Updated: Jan 4
Let's talk about something positive for a change!
Yeah, like finally!
It's been 2+ months since the coronavirus hit our shores and since then, the days have been gloomy, the atmosphere tepid and our survival instincts keeping us tuned towards the slightest sniffle or cough even in the distance.
Our overly enthusiastic colleagues bombard us hourly in multiple chat groups with the latest in COVID updates; prompting us to wonder why they have never exhibited this sort of enthusiasm in their work before.
But enough is enough. It's time we called a stop to what we are feeding our minds daily. Garbage in, garbage out.
By now, we know enough of the dangers, the precautionary measures and the odds of dying. What else do we really need except to fill the void that our insatiable minds crave?
So it's time, and I say it with gravitas, that we look ahead while keeping safe, and IMAGINE the possibilities that this once in 10-12 years kind of black swan event, is bringing us.
That golden era we have been complaining for ages that we missed out on, when HDB flats were only $40,000 each and a bungalow in Holland costed only $1M - Our parents time, when property prices were much much lower.
So, I have whetted your appetite...
But I'm sorry to break the news; those days are history.
While it is likely that we will see a correction in 2020, it is next to impossible for prices to return to those levels unless we are prepared for our incomes to follow suit.
Whuttt? You made me read all that and then an anti-climax?
No no.. Chill. There are still opportunities for you and I to profit from the uncertainties in the market.
Let's dive in to take a look at the possible options for HDB flat and private property owners now.
Ways to Profit From Real Estate Investments In A Crisis
Are you a HDB flat owner?
Well, with the way the market is playing out, it is highly likely, despite the HDB stimulus of enhanced housing grants a few months back, that prices will correct as the livelihoods of people from all walks of life get affected.
Many HDB owners I have come across are asset rich and cash poor. Despite the matrimonial home ABSD remission scheme, most cannot afford to upgrade to a private home even if prices were to correct significantly tomorrow.
That is because you will need to have sufficient & significant dry powder (Cash or CPF) in order to commit to a purchase while holding on to your HDB.
For example, if you are eyeing a $1m resale condominium (Which is really kind of low in today's market) and have an existing loan for your HDB flat, you would have to fork out 55% (excluding BSD & ABSD of almost 15%) of the property value as you're still holding on to your HDB flat.
And that's an eye-watering $700,000 in cash and/or CPF.
Not to mention that you would need to set aside the Basic Retirement Sum of $90,500 in your CPF Ordinary Account before being eligible to use the rest, if you are using your CPF again for this purchase.
Now, how many of us have dry powder of almost $800,000 waiting for us to tap on? I would reckon not many.
Further, there's the risk of not being able to get a refund of the 12% ABSD you paid if you fail to sell your HDB within the strictly enforced 6 months period.
So enter the HDB Upgrader strategy for crisis times:
SELL AND RENT FIRST TO BUY AT STEEPER DISCOUNTS LATER
Yes, this strategy is exactly what it is.
In the coming months, with prolonged global lock downs, job losses and reduced incomes, and incoming foreigners dwindling, it is likely that rentals will fall.
Hence, renting will become cheaper than owning.
Plus the added perk of freeing up dry powder to seize bigger discounts in the private market or larger properties.
Let me illustrate further with examples:
If prices were to correct 10% for a HDB, a $600,000 home can be expected to drop in value by $60,000.
Selling today before it corrects means you get to avoid realising this future loss.
A similar home can be rented at between $2000 to $2200 in today's market. At $2200 per month, that's $26K per year of which $60,000 will easily cover for more than 2 years of rent.
At the same time, if HDB prices, where 80% of Singaporeans are living in, were to correct, what can we expect of private home prices?
A similar 10% correction in a $1M home will mean savings of $100,000.
So, even if it take 2 years for HDB prices to correct by 10% and you rent for that 2 years, before buying the private home at $900,000, you still make a net gain of more than $100K ($60K avoided loss + $100K savings - $52K rental).
*Re-read the above a few times if you don't get it. It's easy if you try.
Now what if HDB prices stay flat while private property prices correct by say 20%?
Step 1: Sell HDB flat today for dry powder to enter when market corrects to your point of entry.
