HDB or Condo As Your First Home? 7 Areas To Consider

If you are considering whether to buy HDB or Condo, you are in the right place!

*Even if you already have a home currently, do read further as it will benefit you as well.

Most of us buy into our first property without putting much thoughts on its future implications.

 We will probably think about property investment only 5 – 10 years later. However, this may not be optimal in the investment perspective. Below are 7 areas you should consider before rushing to decide between HDB or Condo.

Singapore Real Estate Return On Investment ROI 

So you may ask why invest in Singapore’s residential properties. To answer that, we need to understand the Return On Investment (ROI) that we can expect.

The key element of real estate investment is leverage.

Today’s Singapore market we are looking at 3% rental yield.

Meaning for $1,000,000 property, we will expect 3% of $1mil = $30,000/year rental income.

However, our initial investment is only 25% (75% maximum loan per current regulation). So our cash-on-cash return is actually $30,000 / $250,000 x 100% = 12%.

*Note: actual returns range from 6 – 12 % over the investment term. For discussion simplicity we will use this general calculation for illustration purposes.

Due to other cost involved, mainly from the bank’s interest, we are estimating an average of 9% long term ROI. For more information on the detailed calculation, do check out this article.

Of course, the ROI can be higher or lower depending on the investment strategy. This is in addition to selecting the right properties of desirable qualities, as well as potential capital appreciation.

Regulations And Future Implications

Deciding between buying HDB or Condo is more than just weighing your needs or wants. Your decision today will affect the options available in the future.

Imagine you and your spouse are 30 years old today and are applying for HDB BTO, which takes 3 – 5 years to build. You will also need to fulfill the minimum occupation period (MOP) for 5 years. Hence, you will be 38 – 40 years old when you can start looking for investment property.

 What are the options next? Below are some potential decisions you will make in the future.

1. Buy a Condo for investment, and continue staying in your HDB. 

The main payment requirement will be as follow:

  • Buyer Stamp Duty (BSD) of about 3 – 4% of the property value.
  • Additional Buyer Stamp Duty (ABSD) of 12% for the second property.
  • Initial down payment 25% of the private property value.

However, most of the time the ABSD is considered a hefty sum for many and will reduce your ROI.

2. Buy a new Condo and stay in the current HDB till the Condo finish construction, then sell off your HDB. 

  • Pay BSD of about 3 – 4% of the property value.
  • Pay ABSD of 12% for the second property. If you are selling off your HDB within 6 months from the completion of the new private property, you can claim back the 12% ABSD from Inland Revenue Authority of Singapore (IRAS).
  • Pay initial down payment 25% of the private property value.
  • Clear off existing HDB loan. Assume you do this immediately after your 5 years MOP, on average probably there will still be at least $100,000 outstanding loan, which you will need to clear first for the bank to grant a 75% loan for your next property.
  • Assume a $1mil private property, the net result is, you will need to come out at least $500,000, which is quite a hefty sum, in order to proceed with this plan.
  • Due to IRAS requirement that the transition from the first property (HDB) to second property (private) has to be matrimonial (i.e. both husband’s and wife’s names must be in both properties) in order to claim for the ABSD refund later on, this will set us back for additional 3 – 5 years for the new private property to complete and sell the HBD for ABSD refund. This means that you and your spouse can decouple your name around 41 – 43 years old, before purchasing a separate property for investment purposes.
  • Based on the age, you all can probably take advantage of 1 – 2 times of the real estate cycles for investment. This is due to the loan amount decreasing with age, as you will see in the next section,

3. Sell current HDB and buy a new launch Condo. Stay in a rental unit until the private property finish construction. 

The first two scenario above requires hefty capital outlay that’s easily more than $500,000, which can be very challenging for many people.

Alternative option will be to sell off your HDB first to avoid paying the ABSD and having to finish paying off the outstanding HDB loan.

However, this option will incur additional rental expense for example $2,000/month x 12 months x 3 years = $72,000 while the new Condo is building.

4. Sell current HDB and buy a resale Condo.

Here you may be able to sell existing HDB first and buy a resale private property concurrently by managing the timeline for the finances and logistical movement, to avoid having to pay the ABSD.

However, for this case you will likely incur a higher renovation cost estimated to be around $50,000 – $100,000.

Also, you will have to shop around more to hunt for a unit with good price to hedge against first owners who can afford to sell at a lower value in the future.

5. Buy a new Executive Condominium (EC) and continue to stay in the current HDB till the EC finish construction. 

  • Pay the normal BSD of about 3 – 4%.
  • Don’t need to pay ABSD of 12%
  • Pay initial down payment 25% of the EC property value.
  • Option not to clear existing HDB loan first.
  • Upgrading to EC will be easier due to the comparatively lower capital outlay. However, the important thing to note is that this will set you and your spouse back for a longer period assuming 3 – 5 years construction time, plus another 5 years minimum occupation requirement. You will be around 48 – 50 years old before you all can decouple and purchase another private property for investment.
  • The outcome is that you and your spouse collectively can probably take advantage 1 time on the real estate cycles for investment, due to the amount of loan decreasing at a more rapid pace at age 50.

Key Takeaways: 

Above are just some potential paths and challenges that you and your spouse may face. Real estate investment is simple but because of the current market and regulatory condition, there are numerous factors involved that can trip us out of a good investment plan and timeline.

