Comments from an experienced property investor

[Musicwhiz]

My personal practice is to pay off my HDB loan (periodic lump sum repayment) using spare CPF OA money obtained from bonuses (for example). The interest rate on the first $20,000 may be 3.5% against my interest rate of 2.6% (concessionary) being paid to HDB, but the balance is too small to compound significantly. I do keep 6 months worth of installment ALWAYS in case of an emergency (e.g. job loss), but as far as possible I try to pay down the loan.

I'd rather invest the cash I have on hand than invest the CPF OA balance.

Just my personal preference, though some may disagree vigorously.

[Ben]

You are EFFECTIVELY paying only a 0.1% incremental interests for a super-long loans: There are simply no other such loans in town.

It is 0.1% more for loan, that is right, but it is 0.1% more on the entire loan amount. For example, if you have $50K in your OA balance and a $500K HDB loan, HDB is paying you 2.5% interest on your $50K but you will have to pay 2.6% interest on the entire $500K loan. The difference can be very significant.

[Dutch]

Well if you look at investment point of view.

Property (4rm flat) $500K
20% downpayment (or COV) etc $100K (capital layout)
Rental it out for $2K PM ($24K PA)
Interest on $400K @2.6% = $1040

Yield= ($24K-$1040)/100K = 23%

No bad, if you ask me.

[Musicwhiz]

Well if you look at investment point of view.

Property (4rm flat) $500K
20% downpayment (or COV) etc $100K (capital layout)
Rental it out for $2K PM ($24K PA)
Interest on $400K @2.6% = $1040

Yield= ($24K-$1040)/100K = 23%

No bad, if you ask me.

2.6% of $400,000 is $10,400, not $1,040. So the yield is just ($24K-$10.4K)/$100K = 13.6% not 23%.

This may look attractive at first glance, but you are assuming you can rent it out at $2,000 per month. The yield is also magnified due to leverage, as with any investment, leverage will make gains look rosier and losses look worse.

[freedom]

also need to remove depreciation of furniture and other stuff, plus property tax, tv license, blah blah

[ichiran]

Dutch-san,

how about your mortgage payments? However, if your mthly CPF contributions can cover the mortgage payments, then we can view it as monetising your CPF funds.

[wsreader]

Quite a few factual errors in the Yahoo post as picked up by fellow forumers here. The Yahoo poster should be invited to this forum to defend himself and to improve his knowledge. It would be good to have "experienced property investor" here to offer different opinions.

[yeokiwi]

It is 0.1% more for loan, that is right, but it is 0.1% more on the entire loan amount. For example, if you have $50K in your OA balance and a $500K HDB loan, HDB is paying you 2.5% interest on your $50K but you will have to pay 2.6% interest on the entire $500K loan. The difference can be very significant.

Assume both couple A and couple B have monthly $2015 of CPF contribution,
couple A - 30 years, 300k loan at 2.6% interest rate. Monthly payment = $1201
couple B - 15 years, 300k loan at 2.6% interest rate. Monthly payment = $2015
For couple A,
Assuming the couple A invests the difference of ($2015-$1201)*12 = $9768 with 2.5% return for 30 years,
The capital with investment gain at the end of 30 years is $428841.
For couple B,
Assuming the couple invests $2015*12 = $24180 at 2.5% return from 16th to 30th year,
The capital with investment gain at the end of 15 years is $433593.
So, at the end of 30 years,
Both couples A and B had repaid the loan but couple B is only ahead by $4752.

If 3.5% is taken into consideration for 30 years, couple A will definitely be ahead of couple B.
After 30 years, couple A will have $444405.
couple B will have $441062.

[Dutch]

Thanks for spotting my mistake. Paiseh.

Well if you look at investment point of view.

Property (4rm flat) $500K
20% downpayment (or COV) etc $100K (capital layout)
Rental it out for $2K PM ($24K PA)
Interest on $400K @2.6% = $1040

Yield= ($24K-$1040)/100K = 23%

No bad, if you ask me.

2.6% of $400,000 is $10,400, not $1,040. So the yield is just ($24K-$10.4K)/$100K = 13.6% not 23%.

This may look attractive at first glance, but you are assuming you can rent it out at $2,000 per month. The yield is also magnified due to leverage, as with any investment, leverage will make gains look rosier and losses look worse.

---

Yes, you can add those in if you want. Definately the yield will drop.
Illustration is just for discussion purpose. Yes, when times are good, leverage can make big money, but when it goes the other way. The landlord then have to pay high interest and montgage.

I personal feel that HDB has very little depreciation due to SER. The HDB valuators will try to hold the price.

Dutch-san,

how about your mortgage payments? However, if your mthly CPF contributions can cover the mortgage payments, then we can view it as monetising your CPF funds.

[thefarside]

So far in Singapore, the government had been able to cope with aging flats - renewing them through SERS where needed, and retaining the smaller units to let out as rental flat where possible. The greater challenge will come when the big group of flats built in the 1980s and early 1990s start to hit 30+ years old - how well the HDB market will hold its value in light of an aging population etc would be tested by the time this comes around.