mcmlxxvi
01-11-12, 09:59
The following was something I recently put together for some friends, meant for someone totally new to the property game. Hope this will be of use to you.
----------
Property Investment for Dummies (3 Part Mini Series)
(c) mcmlxxvi 2012
NOTE: THIS ARTICLE MAY NOT BE CONSTRUED AS ADVICE, PERMISSION TO
REDISTRIBUTE IS STRICTLY LIMITED. ALL INVESTMENTS SHOULD BE CONSULTED
WITH A PROFESSIONAL AND THE READER AGREES TO UNDERTAKE ALL INVESTMENTS
AT THEIR OWN RISK.
A no nonsense guide to starting on the road to property investment from $0.
1. BUILD THE SEED MONEY
First, please don't believe everything you hear! Don't believe my
tagline above about $0! I trust you are a grown adult, so you can
differentiate from genuine vs scam. If you can't, that will be a
discussion for another day. Don't believe those seminars or get rich
quick schemes that says you can get in the property game for $0. It is
just not possible. There is no free lunch in this world. If so, there
is always a catch.
GET THE TIME HORIZON RIGHT
Getting your first property requires a substantial startup or what is
otherwise known as 'seed' money. Just like any other investment, you
need to grow or build something from something. However, unlike stocks
and shares, property is generally considered illiquid. In layman
terms, it means you can't easily get rid of it in a jiffy to cut
losses for example. Why not? Obviously, you need to get the word out,
market your property, conduct viewings for interested buyers, do up
the documentation, liaise with lawyers, bank, etc etc and then wait
months for the transaction to complete before the money is in your
hands. That's why it is illiquid. In today's context, for Singapore,
due to the restrictions on quick sale (i.e. the 4-year SSD rule,
whereby first year you sell, subject to 16% stamp duty or commonly
known as tax, 2nd year is 12%, 3rd year 8%, 4th year 4%), unless your
sale price is so good that you can cover the above and then some, it's
usually not a good idea to sell. Therefore, it has become an illiquid
vehicle for investment with time horizon of AT LEAST 4 years, barring
a extremely BULL (i.e on the rise) market giving you phenomenal
capital appreciation that easily covers your SSD. *SSD = Seller Stamp
Duty
HOW MUCH DO I REALLY NEED?
Ok, so you accept that you won't really make any money within the next
4 years at least, you are prepared to jump in because you know
Singapore's fundamentals are strong and in the long term the prices
will keep on rising. How much do you really need to start off?
Let me share a few new launches in the market.
http://www.propertyguru.com.sg/listing/11141465/for-sale-le-regal
The one above is probably one of the cheapest ever you can find in the
current market in terms of new launch (i.e. brand new, yet to be
constructed). 366 square feet is really small, yes, but it is a proper
one bedroom apartment in a location near to city, but I hesitate to
say 'decent' since it is Geylang afterall, but do mind that the whole
area is undergoing transformation. These aside, let's look at it
purely from an investment point of view.
Assuming the sum of $450k, for ease of calculation. How much money do
you need to get it?When you sign the OTP (Option to Purchase) at the
showflat, they require you to place immediate payment of 5% in CASH,
that's $22,500. About 2-3 weeks later, the developer of the project
will send the S&P (sales & purchase) legal document to you, which you
should engage a conveyancing lawyer to receive on behalf by then to
work on it. Oh, also, there is BSD (not some mad cow disease) Buyer
Stamp Duty which is 3% x 450k - 5400 = $8,100 payable.Roughly about
4-5 weeks later (give or take) the lawyer will contact you for the full amount.
By then you should have secured your financing / mortgage loan for 80%.
The remainder 15% you need to pay via either cash or CPF or a combi
of both - just tell your lawyer how much of each you want to use.
So in total, you need at least $22,500 in cash plus $67,500 in CPF or
cash/CPF combi.
That's not all.
Lawyers don't work for free. So they will charge. However, most banks
will grant a legal subsidy, that is they will cover part of the legal
fees. Usually 0.5% of the loan amount of up to $2,500 whichever is
lower. So in this case, if you are borrowing 80% of 450k = $360k, the
bank can cover up to $1800 of the legal fees. Net net is 2500-1800 =
$700 you have to pay. Note that the bank will have conditions, if they
lock you in for the loan for a period of say 3 years, if you fully
redeem the loan (usually upon a sale), you need to repay the $1800
subsidized - they call it legal subsidy clawback. With the 4 years
SSD, it's unlikely you will trigger this so just bear in mind for now.
