If you use CPF to cover a portion of your monthly mortgage, you technically do get positive cash flow from rental since it is only required to cover the excess (mortgage less CPF). Of course you have to pay back your CPF eventually but hopefully with a good property the capital gains can cover this repayment (with accrued interest!). But yes, positive cash flow is possible
You're absolutely right there. I forgot to include CPF OA into the cash flow aspect. You're also right about the accrued interest. Factoring in CPF, using the assumptions I shared in the video, the annual cash flow produced should be ~$7k. Meaning about $500 a month. Not alot, but at least the investor won't need to sink more cash into the unit to keep it running.
Sorry, I don't understand the logic of factoring in CPF into monthly mortgage? Does your property help you get your CPF, so why should it be factored into the calculation? The whole discussion here is that having a condo property is net negative to cash flow, regardless of any other factors. Unlocking your Ordinary Account (OA) to have more cash on hand through mortgage is another topic.
But what about money cost of using your CPF which probably if not used will earn risk-free interest in CPF. So it is not entirely cost-free and hence positive cash flow in that sense. Not only you missed out the opportunity cost of interest earned in CPF, but you would need to return these accrued interest back to CPF if you sell your property. So in fact it is a double whammy cost. Even if you are talking about capital appreciation, that amount of appreciation for majority of properties still lag behind the interest rate offered in your CPF account. Only very few properties exceed this and they don't appreciate as much consistently on yearly basis whereas your interest rate in your CPF are pretty stable year on year. When you factor in the risk aspect, the equation will not be favorable to use your CPF to buy property for investment, unless it is for occupier staying (no choice). Correct me if I am wrong.
@jefferysim6997 How is it not relevant? I am literally using less cash to pay for mortgage when I use my monthly CPF contributions to cover a portion of the mortgage, hence positive cash flow since cash inflow (rental) > cash outflow (mortgage less cpf).
@kwoowoo828 You're right that there is opportunity cost involved in terms of the 2.5% risk-free interest if cpf is left in the OA. At the same time, you mentioned that capital appreciation typically lags behind the CPF interest. But we shouldn't forget leverage. If a 1 mil condo appreciates by 2.5% ($25k), my gains is not just 2.5%. Assuming a 25% down payment ($250k), my gross ROI is actually 10% (25k/250k).
As a whole for rental play, factor in 40% as expense. Expenses includes MCST, Property Tax, Income Tax, Some replacements and upkeep. In addition, this does not include interest payable. In most cases, net rental yield is less than 3% or negative for some. A chunk of capital will need to be tied down for at least 3-5 years before one can do their next move.
One more ongoing headache. As the building ages, maintenance fees rise. Whether buying a old building to rent out or buying new and holding 20 years, eventually there will be a call for additional sinking fund etc to pay for repairs and replacement of essential equipment (lifts, pipes, etc). When it is time to cash out, with the exception of enblock for demolition and redevelopment , the owner has to refurbish the apartment to make it salable because tenants trash properties. If property rentals was such a great business, the developers themselves would be 100% renting instead of getting money up front from outright sales. The only way to win this game is to be cash rich enough to buy the development to rent without a loan. Good for those that can do this.
Yes agree. Most people don't ask the question why would anyone lend you the money to buy if they can buy themselves and profit instead. Why are they giving you the profit for no reason?
Different businesses have different business models. For example, the loan department of a bank makes money through lending money (the spread of rates) rather than buying and leasing real estate. Owning and leasing real estate comes with its own set of hassle and challenges. This could be different type of expertise that the bank is equipped with. They may not feel it is worth the risk or ROI to expand into that business model.
negative CF doesn't mean you're not getting richer. the tenant is paying for your interest and principal. you're building up equity in the property. rental income is the life blood of all property investment.
stocks and real estate are different in terms of risk and reward. i still like prop because it cannot go to zero unlike stocks and once one has a leg in it , once can venture out to more risky investments like stocks and cyrpto even. all about asset allocation and diversification.
