Biggest loan you make in yuor life before?

[teddybear]

No I don't think I am wrong in my calculation. I am referring to your own capital of $500k (market value) which is what you get if you sell the property for $1.3m and pay off the existing loan of $0.8m (not the original $200k initial capital anymore).

To know when you should sell, you should look at the return you can get from your own capital of $500k if you sell the $1.3m property. However, consideration of the return should be considered over the longer term and the volatility and risk involved.

Your maths is wrong. My scenario's initial capital is 200k downpayment. And your way of calculating is basically looking at how much money your 200k is making for you.

It doesn't tell you when you should sell because it never takes into account the current market price. Even if your condo selling climb up to 2million, using your method, the numbers are still the same. As all you look is the interest rate on your loan and rental income.

I think you must put in the capital appreciation somewhere in your equations. If you can sell your condo at 1.3million and you don't, there is an opportunity cost involved. As I said, you can use the profits to offset other housing loans and thus make some money. Of course, you can do other things with the money but for SIMPLICITY I assumed you use it to offset other housing loans.

Simple logic. If your condo price goes up to 3million and rental remains flat, it is a no brainer to sell as you will free up huge amount of money which can be used to pay of other loans (ZERO risk investment).

If the interest rate is 1%, then it just change the Yield from 0.3% to 0.8%. And to get the 0.8% you are banking on 1% interest rates.... which is hardly reassuring.

teddybear[/B]]
Your calculation is wrong because:
1) You don't own the $1.3m, since $800k is not your money. Hence your return should be based on your own capital which is only $500k.
2) Interest only count for the loan of $800k since easier to compare to alternative investments for your own capital of $500k.
3) Considering the above, your actual return on your $500k is much much higher than what you calculated, especially now the loan interest is about 1%, not 1.5%. That is the advantage of leverage, but also the disadvantage of leverage because your loss get magnified!
4) Is it any wonder so many citizens are still buying new launch and using whoever family names they can lay their hand on? They are carrying leverage to a "new art" level to overcome the 60% LTV for 2nd property (while 80% for 1st property), 4 years SSD, ABSD ...!

[teddybear]

No, he doesn't need to buy another property. He can spend it to enjoy, or buy shares, bonds, structured deposits, endowment funds, unit trusts etc. It is just that none of those will get you good long-term return considering the risk and volatility involved.

Selling the house does free up the 500k that can generate income of a certain percentage. But things may not be so simple. Selling the house also free up the 800k that does not earn rental for you anymore. So how? Buy another property and pay the duties and fees? Buy new and wait for completion and lose rental income? Buy resale and lock up the 40% downpayment and probably get a lower rental yield?

Very cheeeem

[new2mondrian]

Nope... My friend who earns 8k, the bank allows him to loan up to 2mil. He is only 29.

OMG... Either MAS is sleeping, or the banks have an amazing risk appetite. Your friend is taking up the loan ALONE, or he is entering into the loan jointly with his partner who also earns 8k? That makes a sea of difference.

[mkl22]

OMG... Either MAS is sleeping, or the banks have an amazing risk appetite. Your friend is taking up the loan ALONE, or he is entering into the loan jointly with his partner who also earns 8k? That makes a sea of difference.

Because the banks believe in the govt who will prop up property prices so that it will not fall too much. So can still sell off the apartment and get money back. Haha

[new2mondrian]

What is worryingly is that in recent times, I know of friends/relatives who do NOT have the means to cough up the 40% downpayment for 2nd property, but still entering into the market. Their justification is simply - we know we do not sufficient cash/CPF, BUT we are getting a new launch which means we don't have to cough up the 40% straightaway. By the time the property TOP in 2015 or beyond, we will have enough.

That calls for an assumption that they will retain their jobs and be able to pay up as and when the developer calls for payment. To me that is a huge assumption especially in this economic climate.