How to get a lawyer? If you don't know any, the bank will get one for
you. Usually it has to be one that is on their panel of preferred
lawyers. Some lawyers don't work with certain banks and vice versa.
Now, this unit is a new launch, yet to be constructed. Looking at the
size of the project, typically it will take like 3 years to complete.
So for now, that's all the money you need. When it TOP 3 years later,
you will need the following funds prepared:
- survey fees
This is what the developer charge for architect/land authority? (not
sure which but doesn't really matter; to perform
valuation/measurements etc on the unit to determine correctness):
depending on your unit size, it usually amout to a couple of hundreds.
- 6 months' maintenance fees
Now HDB charges conservancy fees, private housing has what you call
maintenance fees. This is charged for maintenance of the facilities,
security guard salaries, general repairs and maintenance, utilities
etc. The amount depends on your 'share value' of your unit in the
condo. Typically for one-bedroom units, the fee should be around
150-250. So 6 months will be around $1200 assuming it's $200. It
varies according to how luxurious the facilities are, whether any
guards are engaged, whether mechanical car parking system is used, how
many pools and lifts etc. Why 6 months upfront? This is because the
MCST (management corporation strata title) or in layman terms the
managing committee or management agent is not formed or engaged yet,
so this first 6 months is payable to the developer of the project who
will be taking care of all those mentioned above during the first 6
months.
This is notwithstanding your furnishing costs, renovation, designer
fees if you engage ID etc. Usually if you are buying it to rent out,
you just need to do up minimally like provide white goods (fridge,
washer, dryer - some developer throw these in 'free'), curtains and
basic furniture like bed, sofa, dining set, tv console and tv etc.
This could cost upwards of $1500-2000.
So now you have an idea of how much money you need to start off? Are
you still game? If not, can fall out from here. Recruit, dismissed!
Now, if you ask, IF THERE ANYTHING CHEAPER? Short of overseas markets
(which is out of scope here as I have no experience with those), you
may want to look at commercial properties.
Take the following as example:
http://www.commercialguru.com.sg/listing/11802174/for-sale-golden-mile-tower
This is really affordable as first glance, plus you are not subject to
any SSD or what regulation (AT THE MOMENT, IT IS COMING VERY SOON
cooling measures on commercial sector), so you can easily sell it to
liquidate or take profit. However the CATCH for such good deals are
usually:
- leasehold (most commercial properties are 15-30/60 years lease)
- locality (reputation of the area is unsound)
- traffic (you need to look at good catchment if it is shop)
- accessibility (must be easily accessible by public transport if it
is office, plus convenient amenities like food, coffee shops,
convenience stores etc nearby)
- age (if remaining lease is less, the lesser amount of mortgage may be granted)
- rental yield (how much can it fetch you if it is leased out and not
for your own business use)
Besides, you need agents who are familiar in the commercial space with
lots of connections to small/medium business owners etc to help you
find good tenants fast. The target segment is definitely way smaller
than normal residential properties. The risk is definitely higher.
That's probably as much I can share on commercial - I am not really
familiar with this segment.
2. OPEN YOUR EYES
In the previous installment, we touched on the essential question of
HOW MUCH MONEY DO I NEED to start off on this journey. Assuming you
have gone past that stage and are sure you have the means to continue,
the question now is...
THE SEARCH
Now, everyone has different needs and wants. What is your objective?I
will make this very simple. More often than not, I come across
fledging investors who are on fire and keen to join in the fray, only
to hesitate when asked - ARE YOU BUYING IT FOR OWN STAY OR INVESTMENT?
In a logical science, the word OR means EITHER OR BOTH can be true.
However, when I ask that, it is usually meant to be XOR, or EXCLUSIVE
OR, meaning EITHER OR BUT NOT BOTH.
This may differ from what most of you have heard, but it is something
I feel quite strongly about. I believe, you can never achieve 100%
efficiency or results if you are sitting on the fence or being greedy
about your investment objective. EITHER you are buying it for your own
stay, OR you are buying it for investment (capital gain, passive
rental income etc).
I'm not saying that finding a property that can help you achieve BOTH
is impossible - but it is very rare to find one that can give you
optimised results for both purposes.
Let me state an example.