Nice video! Good for those coming out to work to think about. Just wanted to share my experience… from 1999 to 2012, condo prices dropped substantially. Those were best times to buy. While opportunity such as these has not come by for more than a decade… it may come again and best for the early career folks to have savings and decent income to get a loan from banks to buy one! Hold it till economy recovers and rental will pay much more than the mortgage. I enjoyed purchases and hope young folks have the opportunity as well!
The last buying opportunity was a window from about end 2013 to mid 2014, especially after Piyush Gupta said prices will drop by 10 to 15%, after that it was up all the way until now...
Condo prices are likely to fall this year because of economic uncertainties and a large supply of new HDB flats, and transactions costs are high (stamp duty, legal fee, agent fee, etc). Property tax has gone up substantially. Hence I will not invest in condos. (the sums don't add up; should be -9k) Need to include fire insurance, repairs, and renovation costs.
Agreed there are actually more hidden costs than what was listed. If you're not investing in condos, do you have a preferred investment vehicle? Stocks or...?
Almost all agents i found and spoke to in the new launches strongly denied on NEGATIVES cash flow. Only I realised they are luring people to commit to an expensive buy that these new buyers won’t foresee. Disgusting and dishonest property agents. They make their lucrative commissions.
It is good to look at the positive side but in the event of a financial crisis or you been retrench or your tenant break lease before lease end. This will add pressure to the owner. Before buying a property you need to have sufficient cash to prevent any unforeseen situation
There is one cost that MOST people especially developers or property agents don't want you to consider and that is lease decay. In the business world it is called depreciation. EVERY BUSINESS will cost depreciation into their overall P&L. But that is glaringly absent in most calculation when you are talking about property investment. Like it or not your property value (the portion arising from the land lease from government) decay in value day on day, month on month, year on year. You are technically paying rental to government monthly for the use of the state land upon which your property sits on. However you paid it in one lump sum for 99 years in the purchase price. And that rental paid to government has to be subtracted from the rental you received from tenants to truly reflect a true picture of P&L. Correct me if I am wrong.
True but the absurdity of the property market is that a rising tide lifts all boats and if the end game is to sell the property to cash out after some time, even decaying properties will have appreciated in value way above the computed depreciation. Perhaps that is more of a commentary on the depreciating value of money rather than the appreciating value of a used property.
@@tubewatcher3100 Of course the assumption is that you can sell at the 'good' price that will 'cover' the computed depreciation. But the fact is if the end game is such that everyone cash out selling their property, who is to buy these properties? The value of the property is based on the transactional price of 'normal' demand/supply. If it is a case of everyone wanting to sell, it will crash the market because there is not enough demand to soak up all the supply. Those who can afford would have bought and now looking to sell, while those who cannot afford will remain cannot afford and will not buy. Lots of sellers but little buyers. Going by the bigger fool theory, profit can only be made if the bigger fool buy from you giving you the profit and him suffering the same loses. Who will be this bigger fool? No doubts there are definitely many bigger fools around but more importantly will there be enough bigger fools to absorb all the supply? Answer is clearly no not because bigger fools are not willing but bank and regulator (MAS) are smart enough to do their own due diligence to tighten property bank loan when they see the market turning bad to prevent huge bad loans in the bank balance sheet. The depreciation of your property is definite as paying tax but your selling price is unassured and heavily dependent on timing. IF you are at the front end of the curve, you cash out early letting the bigger fool pay for you. If you are late into the curve, there will be not many bigger fools to go around. You can hold on to your property indefinitely hoping to secure a higher good price but your depreciation eat at your worth non-stop every day. Its a risky investment imho. There are better way to invest your money at a much lower risk or even practically risk-free and much higher liquidity at the same time, offering a better return. Risk-reward ratio for property investment is lower on the scale compared to other means of investment. Many people are super-calculative on the side of the reward but they neglect factoring in the risk side of the equation because of selective perception reinforced by all the marketing brain-washing and hard selling. The theory that rich people getting even richer by investing in property is full of flaw imho. Such rich people don't invest in property but they get rich through their direct active involvement in the property business, either developers building properties, marketing properties such as agency companies, or managing properties e.g. facility/estate management. It is business to them, not investment. Rich people dump their money into properties more as a hedge against inflation (depreciating value of money as you have termed it) ONLY after they have enough exposure to other investment classes and property is a way of diversification to spread the risk of over exposure to a certain investment class. It is only a small proportion of their entire assets with the huge portion earning a more stable assured return. On the other hand, property investment remains the SINGLE LARGEST investment in most retail buyer's investment portfolio. This is a risky strategy imho. Of course everything hinged on their job income without which their property investment becomes unsustainable. A rising tide lift all boats, but a falling one, look at China property market now.
