You may have seen Facebook ads on upgrading property.
One of them which was well crafted read “HDB becomes your most POWERFUL Asset".
Others were:
- Average income HDB owners move into a condo”.
- Asset progression! Secrets to property upgrading!
The advertisements are well designed. But there are potential issues financial with this idea and it does NOT suit everyone.
Some HDBs have huge book value gains!
This post is to illustrate some of my conclusions of how it works…
If you bought a BTO (built to order HDB) especially around 2005 to 2007, chances are that your house has appreciated in value because of the strong upward trend in property prices.
From 2005 to 2012, property price index gained about 20%p.a!!
That is why ads target HDB home owners who bought before 2013.
Assuming that the BTO was bought at $300,000 many years back, perhaps it can be sold off now at $780,000 on the open market.
Propertyguru and 99.co has lots of data to do case studies.
How much cash can you take out?
So would you be able to take out $480,000 in cash after selling?
The answer is not exactly yes but you will have quite a lot of capital on hand.
Attached is a short extract addressing “How much do I need to refund to my CPF upon the sale of my HDB flat?” from CPF website.
For HDB flats Bought with HDB Concessionary Loan, you will firstly need to settle
- Outstanding loan
- HDB resale levy (if any)
- The principal CPF amount (P) which you have withdrawn for the HDB flat
- The accrued interest (I) which you would have earned if the savings were not taken out from your CPF account
How much cash can you take out?
If you sold your HDB, the $780,000 will firstly pay off the outstanding loan.
Assuming that the remaining loan with interest is at $150,000, that will leave you with $630,000 remaining!
Next, lets assume that you have used CPFOA to pay $150,000 of your loan over these years. The next step is to return that $150,000 to CPFOA plus the accrued interest (which we assume to be $30,000 in our example).
That means a total of $180,000 will be returned to your CPFOA.
The remaining house proceeds will be refunded to you IN CASH!!
Making it Rain money gif
That works out to be a whopping $450,000 which is quite a nice sight to see in your bank account!
WOW!
Of course there are other fees such as agent fees involved not mentioned in this rough concept.
Asset progression, buying 2 condo is possible
Asset progression comes in to tell you how you can used your $450,000 cash and $180,000 CPFOA into 2 private properties.
Absolutely possible at the purchasing point. It is the "secret in property investing..."
You avoid ABSD also when one property is in your name and other in your spouses.
But owning a property is a long term game.
It is a long term affordability game and a loan burden that you'd need to manage properly.
If you would like to find out how to calculate your mortgage better, this post below has strategies!
HOW TO CALCULATE MORTGAGE AFFORDABILITY IN 2020!
Find out more on based on affordability calculators and how to use them in the post above
What you need to be cautious about is - long term affordability
But property prices do NOT always go up.
There can be long periods of downtrend. Take a look at this chart below.
Property price index was down for such it long time.
It took 9-10years if you invested at Jun1998 to just to get to 2.5%p.a growth! (which is merely CPFOA interest rate.)
Property prices are NOT always rosy.
There is expected to be an oversupply of condos in the next few years.
You need to have serious holding power.
Australia for example is experiencing many quarters of property price decline.
PS: Orchard road enbloc PSF in 2007
Year 2007 is a mere 13 years ago.
Do you want to know how much has property prices have appreciated since then? =)
Below is a post that Orchard enbloc went ONLY at $1,040psf! Shocking right!
If anyone tells you pasir ris today at $1,500psf is a steal, maybe reconsider the perspective.
Conclusions and some other concerns
PS: If you are also a parent and keen to learn on finance, join our Facebook group below
Investing in this "Asset progression" method can suit you if both you and your spouse draw good income.
Mortgage affordability is not an issue.
But it is concerning when ads target couples without strong income. Property investing is then depicted as the solution to "financial success".
I firmly believe affordability is very important and in this video, I'd explain affordability deeper.
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Last updated on February 10th, 2020 at 04:31 pm