If you are buying a house for your own usage and stay in comfortable
enjoyment, I dare say most of us want a place that's peaceful and
quiet, not too near interchanges and noisy public areas like shopping
malls, accessible by both public transport and private (if you drive)
but not right beside a bus stop or the main road, close to greenery
and perhaps large bodies of water like reservoirs and parks, and one
that can hold it's value well (most often, freehold, for estate
planning, i.e. passing on to your future generations and loved ones
etc purposes).
Now put yourself in the shoes of someone looking to rent a place, what
are you looking for?
You probably work full-time, maybe near town or major business parks
or financial centres. You are half dead by the time you knock off from
work on weekdays, you don't want to waste any more precious time on
commute. You want your lodge near to MRT, bus routes, the workplace,
anything but some remote peaceful body of reservoir in the outskirts
of the city state. Although it has been said by some important people
that you can cross the whole island under 30 minutes, but you and I on
the ground know it is practically impossible unless you work the
graveyard shift and ride a scrambler. So you are now just slightly
over half dead by the time you get home to your 'near MRT' lodge, do
you still have energy to prepare dinner and feed the dog? Grab that
leash and take your dog for a walk and poo at the same time 'tabao'
some food from the nice Mexican cafe around the corner. Provided your
dog is ok with you not home for the past say 12 hours and hasn't grown
agitated and started barking incessantly! Your partner wants to drop
by. Ok, you still have like 30% energy and sure why not, your lodge is
just 2 MRT stops away from where he stays. You can quickly spend some
quality time before he flies off again for work the next day. Oh shit!
You sprained your ankles going down the steps in your high heels (what
were you thinking wearing heels and walking your dog while 'tabaoing'
your dinner!)... now thank god for the clinic that is around the other
corner. Quickly hop in and get the doc to check on it and get some
medication. While waiting for your turn, oh well, might as well limp
next door to get some bread for tomorrow's breakfast.
See the difference? Imagine how your tenant (if you do get one) is
going to cope, if she actually rented your peaceful outskirt abode
with ultra relax living environment (far from anything)?
So please do yourself a favour and DECIDE, own stay OR investment?
OWN STAY
You said, hey, you wrote earlier that property price will still go up
in the long term, no? So I will still enjoy capital gain in the future
right?
That is correct, assuming you have the HOLDING POWER to ride economic
ups and down. My personal belief (I'm no economist) is, property will
STILL move in cycles, however, with the increased transparency and
technology today, the cycles will come more often, they will be
shorter, and the delta (magnitude across up and down) will be more
moderate.
However, until you sell that property, all the supposed gains are mere
PAPER profits. That is, profits on paper only, not actually realised.
If it is your main and only home, it is difficult to monetise that
profit, unless you downgrade to a cheaper and likely smaller
alternative or migrate. So it is true while you can't get passive
income from a 'OWN STAY' unit, you can still stand to profit from it
from capital gain, further down the road.
There are exceptions where you may get income from an OWN STAY unit -
for example if you have a 3 bedroom condo and you rent out the other
two rooms. So in a way, the tenants are helping to pay down your
mortgage actually. Provided you are not a private person and willing
to deal with housemate issues. Not every day is an episode off
F.R.I.E.N.D.S you know.
INVESTMENT / PASSIVE INCOME
Now if you have your own place to stay, and this unit is bought purely
for investment purposes, congratulations. You are able to fully
maximize the earning potential. You may enjoy good capital gain down
the road and excellent passive income from rental at the same time.
Barring the 4 year SSD or any other regulations, you can sell this
after 4 years for another investment property that may fetch you even
higher returns (capital gain potential and rental yield).
Gross Rental yield:
(Monthly rental x 12) divided by Purchase price.
Based on the Le Regal unit in chapter 1, assuming projected rental of
$2,300 and purchase price $450k, the Gross yield is 6.1%.
I will not label it as HIGH or LOW for you - you may compare this vs
other investment instruments you are familiar with.
True Rental yield:
(Monthly rental x 12) divided by Cash outlay.
Assuming you took a 80% loan, your cash outlay was roughly say $100k
all in (downpayment, legal fees, stamp duty, survey fees, setup cost
etc), and the maintenance fee is $200 per month, the true rental yield
(not withstanding bank interest fees etc too complicated to count
here) is *25.2%.
*Calculation is (2300-200) x 12 / 100,000.
Now compare this again vs other investment instruments. I leave you to
conclude on the worthiness and feasibility.
3. TAKE THE FIRST STEP
Now that you are armed with adequate knowledge to start off, and you
know what you want, next question - HOW DO I GET IT?
