Sunday, February 22, 2015

Personal Dilemma on Properties

While surfing around the internet for news, I stumbled upon this article on CNA. In the article, it was stated that smaller shoebox units get typically higher yields of around 3%, while other types of private homes had yields between 2-3%.

When I read that, I thought, gosh, owning an investment is huge investment to make, with lots of capital outlay and capital risk, not to mention all the extra work, for a paltry 3%! My previous research corroborates that investing in real estate through REITs securities has a better total return than physical residential real estate. Not to mention customizable capital outlay, diversification benefits and massive liquidity. Is the higher returns due to the more volatile nature of largely non-residential real estate, leverage, professional management and other factors? To that end, the reason for the outperformance of REITs over residential real estate is unknown, but the fact is that it does outperform.

For those that have been following me for a while, I think I've made it pretty clear that I am looking to leave the nest and make a home of my own, a small home in particular. This is because I believe that housing is an expense, therefore I should choose to live in a place large enough that I am comfortable in, but not excessive that I am forking out money for needless space.

On my part, I have actually extensively looked and searched the entire Singapore for the perfect locations. I have found a few properties that are excellent choices, even if money was no option and I could have a mansion on Sentosa, I would probably rather stay in these places. Unfortunately, unlike securities where the market is liquid, big and open for all to see, the real estate market is not. Which is why I will not be sharing the hot tips of locations that I have found until I got a place for myself. It's all subject to preference anyway!

One thing that I am lacking is the lack of knowledge regarding property transactions. I did say many moons ago in November that I will be researching on DIY property transactions (part I and part II here), but I really have done it yet! My friend was asking me if I was interested in taking the real estate course and exam with her. Perhaps because I haven't seen the property market heading south, I don't see the real urgency yet. People aren't running around with fire on their heads. No rush now, at least, not from what I can see. I do have friends that have taken or are planning to take the real estate courses and exams, so I will be asking them for their material so that I can come up with proper steps. I don't think I need to past the exam to be able to DIY. I am not planning to be a freelance agent either. I'm sure once the sky is falling, a post like that with the steps for DIY should be useful to all.

Anyway, 2 things got me thinking about property now. One is all the CNY visiting. I've gone to people's houses where the house is small. Personally, I could live in such a place happily alone as a single. My parents got claustrophobic. Second was talking to a VP of a bank. Anyway, he was telling me that I should consider a larger space, but for more practical reasons than just finances.

Now, that got me thinking. I've met a handful of people that tell me I should live in a space as big enough that I feel comfortable in. Since it wouldn't be too big, it shouldn't cost as much, and I would be able to finance it on my own and I can start living out my adult life as an independent person.

The second group of people are telling me that I should think further out in my life. What if I get married? What if I get kids? I think that is a good possibility, but I don't want to be stuck with a big empty house and pay for it myself. In that scenario, I would have to find tenants, and poof, there goes my privacy.

Currently, I am only thinking of 2 possibilities. What got me to consider a larger house is that while doing my research, I have found out that between a 1BR and 2BR, there is quite a big potential for savings on the PSF. However, between the 2BR and 3BR, I see only a very slight difference which is not worth mentioning. I have also learnt that the yield on a single bedroom compared to an entire unit is much higher and can push up to 6% gross. (Gross Property Income*12 / Cost difference between 2BR and 1BR)

Minimal Impact: I get a 1BR. I have minimal capital outlay and monthly payments. Since my finances will not be stretched, I can happily enjoy quite a decent lifestyle. If my lifestyle changes in the future (marriage), I would likely have to sell this place for a larger place in the future.

Flexibility: I get a 2BR. I have higher capital outlay and monthly payments. My spare bedroom will have to be rented out to help me cover the cost of my mortgage. Privacy will be compromised, but the incoming rent will help lessen the mortgage burden so it would actually be less than the 1BR. However, there is a risk of vacancy, which can be mitigated by undercutting prices during hard times, since the locations I am looking at are very prime. The biggest plus to this is the flexibility that such a home should be able to accommodate the next stage of my life.

After reviewing all my available information, I think that I am less resistant now to a 2BR unit. It is not as crazy of an idea that I thought previously. Why aren't their any websites or resources that consider this above debate at all? Or maybe I just haven't found them.

Of course, all this is just fantasy unless I hit the Toto grand prize. If I do I will have a housewarming, HAHA!


  1. It's almost impossible to give good advice on property to people because so many considerations hinge on one's personal taste and circumstances, but I will try. For a start, I think you need to think carefully if you will really be happy staying in a 2 bedder with one bedroom tenanted out. There are many people out there for whom having to share their home with a stranger is a complete non-starter. If you can get past that, a 2 bedder may give you more flexibility as it is more "future-proof" should you wish to start a family next time, especially before your liability to pay seller's stamp duty is up - but the counter argument to that is that even if you own a 1 bedder and want to start a family, you can always rent first until you can sell the 1 bedder. I'm personally not so bullish about the viability of shoeboxes so make sure you are comfortable with that as well. Also, can you generate better returns with your cash than locking it up into property? Will TDSR and cash flow be an issue, especially if interest rates revert to the norm of 3 to 4%?

    1. Thanks Retail Trader, you threw me a lot of good advice!

      After sleeping on your comment, I actually do think it would be much more preferable to stay alone. I guess my problems are framed a lot nicer now for me to deliberate. I never thought about the SSD, thanks for bringing that up into consideration! After having been to a few shoeboxes of relatives and seeing the locations of some... I am also quite bearish of such apartments over the next few years. There seems to be so much supply on sale now and all this supply would hurt rental pricing in the future. I feel demand is largely investor driven instead of owner occupied. I've seen a project which was specifically built to be rented out! Thanks for the additional questions for me to think about as well. I'm using an interest rate of 2.5% as my base calculation now with 3.5% when I make conservative estimates.

  2. seems are those are the same things when people i talked to recommend me. always get a bigger one. at most you can rent out. it seems you are considering only private at this point.

    1. Hi Kyith, I think that's the general consensus view of 80% of the people I talk to. But those few that recommend a smaller space seem a lot more zen and worldly to me, haha! Aye, I'm 10 years away from qualifying for a single's HDB, and I guess marriage would at least be 5 years out. I don't want to be rushed and forced into marriage as a financial decision anyway. I have looked at resale ECs which are a lot more value, but their locations aren't really good for me.

    2. hi GMGH, now i am confuse you want big or small haha

    3. That's the problem, I don't know! Hahaha!

      How about you Kyith, what do you think?

    4. my thought is that i am at the age where you are probably thinking that is 10 years away. for me its months away. the idea of a shoe box is very nice. its great for me cause i really hate cleaning a 5 room flat. i will definitely not get a 5 room.

      there is a balance between debt and investment. at this moment 4 room make a lot of sense since at the worst case you can rent out 2 rooms for perhaps 1.2k per month. that will offset some subsitence cost or use that to pay the mortgage. you are going to see this appreciate 4-5% over time in capital appreciation, and once you pay off the 2 rooms continue to be your subsitence.

      but if i were to maintain a equity portfolio, i would prefer a 3 room. when my parents are not around in the worse case i can rent out a room. that is substence as well.

  3. A friend bought a 4-room HDB. She takes the master room and rents out the other 2 bedrooms. With the rent, she needs to top up a little each month for the mortgage.

    1. Hey Anon,

      Smart friend you have! If I was 35, I would do that as well! After 5 years I could look to upgrade to a private during the downturn and then start renting out the entire apartment. I think that is what a few savvy people have done!


Observe the house rules.