Not too long ago in around 07/08, a brand new FH property around Potong Pasir could be bought for around $650-$750psf. At 20% downpayment, even if market tanks, the banks' exposure is at max $600psf. Today even a 99yr LH in Punggol is going for $1350psf. At 40% downpayment the banks' exposure is still in excess of $800psf. Has economic fundamentals changed so drastically over 5 years? I do not know. Perhaps it has (since market behavior seems to indicate thus).

[mkl22]

yes, but the decision to sell should be based on current market price right? Because this is what you will get if you sell now.

Example, if one buys a condo at 1million dollars, 800k loan.

Now it is 1.3million. Should one sell?

I never rent out a condo so I am quite blur at this. But the following is my SIMPLISTIC calculation.

If you can rent the condo out at 3.5k/month= 42k/per year.

10% property tax=4.2k.
condo maintenance fees=$250*12=3k
miscellaneous fees (agent/repair/etc)= 2k??

So you end up with 35k per year, which is around 2.8% yield.

Let's say your loan is at 1.5% interest rate. Should I apply 1.5% to 800k or 1.3million? I think we should apply it to 1.3 million because if you sell the house at 1.3million not 800k. You can make use of the extra 500k. Example, you can pay of the 800k loan + 500k (of your other property loan)

So your yield is only 2.8%-1.5%= 1.3%. If condo is 99years, I would assume it will depreciate normally by 1% per annum (all other things being equal). So you end up with only a 0.3% yield.

A 0.3% yield is rather small to take such a big risk especially if you don't see any upside in the property market from now on. And furthermore if the interest rates rise any higher than 1.5%, it will make it not economical to hold on to the property. People will realise this and start selling....

Is my "theory" correct?

So it looks like it is best to put this 200k into CPF? Rather risk free.

[Adva181]

What is worryingly is that in recent times, I know of friends/relatives who do NOT have the means to cough up the 40% downpayment for 2nd property, but still entering into the market. Their justification is simply - we know we do not sufficient cash/CPF, BUT we are getting a new launch which means we don't have to cough up the 40% straightaway. By the time the property TOP in 2015 or beyond, we will have enough.

That calls for an assumption that they will retain their jobs and be able to pay up as and when the developer calls for payment. To me that is a huge assumption especially in this economic climate.

Not too long ago in around 07/08, a brand new FH property around Potong Pasir could be bought for around $650-$750psf. At 20% downpayment, even if market tanks, the banks' exposure is at max $600psf. Today even a 99yr LH in Punggol is going for $1350psf. At 40% downpayment the banks' exposure is still in excess of $800psf. Has economic fundamentals changed so drastically over 5 years? I do not know. Perhaps it has (since market behavior seems to indicate thus).

But they pay the next 20% upon completion of foundation, not upon TOP. They bought without knowing this? Omg, fire sales coming..

[new2mondrian]

But they pay the next 20% upon completion of foundation, not upon TOP. They bought without knowing this? Omg, fire sales coming..

yeah.... to them it's still 20% for a long while. maybe that's why new launches are selling so well. let's hope economy keeps humming along. otherwise a lot of pain is going round, especially for those with multiple dependents (e.g. kids, elderly parents).

[hyenergix]

yeah.... to them it's still 20% for a long while. maybe that's why new launches are selling so well. let's hope economy keeps humming along. otherwise a lot of pain is going round, especially for those with multiple dependents (e.g. kids, elderly parents).

If not in property, then where do they save the money? Banks are offering close to 0% for savings while inflation is about 5% (if you believe the official figure). Stocks and gold are quite volatile, and lack prestige and utility compared to properties.

I think it is good to buy for own-stay if you have the holding power, even if you don't need it immediately after TOP. The era of cheap land and construction is over in Singapore.

Despite government's promise of waves of GLS, I believe it is only temporary because land for residential development is running out at OCR and around MRT stations (I believe no more in CCR). Beyond 2015, I think the government will have problems finding land at the mentioned locations for GLS. The sale of the Bartley Residences land at the Bodhi tree clearly shows that the government is running out of normal land at OCR for GLS.