To chime in on the original point here regarding the depreciation of the lease. It is also my understanding here that you are right that businesses need to factor in depreciation. If you run a business, the lease depreciation needs to be factored in as part of your expenses in your P&L and likewise a reduction in asset value on your balance sheet. The specifics are slightly different depending on whether it is an owner-occupied property or investment property. ON THE OTHER HAND, "P&L" for personal property investments is a loosely used term and there aren't fixed rules on how this should be calculated. The only thing that's mentioned is that depreciation of lease cannot be considered as expense in the eyes of IRAS when it comes to personal income tax. Furthermore, as there aren't fix rules on personal P&L, we are always mentally updating the "value of our asset" in our head when we see a paper gain (something which cannot be loosely done in a business P&L in SG context). Just my two cents. I'm not an accounting expert, so if anybody knows better, feel free to fact-check me.
aren't u suppose to take all cost into consideration (mortgage, maintenance, taxes, etc) before u even put up a logical price for renting? but in any case, the property would pay itself off eventually (u should still be working in order to even have mortgage loan) and net cashflow would still be positive
True la, but the listing price is only one side of the equation mah. It also depends on what price the tenant is willing to pay. Yes, eventually when the loan is paid off, you'll be able to achieve positive cash flow.
Yes, usually quite a hefty sum is required for the downpayment. Furthermore, there are also salary requirements to get a loan approved. Then you will still need to bleed cash every month.
Not true. There will be opportunities but one has to be ready in job and savings and with bank support to be able to exercise their options. Wish you good fortune.
Asking the hard questions! It's not a simple question to answer, but let me try. I think it really depends on the circumstances, cause and severity of the "crash". If indeed such a "crash" happens, the textbook economics would be that property prices would come down. You could argue both ways about the rental market. Since we can't control when or how this "crash" happens, if one chooses to go down this rental path, I think it's better to focus on what we can control instead: 1) Choosing a sound unit 2) Entering at a good price 3) Being prudent to ensure enough of a safety net to cope with the drop in asset value and; 4) Being able to cope with the reduction / loss of rental income. Not forgetting the circumstances of this "crash" as this the could have an impact on personal income.
If you use CPF to cover a portion of your monthly mortgage, you technically do get positive cash flow from rental since it is only required to cover the excess (mortgage less CPF). Of course you have to pay back your CPF eventually but hopefully with a good property the capital gains can cover this repayment (with accrued interest!). But yes, positive cash flow is possible
You're absolutely right there. I forgot to include CPF OA into the cash flow aspect.
You're also right about the accrued interest.
Factoring in CPF, using the assumptions I shared in the video, the annual cash flow produced should be ~$7k. Meaning about $500 a month. Not alot, but at least the investor won't need to sink more cash into the unit to keep it running.
Sorry, I don't understand the logic of factoring in CPF into monthly mortgage? Does your property help you get your CPF, so why should it be factored into the calculation?
The whole discussion here is that having a condo property is net negative to cash flow, regardless of any other factors. Unlocking your Ordinary Account (OA) to have more cash on hand through mortgage is another topic.