Now, you could engage an agent to help you, or you could DIY.
I shall touch on the DIY method.
Unless you are living in a cave, by now you would have known that
there are various online property search engines that you can avail
of. Property Guru, iProperty, ST Property are just some of the popular
ones. Agents have also their own internal network with listings that
otherwise may not be publicized in the other public search engines -
this could be one of the reason you may want to engage them to help in
your search. However, if you are expecting them to fish out FIRE SALES
(euphemism for distressed sales or those sales at below valuation
prices due to various reasons such as bank foreclosure, suicide,
murder, fengshui etc etc etc), most likely they would have makan
(taken) those themselves already.
Those public search engines have filters to narrow down the possible
listings based on your criteria - so use them. Then you won't need to
plough thru thousands of property listings to shortlist a few that
meets your criteria. In today's market, it appears that new launches
(direct developer sales) units form mostly 80-90% of the listings in
the search engines. You may notice many units listings advertised for
even small projects - that is because first, a developer may engage
multiple agencies to market its projects, then each agency will have
many agents marketing the same units. For resale units, a seller may
also engage multiple agents to market them so you may also see
duplicate or multiple listings of in fact the same unit/s. Thus don't
be misled into wondering why so and so project has more listings than
the total number of units in the project.
If you are not that internet savvy, obviously the papers are the other
source of listings. Developers may also send you flyers and project
marketing teams may drop leaflets into into your mailbox so you can
also look out for those. It may also pay to take walks around your
preferred locality to check out any new launches placards or showflats
being set up. Or use social media and liink up with project marketing
teams or property developers and agents. If you particularly like
certain developer projects, check back on their website regularly for
new launch information. Some developers like Soilbuild for instance,
even post photographs on the progress of construction of every one of
their projects, to save you on the trouble of going down onsite for
checks on the progress.
THE EXECUTION
When you have shortlisted a few properties, contact the sales agent.
This could be by phone (for resale) or direct in the showflat (face to
face indication of interest). Make it clear that you are a direct
buyer and not an agent - so that they know they are not going to need
to share their commission with you (if you are an agent) and will give
you the best price possible. Arrange for a meeting to go over the
project specifics, or for a viewing if it is a completed resale unit.
For viewings, arrange two separate ones - one in the day time and one
in the evening. You want to pay attention to how the sun affects (or
not) the place in terms of heat and glare, as well as the ambient
noise level and activity level and traffic conditions around the
place. Other than the obvious checks on the furnishing, fixtures and
built in appliances, take a walk in the estate, its immediate
surroundings and take note of the occupants demographics/behaviour and
level of maintenance and upkeep of the estate. This is especially
important for self stay buys.
Once you are totally satisfied and you are sure you like the unit,
talk to the sales agent or seller to get a sense of what price he is
looking at. More often than not you will need to negotiate obviously.
The 'tactics' and strategies used by sellers and agents are many, but
you should just do the following:
- do your homework prior to contacting the seller, use the URA site
https://www.ura.gov.sg/realEstateWeb/realEstate/pageflow/transaction/TransactionController.jpf
to check on last transacted similar units in the project, and if not
available or no such recent transactions, ask the agent for it
- after taking into consideration the state of the unit, set your own
base and ceiling limits on how much you are willing to pay for it
- make sure you have ready cash (cheque) for 1% if resale unit (and
another 4% two weeks later) and 5% if direct from developer new launch
unit
- you or your representative agent should have a OFFER TO PURCHASE
form ready to submit to seller together with the cheque to lock in
your offer once you are confirm on getting it (for direct developer
units, the selling agent will prepare the necessary documentation -
just bring your cheque book)
Now pray.
Before your offer gets accepted, there might be another round or two
of to and fro. The seller can of course reject your offer if deemed
too low. But usually the agent can advise on whether certain offer
price 'can try' or 'forget it'. Just walk away and say thanks if it is
out of your defined ceiling and bottom range.
Once your offer is accepted, CONGRATULATIONS! Pop the champagne.
The OTP (Option to Purchase) will be given to you within the day or
two. With this, the seller cannot rescind his agreement to sell the
unit to you. You can still pull out, but this will mean forfeiting the
1% you have placed (or 1.25% for direct developer sales).
The subsequent payment steps may be referenced here -
http://www.ura.gov.sg/lad/HBG/progressPayments.htm
Your representative lawyer will liaise and collect the cheque payments
from you at each stage. Depending on the % you are borrowing from the
bank, the mortgage loan will kick in accordingly.
