Cash Flow Diagram
I think most people who have read Robert Kiyosaki’s books (‘Rich Dad Poor Dad’ being one of them) would be familiar with the Cash flow diagrams below.
Well, as highlighted by Robert, we should be focusing on increasing a number of our assets. To populate the ‘Assets’ box with a long list of assets.
So I took some time off to think about my own cash flow diagram (see below).
Perhaps I can include my CPF and Unit trust funds in the Assets column … don’t think it will affect much. (But might make the list longer :p)
Like I mentioned in my previous post, I have thought about purchasing a second property. (read here).
When it comes to property, I feel like I am in the sandwich class. I have a fully paid HDB flat and will be turning 40 soon. My wife and I have savings and it has been a dream to own another property perhaps for stay or investment.
Having said that, I am not too sure if property makes a good investment in the future… yield has been really low (2% to 3%). Moreover, in Singapore buying a second property (or third etc) in Singapore is not that simple.
Yes, the Additional Buyer’s Stamp Duty (ABSD) is a killer. ABSD was not Government’s first Cooling Measure. Three versions of the Seller’s Stamp Duty (SSD) and three changes to Loan-to-Value (LTV) came before the first version of ABSD. The earlier measures were not bringing down prices, and Government needed to buy extra time for supply to come online.
The bugbear is that ABSD treats groups of people differently… and it seems like people like us (in the sandwich class) are at the losing end.
2nd Property an Asset?
An ‘asset’ is only an asset if it generates income for you. Doing my math, with the inclusion of Additional Buyer’s Stamp Duty, Buyer Stamp Duty and 20% down-payment (total 30%), and after considering the rental income and bank loan repayment – me and my wife would still need to fork out $3K to $6K per month to own a decent resale freehold property in a relatively good location.
The difference between a 2nd property and the property you are staying in is… that 2nd property is purely for investment. And frankly, I don’t particularly mind the value of my property dropping provided I am using it for my own stay. It is not a monetary investment to me (it is not even an asset).
But why lose money on a depreciating asset (eg. the one you don’t stay in, the 2nd property), whereby its market value keeps dropping, rental cash flow keep dropping + interest repayment keep increasing?.
Why pay good money for something that doesn’t put income in your pocket … ever?
Technically, this would mean that the 2nd property is not an asset. However, over time, once the loan amount is reduced and interest payment is accordingly reduced – there might be a chance that this becomes an asset.
And that is on top of any potential capital gain from the increased value of the property.
Another view is to stay in your 2nd property and rent out your 1st property. After all HDB apartments have a better yield. However, that would mean you are purely treating your 2nd property ( which could cost $1 to $3 million) as a consumption item eg. a liability. Now, I am not sure I want to do that. I am happy having a simple roof over my head.
The opportunity cost
Another thing to consider is that I would have to liquidate most of my stock holdings to pay for the duties and down-payment of this property.
I like my stocks and I like to hold it for many years. And after years of holding these stocks, I am beginning to see the slow increment in the dividend returns.
Just follow “Law”
Generally, in Singapore, the property market is not ‘free’. There are numerous regulations preventing speculation and the forming of ‘bubbles’ (overheating). This is to ensure that properties remain affordable for first-time buyers. There is a social and political agenda when it comes to property.
Personally, I don’t like to go against government regulations … I like to go with the ‘flow’ so to speak. I like to buy when nobody wants to buy and when the government is trying their best to prevent a collapse of the property market.
For instance, the Deferred Payment Scheme (DPS) was introduced to stimulate the lacklustre property market many years back.
In Oct 1997, the Government allowed developers to offer to purchasers of uncompleted private residential, commercial and industrial properties the option to defer part of the progress payments due after the initial 20% downpayment, to a later stage.
In Nov 2001, the Government further allowed developers to defer up to half of the initial 20% downpayment up to the issue of Temporary Occupation Permit or any time before that. These DPS were introduced at a time when the property market was lackluster and the economy was in recession.
On 26 Oct 2007, the Government announced the immediate withdrawal of the Deferred Payment Scheme (DPS) for property purchases in view of the strong economic and property market conditions.
The ticking clock and loan
I think there are a lot of people on the sidelines waiting for the TDSR or ABSD framework to be removed (be it Singaporeans, PR or foreigners).
People who are in their late 30s, 40s or even 50s would have felt the effect of time when they think about loans.
For buyers taking out a loan from a bank and with no other outstanding housing loans on a private property, the loan tenure cannot exceed 30 years; and the sum of loan tenure and age of borrower at the time of applying for the loan does not extend beyond the retirement age of 65 years. So if you are 40, you can only apply for a 25-year loan.
Yes, as with all “good” investments, time is the determining factor. The more time you have, the better (of course we never really ever know if the investment would turn out to be good). For loans, the longer the tenure, the lesser the monthly repayment (but overall amount considering interest might be more).
And this effect is magnified with leverage. But it is a double edge sword eg. when the investment turns bad, you get ‘burnt’ more due to leverage.
Property and emotions
When it comes to property, many people might be swayed by emotions too…
It is, after all, something we can see and touch and live in. We grow up in it, have friends over, memories are formed in this space. When you visit show-flats or completed units, you envision yourself living in it, you and your spouse growing old in it, your children running around playing there…. (I can’t say the same for stocks or bonds).
Like I say at the beginning of the post.. the 2nd property is for stay or investment. So I am as confused as to the real purpose of this second property.
From another view, it wasn’t that long ago when property staged a huge price recovery since 2009 / 2010. The stories of people getting rich through their properties can still be found.
Yes, people can get irrational when it comes to properties.
Hmm…. many thoughts for that one decision.