The key is time. The next section will provide you with more numerical illustration to have a more in-depth understanding of the effect.

How Future Loan & Leverage Affects ROI

One important thing to keep in mind is the way banks assess the loan amount as such:

  • loan amount increase as income increase.

  • loan amount decrease as age increase (or loan tenure/duration decrease).

 It is critical to understand how the second point can affect our potential ROI in the future. Consider below scenario.

For simplicity, assume your income is $6,000 when you are 35 years old and remain the same till you retire. Assume no capital appreciation of the property.

 We can observe that because of the decreasing loan as you age; there are 2 scenarios that can probably happen:

1. As you age, due to the decreasing loan, more capital outlay is required, to invest in the same property value of $1mil over the years. Because of that, average cash-on-cash ROI % decreases. Of course, accumulated total rental decreases due to shorter investment horizon.

Chart A – Same property value of $1mil considered for investment at different age

HBD or Condo - Same Property Value

2. If you consider reducing the value of the investment property to match the decreasing loan amount as you get older, while the ROI% can stay the same, accumulated total rental decreases again due to shorter investment horizon.

At age 50, indicated by the blue arrow, the loan decreases to about $500,000 which makes it probably the last time you can take advantage of the maximum leverage for your property investment.

Chart B – Decreasing property value to match 75% Loan-To-Value ratio based on the decreasing loan amount at different age

*Note the actual return is lower for initial years due to higher interest payment. Estimated cash-on-cash return range from 6% – 12% over the duration, average to about 9% returns annually.

Key Takeaways: 

  • You can be in a better position in the future for property investment if you plan ahead.
  • If affordability is not an issue, you may consider going for a Condo to lay the path for future investment property. This will allow you to take advantage of the time and leverage effect to maximize your ROI in absolute and percentage terms.
  • Due to the rapid drop in loan amount as we age, the last investment we can make will probably be around 45 – 50 years old. We do not have the next 30 years to take advantage of the real estate cycles. Structuring right for your first property will give you a longer time to grow your wealth ahead of your peers.

How Much You Can Loan 

The next question you will ask is how much can you loan?

The main difference for the loan assessment between HDB and Condo will be Mortgage Servicing Ratio (MSR) and Total Debt Servicing Ratio (TDSR).

Currently for HDB loan, it is subject to MSR of 30%, meaning you can use up to 30% of your monthly income for mortgage payment of your HDB. Note that currently the maximum loan tenure for HDB is 25 years.

For illustration, assuming a monthly salary of $5,000, you can loan a sum of about $300,000 for your HDB.

For private property, it’s not subject to MSR, but it’s subject to TDSR of 60%, meaning you can use up 60% of your monthly salary for mortgage payment of your Condo. This assumes you have no other loan. Note that currently the maximum loan tenure is 30 years if you want to qualify for the 75% Loan-To-Value (LTV) limit.

For illustration, assuming a monthly salary of $5,000, you can loan a sum of about $668,000.

 From the above examples, it should be able to give you a rough idea, or at least by pro-rating, what is the potential amount that you can loan.

For more accurate and professional assessment of the loan that you can take, as well as compare loan packages from the various banks in Singapore are the best, check out our technology partner SRX to assess your loan in less than 5 minutes and select the best bank loan package for you.

Saving Up For Downpayment 

Once you have gotten the loan assessed, the next part is definitely to check on your savings in cash and CPF.

Generally you can use all CPF to pay for the HDB, even for the 10% down payment.

As for private property, if you are qualifying for 75% LTV, the remaining down payment should consist of at least 5% cash and the 20% can be a combination of cash and CPF.

 Indeed the down payment for the private property of 25% is significantly more than the 10% required for HDB. If you can take a little more time to save up for a Condo, it is worth considering to do so, given the long run investment prospect.

Current Property Value

For those who already have a home, the first step will be to check on the market value of your home. And you can get an instant estimated value for your home here.

Then check on your outstanding loan for your current home.

Finally, you can estimate the potential proceeds that you can unlock from your current home to start planning on restructuring to add an investment property your portfolio.  

Trade-Offs 

We have discussed substantially on the investment perspective of real estate and equip you with the knowledge to make a better decision for your property. However, the last thing we want is to have a family of 8 squeezing in a 1 bedroom Condo.

You still have to look at your personal circumstances and financial status to do a self analysis on whether a HDB or private will be a better choice for you.

The main trade off will be the size of the property that you will be staying. For instance, a $400,000 HDB BTO can get you a 4 – 5 room flat of about 1000 sqft. In comparison, a $800,000 private property will probably get you a 650 sqft unit.

If you require a bigger place or more rooms, say to have your parents stay together or already have a family of 5 members, then probably getting a HDB BTO is a wiser choice.

However, if you think there will just be you and your spouse, and planning for a baby in the near term, then you can consider a private property as your first home. This can pave the way for your future investment property.

Conclusion

Looking ahead helps us make better decisions today.

Many of us are not sufficiently invested in building our wealth for the long term. Real estate continues to be a special asset class with great risk-return profile that everyone should take advantage of.

Real estate investment can be a very systematic way to build wealth. For more strategies on increasing our odds of generating a higher ROI, we will leave it for future discussion.

Most importantly, time is the most powerful element in the wealth-building equation. Having understood this, you are now better positioned for an accelerated wealth creation journey. Now that you have a better idea, you can decide what works best for your first home.

Happy investing!

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