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How you can Win with HDB

Despite this, HDB can be a winner for you and me.

The key thing is to understand some fundamental aspects of real estate, wealth management and what you really want.

Let me go through some ways. Some of them are orthodox, some of them are, well, not advisable. Let’s see if you can make out which is which.

Speculate your way to Great Profits with HDB

Whether it is sales of balance, build to order (BTO), resale flats, you can benefit from buying low and selling high.

The late minister mentor have already laid out the formula, and that is how he expects us to play the game.

You know that within the first 25 years the depreciation value of leasehold is negligible. This means that is the window for holding your HDB flat and selling it off.

Property moves in cycles of boom and busts, so if you time your purchase, lock in a low price, then wait for price to appreciate then sell off, you could make a profit.

Do note that there is a 5 year lock in during the minimum occupation period (MOP) so you have to get your timing right.

After which, you could either move into your parents place, or rent for the time being in the hopes that you can capture another downturn and purchase flats or private property cheaply.

If you time your purchase well, and lengthen your loan, you may be able to get a very good leveraged internal rate of return.

On 80% leverage, if the growth rate during the period is 3%, your internal rate of return is 9%, if the growth is 5%, the internal rate of return is 15%. 7% rate of return will be even more dramatic.

For some, they might even time it so well, that they applied for a second BTO, and was able to fully pay off the second BTO with the gains from the first BTO. The biggest benefit is that they do not need to service the mortgage long and have a good flat to live in. Do note that if you sell off a subsidized flat and then buy another subsidized flat, you need to pay a levy. However, if you time it well, your gains might be more than this levy.

Separate Wealth Building from the Place you Live.

One of the reasons for the big outcry was because many have sought to use their home as a wealth building instrument and a place to live.

They will buy, upgrade, then upgrade, until they become very asset rich.

This will not be a problem when it comes retirement time, if the assets remain very valuable AND they have a way to cash flow the place that they live.

Some of the ways to cash flow your home is:

Downgrade to a smaller flat (check out my article on whether it make sense to downgrade from your more expensive HDB flat to a cheaper one)
Carry out HDB’s Lease Buyback Scheme
Rent out your flat and stay with children
Turns out, many folks do not like any of the three options! And they run into a problem of getting adequate cash flow for their retirement to supplement their CPF Life.

My suggestion: Separate out your dwelling objective from your goal of building wealth.

This can be forming a portfolio of stocks and bonds, putting your money in endowment and whole life plans, investing in an investment property.

In this way, you don’t run into a problem of caught in a dilemma of having no place to stay, intruding your privacy and not being able to cash flow your home.

The able table is a list of BTO for the past year and a half.

You can right size your home for your needs, and choose a dwelling that fits your budget, and then put the rest to build up your wealth machines.

The prudent benchmark is:

Don’t spend greater than 30% of your combine annual gross income to service your mortgage
Don’t spend more than 5 times your combine annual gross income on your home
Singapore flats are very spacious and you can purchase a BTO in a not matured area for $260,000 for 4 room or $170,000 for 3 room.

Treat the dwelling like what it is meant for: Dwelling.

A couple who earns $3500/mth $3000/mth each would qualify for the BTO, and wait 3 years to get the keys. Their combine annual income is $78,000/yr with (1 month of bonus). The 4 room is 3.3 times their income, and 3 room is 2.1 times their income.

In the 3 years, their salary could have grown, but had it not, they would have accumulated $58,580 in their CPF OA. Their mortgage may be $201,420 and $111,000 respectively.

Based on their earnings power, they could channel $31,200 out of $62,400 in take home pay (50%) to clearing the loans. This together with the CPF OA, they could channel $50,540/yr to clear their loan in 4 years.

By the time they are 32 year old, they would be debt free, own a dwelling for 99 years and have 34 years to build their wealth unencumbered.

The able above shows the progression of wealth, as the couple could devote all their CPF OA and $25,000 to building wealth. The rate of return is realistic.

And we have not factored in any income increases, CPF SA.

Rent out your HDB flat

HDB flat in Singapore have a better rental yield then condominium. It is likely due to the fact that their value or cost price is lower.

If you are merely living in, your returns are the assumed rental earnings potential of the HDB flat, not the actual earnings potential.

After 5 years MOP, you can rent out the full HDB flat. You could also rent out one of your room if its 3 room, and 2 rooms if it is 4 room and 5 room.

It would be better if you can make your HDB into an AirBNB. However, this is not allowed.

If you purchased a HDB flat with short land lease left, with the expectation to rent, you have to ensure it is a good return. By that, I meant the location demand, the amount of work you need to put in, and whether the place factors in a premium in demand or there is some form of mis-pricing.

When it comes to rental, whether its freehold, long or short land lease gets thrown out of the window. What is more important, I feel is the proximity to places where people will pay for the convenience.

If you have 2 general factories sitting next to each other, one is older, with 10 year land lease left, and the other is newer with a freehold title deed. The newer factory will rent for a higher rent, but if you upkeep the older one, the rent is not going to be much different.

However, because you paid less for the older flat with only a 10 year land lease, your net rental yield (after maintenance, insurance, property taxes) is far higher. That is one of the reason the industrial REITs could achieve such high CAP rates (take a look at some high yielding industrial REITs and other REITs on my tracker here)

The Bottomline

While we can sit here and debate about whether all the old flats should or will be SERS, it is your money and your life at stake here.

Before purchasing something that cost so much money, why not invest in some time to study what are the real considerations. If you did and ignore that depreciation is a factor and that the government will save you, then you live by your choice.

In this environment where there is a lot of liquidity in the world, such that people are putting their money into properties, we get into a situation where many countries real estate is getting to the edge of not affordable, if not unaffordable.

Places like Hong Kong, Vancouver, Toronto, San Francisco Bay Area, Sydney and Melbourne have a lot of jobs, but the prices of private housing puts stress on people.

While our homes may be leasehold, if you purchase the right size for your level of family income, you have a place where there are jobs, security and it does not cost a bomb.

If you have other ways to win with HDB do let me know.