----------
Property Investment for Dummies (3 Part Mini Series)
(c) mcmlxxvi 2012
NOTE: THIS ARTICLE MAY NOT BE CONSTRUED AS ADVICE, PERMISSION TO
REDISTRIBUTE IS STRICTLY LIMITED. ALL INVESTMENTS SHOULD BE CONSULTED
WITH A PROFESSIONAL AND THE READER AGREES TO UNDERTAKE ALL INVESTMENTS
AT THEIR OWN RISK.
A no nonsense guide to starting on the road to property investment from $0.
1. BUILD THE SEED MONEY
First, please don't believe everything you hear! Don't believe my
tagline above about $0! I trust you are a grown adult, so you can
differentiate from genuine vs scam. If you can't, that will be a
discussion for another day. Don't believe those seminars or get rich
quick schemes that says you can get in the property game for $0. It is
just not possible. There is no free lunch in this world. If so, there
is always a catch.
GET THE TIME HORIZON RIGHT
Getting your first property requires a substantial startup or what is
otherwise known as 'seed' money. Just like any other investment, you
need to grow or build something from something. However, unlike stocks
and shares, property is generally considered illiquid. In layman
terms, it means you can't easily get rid of it in a jiffy to cut
losses for example. Why not? Obviously, you need to get the word out,
market your property, conduct viewings for interested buyers, do up
the documentation, liaise with lawyers, bank, etc etc and then wait
months for the transaction to complete before the money is in your
hands. That's why it is illiquid. In today's context, for Singapore,
due to the restrictions on quick sale (i.e. the 4-year SSD rule,
whereby first year you sell, subject to 16% stamp duty or commonly
known as tax, 2nd year is 12%, 3rd year 8%, 4th year 4%), unless your
sale price is so good that you can cover the above and then some, it's
usually not a good idea to sell. Therefore, it has become an illiquid
vehicle for investment with time horizon of AT LEAST 4 years, barring
a extremely BULL (i.e on the rise) market giving you phenomenal
capital appreciation that easily covers your SSD. *SSD = Seller Stamp
Duty
HOW MUCH DO I REALLY NEED?
Ok, so you accept that you won't really make any money within the next
4 years at least, you are prepared to jump in because you know
Singapore's fundamentals are strong and in the long term the prices
will keep on rising. How much do you really need to start off?
Let me share a few new launches in the market.
http://www.propertyguru.com.sg/listing/11141465/for-sale-le-regal
The one above is probably one of the cheapest ever you can find in the
current market in terms of new launch (i.e. brand new, yet to be
constructed). 366 square feet is really small, yes, but it is a proper
one bedroom apartment in a location near to city, but I hesitate to
say 'decent' since it is Geylang afterall, but do mind that the whole
area is undergoing transformation. These aside, let's look at it
purely from an investment point of view.
Assuming the sum of $450k, for ease of calculation. How much money do
you need to get it?When you sign the OTP (Option to Purchase) at the
showflat, they require you to place immediate payment of 5% in CASH,
that's $22,500. About 2-3 weeks later, the developer of the project
will send the S&P (sales & purchase) legal document to you, which you
should engage a conveyancing lawyer to receive on behalf by then to
work on it. Oh, also, there is BSD (not some mad cow disease) Buyer
Stamp Duty which is 3% x 450k - 5400 = $8,100 payable.Roughly about
4-5 weeks later (give or take) the lawyer will contact you for the full amount.
By then you should have secured your financing / mortgage loan for 80%.
The remainder 15% you need to pay via either cash or CPF or a combi
of both - just tell your lawyer how much of each you want to use.
So in total, you need at least $22,500 in cash plus $67,500 in CPF or
cash/CPF combi.
That's not all.
Lawyers don't work for free. So they will charge. However, most banks
will grant a legal subsidy, that is they will cover part of the legal
fees. Usually 0.5% of the loan amount of up to $2,500 whichever is
lower. So in this case, if you are borrowing 80% of 450k = $360k, the
bank can cover up to $1800 of the legal fees. Net net is 2500-1800 =
$700 you have to pay. Note that the bank will have conditions, if they
lock you in for the loan for a period of say 3 years, if you fully
redeem the loan (usually upon a sale), you need to repay the $1800
subsidized - they call it legal subsidy clawback. With the 4 years
SSD, it's unlikely you will trigger this so just bear in mind for now.
