With the effects of the Coronavirus confining people to their homes, personal space suddenly becomes one of the most important things in our lives today. This confinement robs us of our connection to the world and traps us in the bubble of our residence. For some of us who are so used to going out and meeting people all the time, this space might be the only thing preventing us from getting cabin fever and keeping our sanity alive. After all, what kind of price do you want to place on your mental health?
Why Some Singaporeans Will Never Sell Their HDB Flats
I believe this is one of the main reasons why some Singaporeans prefer to keep their HDB flats and never sell them. Due to the lower PSF, HDB flats provide a more substantial size per dollar value. Besides, amenities are all around, and you can get to a nearby supermarket and other essential services on foot. Then for some people there is the sentiment of the HDB being your first home. Not to mention all the friendships you have accumulated over the years in the neighbourhood.
Can You Still Make Money After Paying The ABSD of 12%?
Although HDB flats, in general, may not appreciate as much as private condos, there is an intangible value attached to it. To some people, this is priceless. However, holding on to the HDB does present a problem when it comes to purchasing a property for investment. Firstly, you cannot “decouple” an HDB flat because a family nucleus is a criterion for ownership. Which means that if you are looking at a 2nd property for investment, you will need to come up with the additional capital to pay for the ABSD of 12%. Secondly, is it still worth it after paying this 12% tax? With the buyer’s stamp duty added in, you are looking at a sale price of 116% to break-even. And that is not even counting the interest charges. How to buy?
I believe there is a psychological barrier when it comes to the ABSD. For most people, they would deem that purchasing the 2nd property is not worth it, and it better to park your funds somewhere else. For me, I always look at the numbers because numbers will always give you a clearer picture.
Understanding The Returns And Costs Of Paying For The ABSD
If you are looking to purchase a 2nd property with ABSD, you must understand that your transactional costs are incredibly high. Every time you buy and sell, these costs will take away a significant portion of your profit. Which also means that whatever property you intend to purchase will need to have a more extended holding period. However, even with the 12% ABSD, this method of investment can still help some people reach their objectives. In this calculation, I will use the example of a 35-year-old couple who have finished paying off their HDB. This couple does have extra funds to invest in a 2nd property. So, is paying the ABSD still worth it?
Is Paying The 12% ABSD Worth It?
|Price Of Condo||$700,000|
|Rental Income (Yearly) (Estimated 3% of Property Price)||$21,400|
|Rental Income (30 Years)||$642,000|
|Property Tax (Yearly)||$3000|
|Property Tax (30 Years)||$30,000|
|Income Tax (Yearly)||$800|
|Income Tax (30 Years)||$24,000|
|Bank Interest Costs (30 Years)||$173,580|
|Agent Fees (30 Years)||$31,500|
|Gains After Minusing Off ABSD and BSD||$175,320|
Comparing Property Investment Versus Fixed Deposits
As you can see from the calculations, to purchase the $700k property, they will need to come up with $274k. Also, the cash flow position is negative, and you are looking at a yearly top-up of $7280. With a total investment of $493k, they will end up with an asset of $700k 30 years later. The returns do seem a little pathetic. However, if you were to consider the alternative in fixed deposits, you will realise that you will end up with the same amount of money. Of course, the interest rates I use for the fixed deposits are at 1.5% with an assumption that the net interest margin (NIM) from the bank is at 0.5%.
Magic Happens When You Reach The Retirement Age
The magic happens when the couple reaches age 65. If you were to continue leaving the $700k in the bank, you are only looking at a return of $112k over the next ten years. Or $933 per month, which may be enough to pay for all the groceries in the year 2050. However, the rental returns on your property investment are easily double this amount (assuming rentals remain the same as today). So instead of just paying for the groceries, there are so much more things you can do with this golden goose. This passive income together with the monthly payout from your CPF retirement sum, can mean an amazingly comfortable retirement.
Of course, you may argue that it might make more sense to save a lump sum and invest in the property later on. But then again, what is the probability that this $700k condo will remain at the same price 30 years down the road?
In all my calculations, I always like to use the worst-case scenario. So even if the property price and rentals do not go up in the next 30 years. Paying the ABSD can still make more financial sense than leaving this money in the bank. This is why it is always essential to understand what our objectives are and how to accomplish them. For an in-depth analysis of how real estate can fulfil your financial goals, do fill in the form, and we will get back to you shortly.
Article contributed by Jerry Wong.
Jerry Wong is a realtor with Propnex Realty. 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 making well-informed decisions that see their assets grow. Book a video call appointment and Jerry will share with you the following.
- How certain factors affect real estate prices. Why some condos can make a million dollars while others can lose that same million.
- Why timing is not the most important thing. Because some people can buy the same condo at the same time, but one end up making $100k to $200k while the other suffers losses of the same amount!
- Understanding your requirements and craft a solution for your real estate needs. Be it in the form of asset progression, tax planning, etc.
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