Most Singaporeans start off their homeownership journey with the humble HDB (usually an affordable BTO) . But once the five-year Minimum Occupancy Period (MOP) is up, many seek to upgrade, typically to a private or executive condominium.
Related article: 6 Ways to Upgrade from your HDB to a Private Condo or EC in 2020
But couples may find themselves presented by a more enticing opportunity – perhaps by a charming property agent. Instead of selling the HDB and getting a nicer condo, how about getting two instead? That is, in a nutshell, the “sell one, buy two” strategy that some property agents love to tout.
On the surface, this can seem like an attractive proposition. But there’s a reason MAS has warned people of the risks of this strategy.
This is what we will be diving into today. Before we go into the risks, however, let’s first explore this strategy in more detail, including how an ideal execution would look like.
Sell One, Buy Two – The Idea Behind This Strategy
The idea behind this strategy is for a couple to sell the HDB they are living in and to buy two properties instead, each under their own name. Under the regulations, this would still technically be their first property, thus allowing them to avoid paying the 12% ABSD and get the full 75% home loan from the banks.
As for the two properties themselves, one property should be for their own stay and the other for renting out. This means one larger property and one smaller one (such as a studio unit), with the latter earmarked for rental.
Buy two, sell one can thus be considered a hybrid of a “standard” property upgrade and an investment strategy. In an ideal scenario, an ambitious couple executing this strategy would be able to:
Upgrade to a nicer home
Own two properties
Receive rental cashflow
Avoid paying any ABSD
Avoid coming up with a large downpayment given the 75% LTV (of the remaining 25%, only 5% must be in cash – the other 20% can come from CPF)
Plus, as a bonus, they would also be able to sell off that second property later in life if need be, such as for funding their retirement.
The payoff of this strategy is clear – and indeed substantial. But it does rely upon being able to satisfy several key criteria.
4 Key Criteria for Successfully Executing This Strategy
Every strategy has some fundamental components that must be in place for it to work. In the case of “sell one, buy two”, they are:
1. Dual Income Household
This one is obvious. For each person to buy a property under their own name, they must both be working to qualify for the loan.
2. Able to Meet Higher Home Loan Obligations
Two properties also mean higher home loan instalments. If you and your partner are considering this strategy, make sure to use our Mortgage Affordability Calculator first.
3. Sufficient Funds for the 25% Downpayment
Each party must have enough funds to meet the minimum 5% cash + 20% downpayment. Most are banking on the sales proceeds of their HDB flat to cover this, but most times, a substantial amount of cash savings is still required.
4. Able to Secure a Tenant for the Second Property
To ease the heavier cashflow burden from owning two properties, they must be able to get a reliable tenant for the second property.
Now, you may be reading this and thinking to yourself – wow, we qualify for all four! Not so fast. Remember, these criteria do not just apply “in the moment”. They have to be sustained for the duration of the loan as well.
This brings us to the risks.
4 Crucial Questions to Ask Yourself Before Taking the Plunge
The key question that defines the risk of this strategy is “how sure am I that me and my partner can satisfy all four criteria for the entire loan period (which can be up to 30 years)?”
This is a question you should ask yourself as you go down the list of criteria. Let’s examine them one by one, including the consequences of misjudging the risks.
1. Will we be able to maintain a dual income for the next 20 years or more?
In today’s dynamic job market, there is no such thing as certainty. If one of you loses your job or decides to quit (say, to start a family), the home loan obligations may become too much. This may force you to sell the second property, which depending on the current market environment, may only be at a low rate of return – or even a loss.
Of course, if you can support both instalments on a single income, then lucky you – you check this box.
2. How much of our monthly incomes will the home loan instalments consume?
MAS may have a maximum TDSR of 60%. That is a regulatory mandate. But it is far too high for a personal finance guideline. If the only way you can make this strategy work is to scrape the 60% ceiling, you are probably taking on too much risk.
Beyond the previous question of whether you can persist as a dual income household for the long term, you must also consider potential interest rate changes and changing job situations. Remember, you want to leave yourself a comfortable margin of safety, even with this strategy. Properties cost money to maintain, and you would now have two of them.
Again, the consequences of not assessing this properly is having to sell the second property (or even the first one) in less than ideal circumstances.
3. How much cash do we have on hand and in our CPF accounts? (Plus, how much can we sell our HDB for?)
You must also assess your total cash reserves, including the proceeds of the sale. If 25% downpayments for both properties will end up draining most of your cash reserves, you may be overreaching. Remember the discussion on margin of safety – it applies not just to monthly cashflow, but to your overall liquid cash balances as well.
Even if you have sufficient cashflows for the instalments, draining your cash reserves for the downpayment will leave you exposed. Imagine if a medical emergency or sudden large household expense came up? If paying for the properties will leave you without at least 6 months of emergency funds, you may want to reconsider.
4. Can we pick a good investment property?
Picking the first property is relatively straightforward – it is essentially just a regular home upgrade. Choosing the second one, even though it is smaller, is significantly more difficult. It is after all an investment property and understanding how to select one is its own skillset.
This means that if you are unsure of your ability to select a good rental property, it might be worth stepping back, at least for a moment. Take the time to study the market and learn about what makes a good investment property. Finally, you need also ensure that the investment property fits within your own financial means.
“Sell One, Buy Two”: Not impossible, but not as easy as it seems either
To put it bluntly, “sell one, buy two” is a strategy that will likely only work for higher income couples. But even then, they must still be astute in assessing the risks – as well as their own risk tolerance. We cannot say whether this strategy is right for you or not. We can only give you a few guideposts to help you make the most informed choice.
However, if you are seriously considering this strategy, our Home Finance Advisors will be happy to provide you with personalised advice. Head to this page, fill out a short form, and one of them will contact you within a few hours. And to learn more about everything home financing, refer to our comprehensive guides here.
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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people's financial literacy levels - a necessity in our modern world.