Is this for real? Is this a scam? After all, there are plenty of advertisements like that on facebook. So, how exactly do you buy a condo with little or no cash upfront?
First of all, let’s examine MAS’s regulation of purchasing a private property by a first timer who is a Singaporean. We use this as an example because this group of buyers pay the least stamp duties and have the highest loan to value(75%).
Here’s the breakdown of what is required to purchase a $1mil property
- 5% Cash upon booking of developer’s unit. Or 1% Option fee and 4% exercise fee for resale units. Total cash required is $50k.
- If you are purchasing a developer’s unit, 15% cash/CPF is due within eight weeks from option day. The remaining 5% is called once the project finishes the foundation. The time frame can range from one year later or earlier, depending on the stage of construction. For resale units, 20% cash/CPF payment is due upon completion, usually ten weeks from exercise date. Total cash/CPF required is $200k.
- Not forgetting IRAS, the total stamp fees for this $1mil unit is $24,600. Although you can use CPF for this, you will still need to prepare the cash first before CPF reimburse you.
- The total for the initial amount now comes up to $274,600. Even the primary cash component required is $50k. So how to buy this condo if you have little or no cash?
Well, it is technically possible. The key point lies in the wording, little or no cash upfront. Yes, you don’t even need to touch a single cent in your current bank account. But the money still has to come from somewhere right? Well, it comes from the very asset you are staying!
Let’s assume you bought your HDB flat 12 years ago in 2006 at the age of 21. Average psf islandwide was $231psf. So a 4-room HDB of 92sqm would go for $228,690. Fast forward to today, the average psf is now $420psf*. So the same 4-room would go for $415,800, giving you a net profit of $187,110. Of course, this amount may vary, depending on the interest costs as well as any grants you might have gotten from HDB. For simplicity sake, we will use the sales proceed of $400,000 after selling this HDB.
12 years is a long time. For some people, it is possible to pay off your HDB loan fully. So at the age of 33 now with $400k in cash and CPF and a combined household income of $6000. Purchasing this condo with zero cash upfront is possible.
In some instances, it is even possible to dispose of the HDB and acquire two private properties. Of course, this largely depends on two things. How much did the HDB gain? As well as the income level of both the husband and wife.
Is This A Good Idea?
Well, HDB Prices have fallen from the peak in 2013 at an average of $469 psf to today’s price of $420psf. Around a 10% drop in value, While condos went the other direction from an average of $1528psf in 2013 to $1676psf* in 2018. An increase of around 10%. So by selling the fully paid HDB back in 2013 and using these funds to buy a condo, you are leveraging and getting better returns in an upward market.
- Assuming you are holding on to the HDB and did not sell the unit. Paper loss of the 4 room is $415,800($420) – 464,310($469psf) = -$48,510
- Let’s assume you sold this HDB and bought a $1mil condo. The $1mil condo in 2013 is now worth $1.1mil. Not only did you save your principal amount, but you also made another $100k. Total paper gains would be $150k.
However, do take note that because of leverage, this can work against you if prices fall. In an earlier blog post to understand when leasehold properties depreciate, there are some condos which suffer significant price drops. Purchasing those will mean that your losses are higher than just holding on to the HDB. In some cases, if you sold your HDB and bought two such condos, your paper loss might amount to $400,000 which is the value of the entire 4-room HDB.
So going forward, what should you do? Keep your HDB? Sell your HDB to purchase a condo? If that is the case, what type of condos should I look at to minimise the risk of price depreciation? To understand more, do contact us for a free consultation to understand the relationship of how certain factors affect prices so that you can make better-informed choices.
*Average PSF from 1st January 2018 to 28th October 2018.
Read Our Other In-Depth Resale Analysis Here!
Article contributed by Jerry Wong
Jerry Wong is a realtor with Huttons Asia Pte Ltd. He loves coffee, cookies and condos. Most importantly, he loves connecting people to properties and gets enormous satisfaction when they acquire their dream home or make that capital upside in just a matter of months. Buy Jerry a coffee, and he will meet up with you on a 1 to 1 session to share the following
- How certain factors affect real estate prices. (Using historical transactions as references)
- Applying lessons from history to determine if a condo has the potential for upside or not. These condos can be those under construction, resale or the very one you are staying in right now.
- Or just prepare the toughest question you have on your mind! If it is interesting enough, the answer will be in a blog post and shared with everyone!
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