Earlier this year, I had the opportunity to meet up with this gentleman who is in his early 50s.
During the meeting, I found out he owns 3 properties!
Within his portfolio, he has:
- 1 bedder private condo unit located at Geylang (he recently sold it)
- 1 bedder private condo unit located at Sims Drive (currently still holding)
- 5-room HDB flat located at Serangoon that was fully paid off
Not bad right? Financially, I thought he was doing well. Most of us don’t even own 2 properties – let alone 3!
He met up with me looking to whether it was possible to restructure his property portfolio.
55-Years Old Is A Significant Milestone In Singapore
Now the age of 55 is a critical juncture in a Singaporean’s life.
When you turn 55, a Retirement Account (RA) is created for you.
Savings from your Ordinary Account (OA) and Special Account (SA) will be transferred to your RA to form your retirement sum, which will provide you with monthly payouts from your payout eligibility age.
After setting aside your retirement sum – only then! – you can withdraw your remaining OA and SA savings.
So for this multiple-property investor – he wanted to do something regarding his property portfolio before he turns 55.
He wanted to explore his options.
It is understandable – with our life expectancy in Singapore to be about 85 years old – he needs to secure his and his spouse’s retirement nest egg.
The Implications of Owning a Fully-Paid Off HDB Flat
For this investor – his current HDB flat is fully paid off. He actually paid it off about 10 years ago.
At this point, I can tell I am not the first agent he met. Why?
He was fully aware about the impact of using his CPF monies to pay off his HDB flat.
Back in 2009 – he used $400K from his CPF to pay off his HDB flat in full.
Here is the total accrued interest incurred over the 10 year period. Remember – he essentially he borrowed $400K from his CPF and decided to park it in his 5-room HDB flat.
A 5-room HDB flat in Serangoon should be able to fetch about between $500K to $510K. This is based on past transaction data.
As his flat is about 27 years old – it is considered an old flat. In the current market of decaying HDB leases, older flats are not as highly sought after when compared to newer flats.
So what does it mean for this investor?
It means it is likely he won’t be able to get a lot of cash proceeds from the sale of his HDB flat – majority of the funds will have to be returned back to both his and his spouse’s CPF accounts.
In fact, if it is sold at $500K – he might have to fork out $12K in cash back to CPF Board if the flat is sold at below valuation price.
Of course, he can write in to appeal to waive off the shortfall.
Downsizing To a Fully Paid Off HDB Flat
Assuming he sells of the HDB flat – he will have more than $500K sitting in his CPF accounts.
This amount of money can then be used to buy a smaller and cheaper HDB flat – which can be fully paid off.
Why is having a fully-paid off HDB flat important?
For someone of his age – sometimes you no longer want to think about paying monthly installments.
In the event of job loss or lack of employment opportunities – it is very important to at least secure the roof over his head.
But he has another private condo!
To be honest, both he and his wife are in a great financial position. That 1-bedder unit can provide some rental income.
However – he has to be aware of the danger of falling rental yield – there are a lot of new condos coming up.
As I wrote previously – there are more than 60 new launches just in 2019 alone.
Tenants will be spoilt for choice and might prefer to rent newer units.
So there is a danger here if he doesn’t take action fast.
His rental income might not be enough to cover the monthly mortgage and maintainence fees.
At the same time, 1-bedder units are usually not sought after in the resale market unless another investor chooses to buy it.
This is because majority of buyers in the private condo resale market prefer bigger units to stay with their family members.
Another Option: Buy a Brand New Condo Unit
This investor was actually considering another option. He wanted to know if it was a good idea to buy a 3-bedder unit for own stay with his family of 5.
They have more than enough sufficient CPF funds.
However, they will have to come up a substantial amount in cash in order to purchase a 3-bedder private property for own stay.
Remember, they have to service 2 mortgage loans – this includes the 1-bedder unit they already have.
So I told him that at his age – it will be quite a financial stretch.
They have to service 2 monthly mortgages which can be over-leveraging on them as they are reaching their retirement age.
Moreover – with the Total Debt Servicing Ratio (TDSR) in place – there is a loan tenure that they can borrow (65 years – 50 years) is only up to 15 years each.
(Both husband and wife are about the same age)
If they decide to purchase a new launch property for their own stay, they will also have to incur rental cost – they have to rent in the interim period while waiting for the new launch to reach completion.
Alot of cash have to be forked out upfront. This is not easy to do – especially since you already have to waive off losses from the sale of your HDB flat.
Is Being “CPF-rich” a Good Idea?
This is not such an easy question to answer actually.
Once you are above 55 years old, the best advice is to take less risks with your money.
If I were him – I would actually sell off all my 1-bedder units. With the rental yield dropping – it is not a good idea to hold on to these shoebox units.
Anything that is above the Full Retirement Sum – I would withdraw and park into another investment.
It doesn’t have to be property. I can park into a private annuity plan – to guarantee me income for life.
So this would be an add-on to my existing CPF Life future payouts.
Should I Own 2 Properties Then?
If I were to buy another property – I will let go of my existing HDB flat.
This is because 12% ABSD becomes very painful to pay.
There is no guarantee that your new condo you purchased can even appreciate by 12% to cover the ABSD.
But again, I have to caution prudence here because of their age. It will be a big stretch on their finances to buy a brand new condo.
Owning Multiple Properties Is No Guarantee of Financial Freedom
This was a very interesting case study for me. To be honest, they are in a good financial position.
They have a fully-paid 5-room HDB home.
Their CPF monies easily exceeds the Full Retirement Sum for their age cohort.
They have some rental income from their 1-bedder unit.
Unfortunately, they made some mistakes in their property purchases and loan repayment.
The mistakes made are:
- Paying off for the HDB flat too quickly without considering the consequences
- Didn’t cash out from their HDB flat earlier to maximize their cash proceeds
- Purchasing two 1-bedder units instead of buying bigger units (bigger units could have resulted in higher appreciation gains)
- Not monitoring their property prices and making exit plans
Of course, these are based on 20/20 hindsight – we are now just looking back and can see these mistakes clearly.
But had they talked to a property agent earlier – they would have certainly been cautioned about the impact of CPF accrued interest.
They would also have been cautioned on the impact of buying shoebox units. For this case, the 1-bedder units they bought did not result in a lot of appreciation gains.
To find out more on how to select a quality property for capital gains – read my previous article here.
In this case, this investor did not take up on my proposed solutions. I can understand why.
It is not easy to accept the potential losses incurred if the HDB flat was to be sold. But for as long as he holds on to the flat – the accrued interest will just continue to build up.
It is also not easy to accept that your 1-bedder investment units didn’t bring in the desired gains or investment returns you thought it can accomplish.
But sometimes, it is not the best idea to lock up good money in a lousy investment.
It is akin to throwing good money away.
Find out what is going on exactly in terms of your own financial numbers.
Transaction data cannot lie. Check if you are really in a good financial position – do NOT assume!
Property investment is not for everyone and can have unexpected consequences if you donʼt plan to invest carefully.
Over the years, I have helped my clients maximize their investment returns by helping them plan and restructure their property portfolio for maximum profit.
If you are keen to explore your property options, please do not hesitate to arrange a no-obligation consultation with me.