Important Disclaimer:
The conditions for real estate eligibility and the layered fees of different types of properties in Singapore make it extremely complicated for the buyer to self-evaluate. Please read this article to completion. And I recommend doing your own due diligence by speaking to MULTIPLE real estate advisors before making a decision.
You hear it on the news, on the radio, or any time inflation is mentioned.
Yet, somehow, some of us can go through 20, 30, 40, 50 years of our lives never looking into it. If you think this doesn’t apply to you, it especially applies to you. So here’s a foundational crash course.
I’ll try my best to keep the numbers to a minimum.
A staggering amount of people I speak to believe that the purpose of a loan is to delay payment of the total cost of the property.
This means, when they initially refuse to speak to a real estate agent/advisor, their internal math goes like this:
“Before buying a property, I must save up enough for the downpayment, and more, so that in the next few years, I can pay off the full amount of the remaining loan as fast as possible, so that I incur less of the total loan interest. And therefore pay as little as possible for the entire property….”
..there’s more…
“…and if I decide to, or need to sell in the future (after I’ve fully paid for the property), hopefully the sale price will exceed the amount I’ve paid till date.”
This is where most of us begin; and it’s perfectly logical. Pay off your loan so that you don’t incur extra costs (ongoing interest) and hope to sell at a higher price.
Now at this point, a few stubborn souls (you know who you are) will say this:
“A home is for staying, I don’t care about building capital, and I will always have the option to sell once I pay off my loan.”
“I’m young and know what I want, and I’m not greedy like other people. I just want my first property to be my forever home.”
“I’m old and have no more options, I don’t know if I can afford to move.”
You’re absolutely right!
A home is for staying and not for building capital, until you’re forced to sell it for an emergency, or at a loss, because the math is overlooked.
You’re young and maybe you know what you want now, but you don’t really know what life has in store for you 10, 20, 30 years in the future. Also, this is likely not the first time you're hearing this piece of advice.
You’re old, sure, and you don’t know if you can afford to move. That’s what a consultation is for. To discover and expand your options.
This is not about greed. It’s about having a contingency plan.
And what’s wrong with a contingency plan?
Everyone can do this next part if done early. Here’s what you plan for.
Instead of paying off the full loan as fast as possible. Pay off the monthly loan consistently, and sell optimally when the property goes up in value. This will typically be 5 years after MOP (HDB), or 3 years after SSD (Private).
Some conditions to take note of:
1) Does your property grow in capital during that holding period?
2) Will this specific property grow in value in the next 5 to 7 years?
3) Which properties could you see yourself moving into once you sell the current place?
4) Are you able to have a buffer period of 2-4 years more if (for some unexpected reason) you’re not able to sell at the optimal capital gain after the minimum holding period?
5) And much more…
These are questions which a reasonably adept real estate agent/advisor can answer. Anticipating multiple scenarios to ensure a smooth entry and exit to secure a growth in capital.
Scenario 1 (Typical):
Say you do the typical thing and buy a property worth $600,000; you pay a downpayment of 25% and take a loan of 30 years (tenure). But you pay it off in 5 years. Without doing the math, in total, you fork out about $740,000. (This also means you actually do have to have that amount of money within those 5 years). If you have to sell that property any time in the future, the amount over $740,000 + fees will form the sale proceeds.
Scenario 2 (Savvy):
In the second scenario, you speak to a real estate agent/advisor and with multiple considerations, you purchase that same property (at $600,000) with a plan, and ability, to move out in 5 to 7 years. You pay the same downpayment of 25% ($150,000) and take the same loan of 30 years (tenure). This time, you only pay off your monthly instalments as the months go by. Assuming you sell in the 5th year, you would’ve only forked out about $300,000 till date. Upon sale, the remaining loan will be paid off (side note: don’t try to do the math without a real estate advisor or banker, there are hidden fees) and the balance returned to you as your sale proceeds.
In Scenario 1 (Typical):
You’ve paid $740,000 in 5 years. Upon sale, let’s assume sale proceeds of $40,000 after fees. Your Return on Investment [R.O.I] is ($40,000/$740,000) x 100% = ~5.4%. Put into words, you’ve spent $740,000 to gain ~5.4%.
In Scenario 2 (Savvy):
You’ve paid $300,000 in 5 years. Upon sale, let’s assume sale proceeds of $40,000 after fees. Your Return on Investment [R.O.I.] is ($40,000/$300,000) x 100% = ~13.3%. Put into words, you’ve spent $300,000 to gain ~13.3%.
In Scenario 2, you used less capital (and less stress) during those 5 years to earn almost 2.5x the capital gain (13.3%/5.4%).
If you haven’t realised what this means yet. It means, this same owner could have bought a larger property and gained much more than $40,000.
And if you’re young and thinking you still want that forever home now… how about moving a couple of times during your youth so that your future forever home is worth $1,000,000 and up, is bigger in size, in a better location, paid for with less financial stress, and much more benefits.
This is how it works across the globe.
This is what it means to do real estate right.