How to get a lawyer? If you don't know any, the bank will get one for
you. Usually it has to be one that is on their panel of preferred
lawyers. Some lawyers don't work with certain banks and vice versa.
Now, this unit is a new launch, yet to be constructed. Looking at the
size of the project, typically it will take like 3 years to complete.
So for now, that's all the money you need. When it TOP 3 years later,
you will need the following funds prepared:
- survey fees
This is what the developer charge for architect/land authority? (not
sure which but doesn't really matter; to perform
valuation/measurements etc on the unit to determine correctness):
depending on your unit size, it usually amout to a couple of hundreds.
- 6 months' maintenance fees
Now HDB charges conservancy fees, private housing has what you call
maintenance fees. This is charged for maintenance of the facilities,
security guard salaries, general repairs and maintenance, utilities
etc. The amount depends on your 'share value' of your unit in the
condo. Typically for one-bedroom units, the fee should be around
150-250. So 6 months will be around $1200 assuming it's $200. It
varies according to how luxurious the facilities are, whether any
guards are engaged, whether mechanical car parking system is used, how
many pools and lifts etc. Why 6 months upfront? This is because the
MCST (management corporation strata title) or in layman terms the
managing committee or management agent is not formed or engaged yet,
so this first 6 months is payable to the developer of the project who
will be taking care of all those mentioned above during the first 6
months.
This is notwithstanding your furnishing costs, renovation, designer
fees if you engage ID etc. Usually if you are buying it to rent out,
you just need to do up minimally like provide white goods (fridge,
washer, dryer - some developer throw these in 'free'), curtains and
basic furniture like bed, sofa, dining set, tv console and tv etc.
This could cost upwards of $1500-2000.
So now you have an idea of how much money you need to start off? Are
you still game? If not, can fall out from here. Recruit, dismissed!
Now, if you ask, IF THERE ANYTHING CHEAPER? Short of overseas markets
(which is out of scope here as I have no experience with those), you
may want to look at commercial properties.
Take the following as example:
http://www.commercialguru.com.sg/listing/11802174/for-sale-golden-mile-tower
This is really affordable as first glance, plus you are not subject to
any SSD or what regulation (AT THE MOMENT, IT IS COMING VERY SOON
cooling measures on commercial sector), so you can easily sell it to
liquidate or take profit. However the CATCH for such good deals are
usually:
- leasehold (most commercial properties are 15-30/60 years lease)
- locality (reputation of the area is unsound)
- traffic (you need to look at good catchment if it is shop)
- accessibility (must be easily accessible by public transport if it
is office, plus convenient amenities like food, coffee shops,
convenience stores etc nearby)
- age (if remaining lease is less, the lesser amount of mortgage may be granted)
- rental yield (how much can it fetch you if it is leased out and not
for your own business use)
Besides, you need agents who are familiar in the commercial space with
lots of connections to small/medium business owners etc to help you
find good tenants fast. The target segment is definitely way smaller
than normal residential properties. The risk is definitely higher.
That's probably as much I can share on commercial - I am not really
familiar with this segment.
2. OPEN YOUR EYES
In the previous installment, we touched on the essential question of
HOW MUCH MONEY DO I NEED to start off on this journey. Assuming you
have gone past that stage and are sure you have the means to continue,
the question now is...
THE SEARCH
Now, everyone has different needs and wants. What is your objective?I
will make this very simple. More often than not, I come across
fledging investors who are on fire and keen to join in the fray, only
to hesitate when asked - ARE YOU BUYING IT FOR OWN STAY OR INVESTMENT?
In a logical science, the word OR means EITHER OR BOTH can be true.
However, when I ask that, it is usually meant to be XOR, or EXCLUSIVE
OR, meaning EITHER OR BUT NOT BOTH.
This may differ from what most of you have heard, but it is something
I feel quite strongly about. I believe, you can never achieve 100%
efficiency or results if you are sitting on the fence or being greedy
about your investment objective. EITHER you are buying it for your own
stay, OR you are buying it for investment (capital gain, passive
rental income etc).
I'm not saying that finding a property that can help you achieve BOTH
is impossible - but it is very rare to find one that can give you
optimised results for both purposes.
Let me state an example.
If you are buying a house for your own usage and stay in comfortable
enjoyment, I dare say most of us want a place that's peaceful and
quiet, not too near interchanges and noisy public areas like shopping
malls, accessible by both public transport and private (if you drive)
but not right beside a bus stop or the main road, close to greenery
and perhaps large bodies of water like reservoirs and parks, and one
that can hold it's value well (most often, freehold, for estate
planning, i.e. passing on to your future generations and loved ones
etc purposes).
