REVISIT SELL ONE BUY TWO
“Sell one property buy two” is nothing new, but it has been in the spotlight recently. Some pundits have highlighted the risk of such strategy and cautioned buyers to exercise caution and prudence.
Significant risks include loss of jobs and depreciation in property value. Our current slow economy has accentuated these risks.
As in any investment, there are inevitably risks. But some risks can be minimised with proper planning.
Let us take a closer look at this whole concept of Sell-One-Buy-Two.
In an increasingly affluent nation, many Singaporeans aspire to own more than one property.
Owning more than one property makes our money work harder for us. Besides collecting rental income, there is also a chance to make capital gains, with the correct entry and exit strategies.
By leaving our money in the bank, in reality, we are suffering loss through inflation. The future value of our dollar will be so much smaller than the present value. So, we need to find ways to make our money grow at a faster rate than inflation.
Property investment is one of them.
With proper planning, we can then enjoy our retirement.
“Owning more than one property makes our money work harder for us. Besides collecting rental income, there is also a chance to make capital gains, with the correct entry and exit strategies.”
WHY OWN TWO OR MORE PROPERTIES?
Why buy two or more properties? You need one for your stay and the others for rental income.
The investment property not only can earn you rental income, but you can also sell it at the opportune time to realise capital gains. You can’t monetise the house you live in since you need a roof over your head. When the market goes up or down, it is only paper gain or loss.
Historically, the market trend moving upwards. With our land-scarce island and a targeted 6.9m population by 2030, prices will appreciate in the long run. Holding power is key. Land prices are ever-escalating, so are labour cost and material cost.
When a 99-year leasehold project in a sub-urban area first sold for $1,500psf, many were sceptical. Today, the new norm is $1,600-2,000psf. Who would have thought EC condos are selling like hotcakes at more than $1,000psf when it was only $700psf+ not too long ago?
Prices for HDB flats, on the other hand, have been heading south since it peaked in 2013. A foremost concern is the 99-year leasehold issue of HDB flats.
WHY SELL ONE BUY TWO?
How did Sell-One-Buy-Two become so popular? It boils down to tax-saving.
This strategy usually targets at HDB owners.
If an HDB owner aspires to own multiple properties, what are the options?
Option 1: Keep the HDB flat and buy an investment property
To own a second property by keeping the HDB flat, a 12% Additional Buyer’s Stamp Duty (ABSD) applies.
12% is a hefty amount! For a $1m property, you have to pay an extra $120,000 of ABSD.
This additional cost is painful!
And it is only payable by CASH. No bank loan is allowed for ABSD.
“How did Sell-One-Buy-Two become so popular? It boils down to tax-saving.”
Option 2: Keep the HDB flat and buy a commercial/industrial property
Currently, there is no ABSD payable for a commercial or industrial property. Most Singaporeans, however, stay away from them because of unfamiliarity.
While there is no ABSD, sometimes buyers have to pay GST, which is 7% currently.
Most industrial properties are only 30 to 60 years, while offices and shops are out of reach for most small investors.
Another factor to take into consideration is you cannot use CPF for financing.
Option 3: Sell the HDB flat and buy two private properties under two different names
Since decoupling is not possible for HDB owners, unlike private property owners, a very viable option is to sell the HDB flat owned by a couple and then buy two private properties in each name. In this way, each of the spouses will have only one house title to their names, hence avoiding ABSD.
Now you can understand why there is so much hype to this method.
BASIC CRITERIA FOR SELL ONE BUY TWO
Sell one buy two is not for everyone.
It is of utmost importance to do the sum properly and to consider every factor to minimise the risk factor.
Besides, not everyone has the risk appetite to take the plunge.
Recently, I worked with a young couple in their mid-thirties. After selling their fully paid-up EA flat, they bought two condos, with enough to spare for a third property. They are considering buying for their young daughter under a trust.
Not everyone is as fortunate as them.
So, what are some necessary conditions that must be met to consider for sell-one-buy-two candidates?
Condition #1: Healthy sales proceeds from the sale of the HDB flat.
If a couple has bought their BTO flat, usually they would have purchased low and sell high.
Buying at a low price also means lesser outstanding loan.
Also, not keeping their HDB flat for too long results in a relatively smaller amount of CPF accrued interest.
