF in the payment of downpayment before paying any excess amount using cash.

Savings after purchase of HDB:

  Mr Tan Mrs Tan Total
CPF – Ordinary Account $- $35,000 $35,000
Cash $85,000 $150,000 $235,000
Total $85,000 $185,000 $270,000

 

So the first key point to illustrate is now Mr. Tan and Mrs. Tan has 2 private properties under their name while maintaining a decent CPF and Cash of $270,000 which could be set aside as an emergency funds. The total amount of cash and CPF of $270,000 is not far off from the original savings they had of $300,000.

The other plus point specific to the Singapore real estate market is that both private property purchase will be considered as their first property purchase which would mean Mr Tan and Mrs Tan will not have to fork out the additional buyer stamp duty on second property purchase which is computed based on 7% of the property value (i.e. $84,000 for Mr Tan and $49,000 for Mrs Tan).

Before you get too excited to market your HDB, lets look at the net debt position of Mr Tan and Mrs Tan which is often not highlighted by property agents. Net debt position is computed by adding the debt position with the cash position Mr Tan and Mrs Tan.

Debt position before sale of HDB

Outstanding loan $(150,000)
Total cash and CPF $300,000
Net cash position $150,000

 

Debt position after sale of HDB and purchase of 2 private properties

Outstanding loan $(1,520,000)
Total cash and CPF $270,000
Net debt position $(1,250,000)

 

From one the glance, the so called “cash savings” from the asset progression is rather misleading given that the net debt position of Mr Tan and Mrs Tan has changed from a zero debt position to a debt position in excess of $1 million.

Mr Tan and Mrs Tan should consider their ability to finance the debt position that comes with this asset progression which I will discuss in the next section: monthly cash flow after the asset progression whereby interest cost is assumed to be at 2% and financing period of 25 years. I would assume the financing cost for HDB for Mr Tan and Mrs Tan be negligible since they are able to pay off the loan with their savings readily.

  Mr Tan Mrs Tan Total
Rental income $2,000 $2,000
Mortgage payment $(4,069) $(2,374) $(6,443)
Cash inflow/(outflow) $(4,069) $(374) $(4,443)

 

As shown in the table, the cash flow position for Mr Tan and Mrs Tan turn from a no outflow from their HDB to an outflow of about $4,500 per month which translates to $54,000 per year. The so called cash savings will be wiped out in about 5 years leaving Mr Tan and Mr Tan to finance the remaining 20 years of the mortgage loan from their personal income.

I hope the above analysis provide readers a more complete picture on asset progression which property agents are selling. There are variables within the above model such as rise/fall in interest rate, rise/fall in rental income, rise/fall in private property market which might affect the ultimate outcome of the investment. It would also be wise to consider personal factors such as stability of income which Mr Tan and Mrs Tan is earning to enable them to finance the mortgage payment before commiting to the property purchase.

P.S. For purpose of illustration, this blog post did not include other costs involved in selling and selling of property such as agent commision, stamp duty and lawyer fee which could add up to be rather sizeable and should be considered when making your investment decision. Being a conservative, I personally do not subsribe to the above “asset progression” plan. as well =).

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