Now put yourself in the shoes of someone looking to rent a place, what
are you looking for?
You probably work full-time, maybe near town or major business parks
or financial centres. You are half dead by the time you knock off from
work on weekdays, you don't want to waste any more precious time on
commute. You want your lodge near to MRT, bus routes, the workplace,
anything but some remote peaceful body of reservoir in the outskirts
of the city state. Although it has been said by some important people
that you can cross the whole island under 30 minutes, but you and I on
the ground know it is practically impossible unless you work the
graveyard shift and ride a scrambler. So you are now just slightly
over half dead by the time you get home to your 'near MRT' lodge, do
you still have energy to prepare dinner and feed the dog? Grab that
leash and take your dog for a walk and poo at the same time 'tabao'
some food from the nice Mexican cafe around the corner. Provided your
dog is ok with you not home for the past say 12 hours and hasn't grown
agitated and started barking incessantly! Your partner wants to drop
by. Ok, you still have like 30% energy and sure why not, your lodge is
just 2 MRT stops away from where he stays. You can quickly spend some
quality time before he flies off again for work the next day. Oh shit!
You sprained your ankles going down the steps in your high heels (what
were you thinking wearing heels and walking your dog while 'tabaoing'
your dinner!)... now thank god for the clinic that is around the other
corner. Quickly hop in and get the doc to check on it and get some
medication. While waiting for your turn, oh well, might as well limp
next door to get some bread for tomorrow's breakfast.
See the difference? Imagine how your tenant (if you do get one) is
going to cope, if she actually rented your peaceful outskirt abode
with ultra relax living environment (far from anything)?
So please do yourself a favour and DECIDE, own stay OR investment?
OWN STAY
You said, hey, you wrote earlier that property price will still go up
in the long term, no? So I will still enjoy capital gain in the future
right?
That is correct, assuming you have the HOLDING POWER to ride economic
ups and down. My personal belief (I'm no economist) is, property will
STILL move in cycles, however, with the increased transparency and
technology today, the cycles will come more often, they will be
shorter, and the delta (magnitude across up and down) will be more
moderate.
However, until you sell that property, all the supposed gains are mere
PAPER profits. That is, profits on paper only, not actually realised.
If it is your main and only home, it is difficult to monetise that
profit, unless you downgrade to a cheaper and likely smaller
alternative or migrate. So it is true while you can't get passive
income from a 'OWN STAY' unit, you can still stand to profit from it
from capital gain, further down the road.
There are exceptions where you may get income from an OWN STAY unit -
for example if you have a 3 bedroom condo and you rent out the other
two rooms. So in a way, the tenants are helping to pay down your
mortgage actually. Provided you are not a private person and willing
to deal with housemate issues. Not every day is an episode off
F.R.I.E.N.D.S you know.
INVESTMENT / PASSIVE INCOME
Now if you have your own place to stay, and this unit is bought purely
for investment purposes, congratulations. You are able to fully
maximize the earning potential. You may enjoy good capital gain down
the road and excellent passive income from rental at the same time.
Barring the 4 year SSD or any other regulations, you can sell this
after 4 years for another investment property that may fetch you even
higher returns (capital gain potential and rental yield).
Gross Rental yield:
(Monthly rental x 12) divided by Purchase price.
Based on the Le Regal unit in chapter 1, assuming projected rental of
$2,300 and purchase price $450k, the Gross yield is 6.1%.
I will not label it as HIGH or LOW for you - you may compare this vs
other investment instruments you are familiar with.
True Rental yield:
(Monthly rental x 12) divided by Cash outlay.
Assuming you took a 80% loan, your cash outlay was roughly say $100k
all in (downpayment, legal fees, stamp duty, survey fees, setup cost
etc), and the maintenance fee is $200 per month, the true rental yield
(not withstanding bank interest fees etc too complicated to count
here) is *25.2%.
*Calculation is (2300-200) x 12 / 100,000.
Now compare this again vs other investment instruments. I leave you to
conclude on the worthiness and feasibility.
3. TAKE THE FIRST STEP
Now that you are armed with adequate knowledge to start off, and you
know what you want, next question - HOW DO I GET IT?
Now, you could engage an agent to help you, or you could DIY.