Step 2: Rent a similar home for 1 year with the option to extend for another. (PM Lee has mentioned that this will last at least till year end so 12 months is a safe minimum lease period. I trust that he's been well advised by the top medical minds around.)
Step 3: Don't hold your breath. Keep searching and making offers until your ideal price point is met and commit to one before the eventual recovery.
Step 4: When the coast clears, the property market will inevitably experience a surge in transaction volumes led by pent up demand and renewed hopes for the future.
My guess is that it will take less than 2 years for prices to bounce back to previous levels.
Step 5: Enjoy your paper gains! You now have the option to gear up (equity loan) for another investment property or downgrade back to a HDB flat with excess funds in your pocket.
Okay so, what if I am already a private property owner?
Congratulations, you have more methods, whether you know it or not, at your disposal.
1st Method - Arbitrage
This is a classic upgrader strategy for crisis investing.
Say you currently own a $1.5M property and intend to upgrade to a $3M property nearer to town. Let's assume the market corrects by 20%.
Step 1: Once the market corrects, buy the larger/better location/facing property at a discount of $600K.
Step 2: Sell your property (If you haven't already & rented for the time being) at $1.2M or a $300K loss.
Step 3: When the market eventually recovers to its previous levels, you would enjoy a nett equity gain of $300K ($600K-$300K).
Of course, a better way with higher profits would definitely be to sell first, avoid the correctional loss, rent for the time being before jumping in at discounted prices.
Kind of like shorting the stock market (Where there are borrowing costs equivalent to rental costs)
Alternatively, if you wish to keep your 1st property, you can do a part-sale to free up either spouse's name for the 2nd property to save on Additional Buyer's Stamp Duties (ABSD).
2nd Method - Equity Term Loans
This method that private and commercial property owners frequently use to seize opportunities in a correcting market is via the use of equity loans, which is a great way to access immediate an immediate lump sum of cash at low interest rates comparable to mortgage loan rates.
Loan tenures can go as high as up to 35 years or 75 years old if the borrower is an individual.
Equity loans are also known as term loans or gearing up.
The benefit of this is obvious as cash on hand during periods of depressed valuations enable you to scoop up great deals at below market valuations and wait for the eventual rebound.
A word of advice though, is that leverage is a double edge sword that amplifies returns as it does risk.
So ensure you do a financial affordability check and have reserve funds buffer for unexpected situations.
If you are considering this method but have ABSD liability, this article may help you save on taxes by structuring your portfolio correctly. Read about it here: Methods to Beat ABSD and Own Multiple Properties in 2020
You May Say I'm A Dreamer... about opportunities in the real estate market
Now, before you conclude that I am too optimistic and a dreamer (which I am guilty of actually), take a look at what happened to the different segments in Singapore's property market during the Asian Financial Crisis and the Global Financial Crisis.
How much did properties correct in each event and do you think we can expect COVID-19 to have a larger or smaller impact this time around?
IF PROPERTY PRICES CORRECTED BY THE 1997 ASIAN FINANCIAL CRISIS STANDARDS
IF PROPERTY PRICES CORRECTED BY THE 2008 GLOBAL FINANCIAL CRISIS STANDARDS
So, tell me, do you think I'm a dreamer? Or am I the only one?
It's 4:50am and I will end off with this:
Property Investing is like a game where great moments of opportunity arise in great crises.
Those who quieten their minds, to focus on the probabilities instead of their fears, will stand to reap the most from this once in a decade great wealth re-distribution in the property market.
I hope you get to be a beneficiary of this golden era.
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Stuart Chng, Senior Associate Executive Director of OrangeTee & Tie, is a renowned leader and personality in the real estate industry.
He adores music and can play a few instruments decently without upsetting his neighbours. When not doing so, he enjoys pillow fighting with his son and coming up with silly puns which barely amuses his wife.
Professionally, he is a licensed real estate agent, investor, team leader, speaker and columnist for several property newsletters and blogs and is often quoted in media interviews on 938FM, Channel 8, PropertyReport, PropertyGuru and other publications. Throughout his career, he has helped many clients grow their wealth through selecting great property investments and managing their portfolios actively. Read his clients' reviews here.