These factors would generally translate into higher cash sales proceeds. A high amount of available cash is crucial to pay for the down payments for two private properties.
Condition #2: Husband and wife both have stable jobs and relatively high incomes.
No one can guarantee they will keep their job indefinitely.
Buyers need to be very disciplined when it comes to their spending and savings.
Building a healthy cash reserve before they buy their investment property will reduce the amount of loan required.
Taking a lesser than maximum loan-to-value (LTV) can give a positive cash flow from the rental income.
A smaller monthly mortgage payment will reduce the stress when the property is not rented out.
Condition #3: Ideal age range for husband and wife between 35-50.
35-50 is the age range when one is at the peak of their career and earning power. Also, a couple would have accumulated enough savings for their investment property without entirely relying on housing loans.
The cash portion usually is the biggest hurdle when it comes to investment. Solely relying on the sales proceeds from their HDB flat to fund for two properties at times can be challenging.
On the hand, when the couple is past their 50s, the risk appetite may be reduced as they plan for their retirement. To take a loan up to the maximum age of 65 means a shorter tenure and higher monthly payment. In this kind of situation, the couple must have a significant cash reserve.
Condition #4: There should be enough CPF or cash reserves that can last for a year
Fundamentally, property investment relies on leveraging. To put in layman’s terms, it means borrowing other people’s money to make money. But over-leveraging can be risky.
To lower this risk, buyers should set aside enough reserves to meet the monthly mortgage payment and expenses for unforeseen circumstances such as job retrenchment or financial downturn.
Most buyers rely on their CPF to fund the house payment. Loss of job means no CPF contributions. It is not wise to use up all the available CPF to pay for the house. Always prudent to keep some for rainy days.
A REAL CASE OF SELL-ONE-BUY-TWO
David and Susan are 36 and 34, respectively.
They own a fully paid-up EA HDB flat. David’s CPF OA accounts balance is $100,000 and Susan $80,000. On top of that, they have $100,000 savings in their bank accounts.
The couple sells their flat for $530,000, of which:
- $180,000 of CPF plus accrued interest goes back to David’s CPF
- $150,000 to Susan’s CPF
- Cash proceed: $200,000.
David draws a salary of $8,000.
With no outstanding loans and debts, he is eligible to take a mortgage of $1.048m.
He buys a $1.2m 3-bedroom condo under his name for own stay with a loan for $900,000 for 25 years @ 2% interest.
Susan’s salary is $6,000 and can borrow $800,000.
Using her name, she buys a 1-bedroom investment property for $800,000.
She takes a 30-year loan of $600,000 @ 2% interest.
As seen from this example, David and Susan, from the sale of their HDB flat, now own two properties.
They have not touched their cash reserves of $100,000.
Furthermore, they have an outstanding $60,000 cash from the sales proceeds.
With two properties to their names, the total monthly mortgage payment is $6,031.
After offsetting from their combined CPF contributions of $2,520, projected monthly rental of $2,500, they have to fork out $1,011 a month in cash ($1,411 if including $300 monthly maintenance fee).
They can choose to reduce this amount by using up more of their cash reserves and take a smaller loan.
Their money in their CPF is a buffer should they lose their jobs.
IT IS POSSIBLE TO SELL ONE BUY TWO
As you can see from this example, it is possible to sell one buy two, provided some underlying conditions are satisfied.
No ABSD is payable.
The main difference before and after is David and Susan have moved from owning an HDB flat to two condos.
Based on current market trends, their HDB flat is likely to depreciate over time. In contrast, their condos are likely to appreciate.
With the right exit strategy, the couple may sell their investment property in the future to realise capital gains. In the meanwhile, their rental income is helping them to pay for the property.
A WORD OF CAUTION ABOUT SELL-ONE-BUY-TWO
Every case is different. This example may not apply to you.
Not everyone has the risk appetite to take the plunge. And everyone is optimistic about the future of the property market.
It’s all right if you think this is not for you.
If, however, you are interested to know if it is possible with you, please contact me for a non-obligatory discussion.
Associate Deputy Group Director
OrangeTee & Tie Pte Ltd
Danny has been a licensed real estate agent since 2005 and has helped many in Property Wealth Planning.
Do drop him a Whatsapp message or send him an email for a discussion if you are planning to grow your property wealth.