I shall touch on the DIY method.
Unless you are living in a cave, by now you would have known that
there are various online property search engines that you can avail
of. Property Guru, iProperty, ST Property are just some of the popular
ones. Agents have also their own internal network with listings that
otherwise may not be publicized in the other public search engines -
this could be one of the reason you may want to engage them to help in
your search. However, if you are expecting them to fish out FIRE SALES
(euphemism for distressed sales or those sales at below valuation
prices due to various reasons such as bank foreclosure, suicide,
murder, fengshui etc etc etc), most likely they would have makan
(taken) those themselves already.
Those public search engines have filters to narrow down the possible
listings based on your criteria - so use them. Then you won't need to
plough thru thousands of property listings to shortlist a few that
meets your criteria. In today's market, it appears that new launches
(direct developer sales) units form mostly 80-90% of the listings in
the search engines. You may notice many units listings advertised for
even small projects - that is because first, a developer may engage
multiple agencies to market its projects, then each agency will have
many agents marketing the same units. For resale units, a seller may
also engage multiple agents to market them so you may also see
duplicate or multiple listings of in fact the same unit/s. Thus don't
be misled into wondering why so and so project has more listings than
the total number of units in the project.
If you are not that internet savvy, obviously the papers are the other
source of listings. Developers may also send you flyers and project
marketing teams may drop leaflets into into your mailbox so you can
also look out for those. It may also pay to take walks around your
preferred locality to check out any new launches placards or showflats
being set up. Or use social media and liink up with project marketing
teams or property developers and agents. If you particularly like
certain developer projects, check back on their website regularly for
new launch information. Some developers like Soilbuild for instance,
even post photographs on the progress of construction of every one of
their projects, to save you on the trouble of going down onsite for
checks on the progress.
THE EXECUTION
When you have shortlisted a few properties, contact the sales agent.
This could be by phone (for resale) or direct in the showflat (face to
face indication of interest). Make it clear that you are a direct
buyer and not an agent - so that they know they are not going to need
to share their commission with you (if you are an agent) and will give
you the best price possible. Arrange for a meeting to go over the
project specifics, or for a viewing if it is a completed resale unit.
For viewings, arrange two separate ones - one in the day time and one
in the evening. You want to pay attention to how the sun affects (or
not) the place in terms of heat and glare, as well as the ambient
noise level and activity level and traffic conditions around the
place. Other than the obvious checks on the furnishing, fixtures and
built in appliances, take a walk in the estate, its immediate
surroundings and take note of the occupants demographics/behaviour and
level of maintenance and upkeep of the estate. This is especially
important for self stay buys.
Once you are totally satisfied and you are sure you like the unit,
talk to the sales agent or seller to get a sense of what price he is
looking at. More often than not you will need to negotiate obviously.
The 'tactics' and strategies used by sellers and agents are many, but
you should just do the following:
- do your homework prior to contacting the seller, use the URA site
https://www.ura.gov.sg/realEstateWeb/realEstate/pageflow/transaction/TransactionController.jpf
to check on last transacted similar units in the project, and if not
available or no such recent transactions, ask the agent for it
- after taking into consideration the state of the unit, set your own
base and ceiling limits on how much you are willing to pay for it
- make sure you have ready cash (cheque) for 1% if resale unit (and
another 4% two weeks later) and 5% if direct from developer new launch
unit
- you or your representative agent should have a OFFER TO PURCHASE
form ready to submit to seller together with the cheque to lock in
your offer once you are confirm on getting it (for direct developer
units, the selling agent will prepare the necessary documentation -
just bring your cheque book)
Now pray.
Before your offer gets accepted, there might be another round or two
of to and fro. The seller can of course reject your offer if deemed
too low. But usually the agent can advise on whether certain offer
price 'can try' or 'forget it'. Just walk away and say thanks if it is
out of your defined ceiling and bottom range.
Once your offer is accepted, CONGRATULATIONS! Pop the champagne.
The OTP (Option to Purchase) will be given to you within the day or
two. With this, the seller cannot rescind his agreement to sell the
unit to you. You can still pull out, but this will mean forfeiting the
1% you have placed (or 1.25% for direct developer sales).
The subsequent payment steps may be referenced here -
http://www.ura.gov.sg/lad/HBG/progressPayments.htm
Your representative lawyer will liaise and collect the cheque payments
from you at each stage. Depending on the % you are borrowing from the
bank, the mortgage loan will kick in accordingly.