Property investment starts at home

HDB flats also can be a tool for making money as owners move into the private market

You don't have to own a condo near Orchard Road to be on the path to property riches; your HDB flat can serve as a fine investment springboard.

After all, even if you have a mortgage on your home, the fact that you are an owner and not renter means you are already a property investor.

So view your HDB home as a tool for making you more money as you move into the private market.

Assume you bought a three-room HDB flat in Tampines for about $180,000 five years ago. You could rent out the flat today for about $1,600 a month - an investment yield of about 10.7 per cent.

This is a very good yield and is unique to smaller units. By contrast, a five-room HDB flat in Marine Parade bought five years ago cost about $485,000 and would fetch a monthly rental now of $2,500 - a yield of about 6.2 per cent.

However, HDB flats are primarily meant for public housing and should not really be retained by owners for investment purposes.

That is why there are many restrictions put in place by the HDB, such as a Minimum Occupation Period (MOP).

Flat owners can rent out their home only after occupying it for three years if it is a resale flat bought without any Central Provident Fund grants. The term is five years if it was bought directly from the HDB, or a resale flat purchased with a CPF grant.

Timing is paramount when upgrading from HDB to private property. The idea is to make the jump from public to private housing when the price gap between the two narrows.

HDB flat prices are almost guaranteed to slowly but steadily increase, while private home prices tend to fluctuate depending on factors such as the global economy and the supply of new homes.

That three-room Tampines flat used as an example earlier could be sold today for around $300,000.

As a seller, you would then have realised a profit of about $120,000. Naturally you would have to plough some of that back into your CPF account with accrued interest, but essentially you would now have cash to buy a new property.

You could buy a slightly larger unit in the nearby freehold Ferraria Park Condominium in Tampines. That would cost about $630,000.

After paying $126,000 or 20 per cent of the sale price in cash and CPF, a loan for the remaining 80 per cent, or $504,000, would involve a monthly instalment of less than $2,200 for the next 25 years, based on prevailing interest rates of 2 per cent.

In February, the Government introduced tougher rules on bank loans that allow lending institutions to lend only up to 80 per cent of the purchase price in a bid to cool the market by weeding out overzealous investors.

If you empty your CPF account to reduce the loan, you could reduce the amount for a shorter mortgage term or lower monthly instalments.

Alternatively, if you had bought a four-room build-to-order flat in Treelodge@Punggol at $231,000 in March 2007, the same flat would be worth around $369,000 on the resale market today.

Imagine the value of the flat when you collect your keys next year, and when you are eligible to sell your flat in 2016, especially given the blossoming Punggol neighbourhood.

However, note that all property investments require a mid- to long-term view. Whether you are a first-time buyer having to fulfil an MOP or not, expect to stay in your property for at least five to 10 years.

Then do your research on the flats in your targeted area. Are they old and due for an en bloc sale? Will there be an MRT station or a mall close by in a couple of years? These are just some of the many factors which will enhance the value of your property over time.

It also helps to always buy within your means. It is not advisable to wipe out your CPF account and savings, and then take a massive loan and hefty mortgage repayments just to acquire a more expensive apartment.

You might also need interim accommodation and furniture storage when upgrading from HDB to private property, as well as funds for renovations.

HDB resale prices are still growing slowly but steadily, both in terms of cash-over-valuation as well as the Resale Price Index.

Prices should go up by another 5 per cent over the next six months for an overall growth of 10 per cent this year.

The writer is corporate communications manager of PropNex Realty.

Source: Sunday Times, 18 Jul 2010