[wind30]

No I don't think I am wrong in my calculation. I am referring to your own capital of $500k (market value) which is what you get if you sell the property for $1.3m and pay off the existing loan of $0.8m (not the original $200k initial capital anymore).

To know when you should sell, you should look at the return you can get from your own capital of $500k if you sell the $1.3m property. However, consideration of the return should be considered over the longer term and the volatility and risk involved.

Ok I understand your point.

Then I think our equations are the same what... then why you say I am wrong?

except I simplified by assuming that one uses the freed up capital to pay of other housing loans.

using your method.

Income is around 33k/year ( I noticed i made a calculation error as said 35k previously)

Depreciation for a 99 year property is simplified as 1% per year. 13k/year.

Your interest payment for 800k loan at 1% is around 8k/year.

So net income is 12k per year.So Yield for your 500k "capital" is 2.4%.

So it still does not make sense to sell your house and free up the 500k.

But if interest rates is 1.8%,

your 800k loan interest is 14.4k/year.

And your net income is 5.6k/year and your Yield for the 500k drops to 1.12% which is lower than your 1.8% housing loan interest rate. (there is a delta because I made an error of 2k earlier)

The conclusion is the same.

I think the 1% depreciation I put in for 99 year property has a big effect. But I think we must put something in else how to differentiate FH and LH? FH has much lower rental yield but FH property don't depreciate due to the lease running out.

[Rosy]

We should avoid all 99lh property if we based on above calculation.

Ironically, prices of 99lh property do not depreciate 1% annually.

[supermax]

You haven't factored in property tax, maintenance fees as a recurring expense. Also if you have a car, your car loan may add another 1K monthly. If you have maids + kids, another 1K. Your cash flow will be tight on one income. Do not underestimate the little things that add up eg groceries, electricity, car petrol, meals outside (even fast food is not cheap these days).

If loan interest takes a hike it will be even worse.

If you can hold out for the term of the loan, 7K rental income on top of your own income(s) of 13K is very good. But you re in for the long haul (30 years). Anything can happen. You will also be shocked that even young-ish people are getting gravely ill these days (cancer, heart disease, etc - choi choi choi but it does happen so take care of your health and dont' focus so much on your careers and making money that you neglect your health - it's one thing that money cannot buy back once you've lost it). Ahem and that brings me to another expense - insurance (sorry am not an agent but I thought I should remind you that you need to fork out some money for insurance too).

I am a Malaysian,on top of the property tax,maintenance fees,does one need to pay income tax on rental property?Is it part of the cost to determine rental yield?

[hyenergix]

Landlords - Possible not to declare rental income? If paiseh can PM me you answer

[samuelk]

delete double post

[samuelk]

450k is still a huge amount of debt to clear, imo.

And before you move to the next stage, IRAS would also want to know how you can afford to over leverage yourself. There are cases where they write in to u to give a response and if the response is iffy, time to lah kopi with them.
. How many of us here have that letter ? .

[amk]

Landlords - Possible not to declare rental income? If paiseh can PM me you answer

Is that a trick question ?

[amk]

Ironically, prices of 99lh property do not depreciate 1% annually.

It's not linear. It escalates after 40yrs.
Frankly SG is so young, no one has really seen his LH properties going to 0 yet. You should watch Arcadia saga. Owners now suddenly wake up it's LH and lease is running out, and now complaining " pty value going down" and want gov to do something.

[wind30]

We should avoid all 99lh property if we based on above calculation.

Ironically, prices of 99lh property do not depreciate 1% annually.

1% is arbitrary. I have to put a number. you can put 0.5% or 2%. It is up to you.

As someone else have said, it is probably not linear. It could be bigger as the property gets older.

[DC33_2008]

This is really worrying. Price has really gone up so much in the last few years. Current price at Punggol is equivalent to price of a FH D1 3 years ago. Everyone is buying a hope in the future.