But what about money cost of using your CPF which probably if not used will earn risk-free interest in CPF. So it is not entirely cost-free and hence positive cash flow in that sense. Not only you missed out the opportunity cost of interest earned in CPF, but you would need to return these accrued interest back to CPF if you sell your property. So in fact it is a double whammy cost. Even if you are talking about capital appreciation, that amount of appreciation for majority of properties still lag behind the interest rate offered in your CPF account. Only very few properties exceed this and they don't appreciate as much consistently on yearly basis whereas your interest rate in your CPF are pretty stable year on year. When you factor in the risk aspect, the equation will not be favorable to use your CPF to buy property for investment, unless it is for occupier staying (no choice). Correct me if I am wrong.
@jefferysim6997 How is it not relevant? I am literally using less cash to pay for mortgage when I use my monthly CPF contributions to cover a portion of the mortgage, hence positive cash flow since cash inflow (rental) > cash outflow (mortgage less cpf).
@kwoowoo828 You're right that there is opportunity cost involved in terms of the 2.5% risk-free interest if cpf is left in the OA. At the same time, you mentioned that capital appreciation typically lags behind the CPF interest. But we shouldn't forget leverage. If a 1 mil condo appreciates by 2.5% ($25k), my gains is not just 2.5%. Assuming a 25% down payment ($250k), my gross ROI is actually 10% (25k/250k).
As a whole for rental play, factor in 40% as expense.
Expenses includes MCST, Property Tax, Income Tax, Some replacements and upkeep.
In addition, this does not include interest payable. In most cases, net rental yield is less than 3% or negative for some.
A chunk of capital will need to be tied down for at least 3-5 years before one can do their next move.
Very insightful details, I picked up so much info from your short 10 mins clip, thank you!
Glad it was helpful!
One more ongoing headache. As the building ages, maintenance fees rise. Whether buying a old building to rent out or buying new and holding 20 years, eventually there will be a call for additional sinking fund etc to pay for repairs and replacement of essential equipment (lifts, pipes, etc). When it is time to cash out, with the exception of enblock for demolition and redevelopment , the owner has to refurbish the apartment to make it salable because tenants trash properties. If property rentals was such a great business, the developers themselves would be 100% renting instead of getting money up front from outright sales.
The only way to win this game is to be cash rich enough to buy the development to rent without a loan. Good for those that can do this.
Yes agree. Most people don't ask the question why would anyone lend you the money to buy if they can buy themselves and profit instead. Why are they giving you the profit for no reason?
Different businesses have different business models. For example, the loan department of a bank makes money through lending money (the spread of rates) rather than buying and leasing real estate. Owning and leasing real estate comes with its own set of hassle and challenges. This could be different type of expertise that the bank is equipped with. They may not feel it is worth the risk or ROI to expand into that business model.
Thanks for the unbiased view! I learned a lot from the tax breakdowns, these are hidden costs that not many talk about!
Glad it was helpful!
negative CF doesn't mean you're not getting richer. the tenant is paying for your interest and principal. you're building up equity in the property. rental income is the life blood of all property investment.
Bingo
Monthly condo fee, maintenance and quality of tenants play big role in determining whether a profit or loss!
stocks and real estate are different in terms of risk and reward. i still like prop because it cannot go to zero unlike stocks and once one has a leg in it , once can venture out to more risky investments like stocks and cyrpto even. all about asset allocation and diversification.
Interesting perspective, thanks for sharing!
Nice video! Good for those coming out to work to think about.
Just wanted to share my experience… from 1999 to 2012, condo prices dropped substantially. Those were best times to buy.
While opportunity such as these has not come by for more than a decade… it may come again and best for the early career folks to have savings and decent income to get a loan from banks to buy one!
Hold it till economy recovers and rental will pay much more than the mortgage. I enjoyed purchases and hope young folks have the opportunity as well!
Thanks for sharing! Indeed, many people are waiting for another similar crash 😂
The last buying opportunity was a window from about end 2013 to mid 2014, especially after Piyush Gupta said prices will drop by 10 to 15%, after that it was up all the way until now...