What is worryingly is that in recent times, I know of friends/relatives who do NOT have the means to cough up the 40% downpayment for 2nd property, but still entering into the market. Their justification is simply - we know we do not sufficient cash/CPF, BUT we are getting a new launch which means we don't have to cough up the 40% straightaway. By the time the property TOP in 2015 or beyond, we will have enough.

That calls for an assumption that they will retain their jobs and be able to pay up as and when the developer calls for payment. To me that is a huge assumption especially in this economic climate.

Not too long ago in around 07/08, a brand new FH property around Potong Pasir could be bought for around $650-$750psf. At 20% downpayment, even if market tanks, the banks' exposure is at max $600psf. Today even a 99yr LH in Punggol is going for $1350psf. At 40% downpayment the banks' exposure is still in excess of $800psf. Has economic fundamentals changed so drastically over 5 years? I do not know. Perhaps it has (since market behavior seems to indicate thus).

[DC33_2008]

There LH properties where prices appreciate rather than depreciate. For example, mrt build next to it, nearby redevelopment or new development, etc. Location is important especially for LH ones.

1% is arbitrary. I have to put a number. you can put 0.5% or 2%. It is up to you.

As someone else have said, it is probably not linear. It could be bigger as the property gets older.

[mkl22]

It's not linear. It escalates after 40yrs.
Frankly SG is so young, no one has really seen his LH properties going to 0 yet. You should watch Arcadia saga. Owners now suddenly wake up it's LH and lease is running out, and now complaining " pty value going down" and want gov to do something.

Which is why I pointed out in another post about what happens when a LH private condo hits 99 years. This has not happened yet so there is no absolute certainty that the land will get reverted back to govt and the people living there gets kicked out. Until that time comes I think many will think there is not to much difference between LH and freehold as observed from the prices.

[wind30]

There LH properties where prices appreciate rather than depreciate. For example, mrt build next to it, nearby redevelopment or new development, etc. Location is important especially for LH ones.

There are other factors that affect pricing.

For calculation I am assuming that the overall market is constant as I can't predict market movement.

But the fact is that 99 yr LH condo does lose its value as the years passes.

On a good year, FH condo will go up 10% but LH condo might go up 9%. This is in general lah.

Common sense right? Would you pay the same amount of money for a condo that only has 70 year lease vs one that has 95 years if everything else is the same, location, unit size, condition? How much discount then is another matter. 10% less? 20% less?

I think only people in dreamland will say LH and FH has no difference.

[DC33_2008]

Unfortunately, in life nothing is perfect and everything is unique. Investor will look for such uniqueness when they invest. This is what one call 'niches'.

There are other factors that affect pricing.

For calculation I am assuming that the overall market is constant as I can't predict market movement.

But the fact is that 99 yr LH condo does lose its value as the years passes.

On a good year, FH condo will go up 10% but LH condo might go up 9%. This is in general lah.

Common sense right? Would you pay the same amount of money for a condo that only has 70 year lease vs one that has 95 years if everything else is the same, location, unit size, condition? How much discount then is another matter. 10% less? 20% less?

I think only people in dreamland will say LH and FH has no difference.

[wind30]

http://www.sla.gov.sg/doc/ser/DP%20p...Jul%202007.pdf

I see a table by the government showing the depreciation of LH compared to FH value

Very interesting. I think I over calculated the LH depreciation. I think it is more in line with 0.4-0.5% on the average assuming your property is 10 years old.

Those should be the best number to use right?

[DC33_2008]

The inflation and recent property prices would have brought some of these prices upwards by 20-30% in the last 5 years. 0.5% is just insignificant.

http://www.sla.gov.sg/doc/ser/DP%20p...Jul%202007.pdf

I see a table by the government showing the depreciation of LH compared to FH value

Very interesting. I think I over calculated the LH depreciation. I think it is more in line with 0.4-0.5% on the average assuming your property is 10 years old.

Those should be the best number to use right?

[lifeline]

It's not linear. It escalates after 40yrs.
Frankly SG is so young, no one has really seen his LH properties going to 0 yet. You should watch Arcadia saga. Owners now suddenly wake up it's LH and lease is running out, and now complaining " pty value going down" and want gov to do something.

sh highlighted this useful link before on "The Differential Premium System & Premium for Remnant State Land" :

http://tinyurl.com/6w5kzdu

http://forums.condosingapore.com/sho...5&postcount=41

[lifeline]

http://www.sla.gov.sg/doc/ser/DP%20p...Jul%202007.pdf

I see a table by the government showing the depreciation of LH compared to FH value

Very interesting. I think I over calculated the LH depreciation. I think it is more in line with 0.4-0.5% on the average assuming your property is 10 years old.

Those should be the best number to use right?

oops... you already found it while i was searching my database.

[CCR]

Do you know that if you put a downpayment of 40% banks actually don't even need to see your income statement.... They just take it to show that they are prudent.... You actually can get approval right away.. No risk to banks..... Wen have property drop 40%?

[ysyap]

Do you know that if you put a downpayment of 40% banks actually don't even need to see your income statement.... They just take it to show that they are prudent.... You actually can get approval right away.. No risk to banks..... Wen have property drop 40%?

Yup.. if property prices plummet 40%, banks can close shop liao... Lol!

[teddybear]

Your "0.3% yield" is wrong!
And you can't include depreciation in the calculation because you are depreciating market price of the property? Didn't market price already reflect the current value of the property? You should take capital appreciation instead since property price is supposed to rise equal to inflation, which is about 3% per year average over a long term? In fact, inflation is >5.5% now and the past year! May be we will see a long-term inflation of 4.5% instead for next 10 years and hence you should consider 4.5% appreciation?
After considering what I mentioned above, a person will arrive at a vastly different conclusion than what you have derived based on your calculations!

Ok I understand your point.

Then I think our equations are the same what... then why you say I am wrong?

except I simplified by assuming that one uses the freed up capital to pay of other housing loans.

using your method.

Income is around 33k/year ( I noticed i made a calculation error as said 35k previously)

Depreciation for a 99 year property is simplified as 1% per year. 13k/year.

Your interest payment for 800k loan at 1% is around 8k/year.

So net income is 12k per year.So Yield for your 500k "capital" is 2.4%.

So it still does not make sense to sell your house and free up the 500k.

But if interest rates is 1.8%,

your 800k loan interest is 14.4k/year.

And your net income is 5.6k/year and your Yield for the 500k drops to 1.12% which is lower than your 1.8% housing loan interest rate. (there is a delta because I made an error of 2k earlier)

The conclusion is the same.

I think the 1% depreciation I put in for 99 year property has a big effect. But I think we must put something in else how to differentiate FH and LH? FH has much lower rental yield but FH property don't depreciate due to the lease running out.

yes, but the decision to sell should be based on current market price right? Because this is what you will get if you sell now.

Example, if one buys a condo at 1million dollars, 800k loan.

Now it is 1.3million. Should one sell?

I never rent out a condo so I am quite blur at this. But the following is my SIMPLISTIC calculation.

If you can rent the condo out at 3.5k/month= 42k/per year.

10% property tax=4.2k.
condo maintenance fees=$250*12=3k
miscellaneous fees (agent/repair/etc)= 2k??

So you end up with 35k per year, which is around 2.8% yield.

Let's say your loan is at 1.5% interest rate. Should I apply 1.5% to 800k or 1.3million? I think we should apply it to 1.3 million because if you sell the house at 1.3million not 800k. You can make use of the extra 500k. Example, you can pay of the 800k loan + 500k (of your other property loan)

So your yield is only 2.8%-1.5%= 1.3%. If condo is 99years, I would assume it will depreciate normally by 1% per annum (all other things being equal). So you end up with only a 0.3% yield.

A 0.3% yield is rather small to take such a big risk especially if you don't see any upside in the property market from now on. And furthermore if the interest rates rise any higher than 1.5%, it will make it not economical to hold on to the property. People will realise this and start selling....

Is my "theory" correct?