Condo prices are likely to fall this year because of economic uncertainties and a large supply of new HDB flats, and transactions costs are high (stamp duty, legal fee, agent fee, etc). Property tax has gone up substantially. Hence I will not invest in condos. (the sums don't add up; should be -9k) Need to include fire insurance, repairs, and renovation costs.
Agreed there are actually more hidden costs than what was listed. If you're not investing in condos, do you have a preferred investment vehicle? Stocks or...?
Almost all agents i found and spoke to in the new launches strongly denied on NEGATIVES cash flow. Only I realised they are luring people to commit to an expensive buy that these new buyers won’t foresee. Disgusting and dishonest property agents. They make their lucrative commissions.
It is good to look at the positive side but in the event of a financial crisis or you been retrench or your tenant break lease before lease end. This will add pressure to the owner. Before buying a property you need to have sufficient cash to prevent any unforeseen situation
Agreed, financial planning should always be done and prudence should always be exercised
There is one cost that MOST people especially developers or property agents don't want you to consider and that is lease decay. In the business world it is called depreciation. EVERY BUSINESS will cost depreciation into their overall P&L. But that is glaringly absent in most calculation when you are talking about property investment. Like it or not your property value (the portion arising from the land lease from government) decay in value day on day, month on month, year on year. You are technically paying rental to government monthly for the use of the state land upon which your property sits on. However you paid it in one lump sum for 99 years in the purchase price. And that rental paid to government has to be subtracted from the rental you received from tenants to truly reflect a true picture of P&L. Correct me if I am wrong.
True but the absurdity of the property market is that a rising tide lifts all boats and if the end game is to sell the property to cash out after some time, even decaying properties will have appreciated in value way above the computed depreciation. Perhaps that is more of a commentary on the depreciating value of money rather than the appreciating value of a used property.
@@tubewatcher3100 Of course the assumption is that you can sell at the 'good' price that will 'cover' the computed depreciation. But the fact is if the end game is such that everyone cash out selling their property, who is to buy these properties? The value of the property is based on the transactional price of 'normal' demand/supply. If it is a case of everyone wanting to sell, it will crash the market because there is not enough demand to soak up all the supply. Those who can afford would have bought and now looking to sell, while those who cannot afford will remain cannot afford and will not buy. Lots of sellers but little buyers.
Going by the bigger fool theory, profit can only be made if the bigger fool buy from you giving you the profit and him suffering the same loses. Who will be this bigger fool? No doubts there are definitely many bigger fools around but more importantly will there be enough bigger fools to absorb all the supply? Answer is clearly no not because bigger fools are not willing but bank and regulator (MAS) are smart enough to do their own due diligence to tighten property bank loan when they see the market turning bad to prevent huge bad loans in the bank balance sheet.
The depreciation of your property is definite as paying tax but your selling price is unassured and heavily dependent on timing. IF you are at the front end of the curve, you cash out early letting the bigger fool pay for you. If you are late into the curve, there will be not many bigger fools to go around. You can hold on to your property indefinitely hoping to secure a higher good price but your depreciation eat at your worth non-stop every day. Its a risky investment imho. There are better way to invest your money at a much lower risk or even practically risk-free and much higher liquidity at the same time, offering a better return. Risk-reward ratio for property investment is lower on the scale compared to other means of investment. Many people are super-calculative on the side of the reward but they neglect factoring in the risk side of the equation because of selective perception reinforced by all the marketing brain-washing and hard selling.
The theory that rich people getting even richer by investing in property is full of flaw imho. Such rich people don't invest in property but they get rich through their direct active involvement in the property business, either developers building properties, marketing properties such as agency companies, or managing properties e.g. facility/estate management. It is business to them, not investment.
Rich people dump their money into properties more as a hedge against inflation (depreciating value of money as you have termed it) ONLY after they have enough exposure to other investment classes and property is a way of diversification to spread the risk of over exposure to a certain investment class. It is only a small proportion of their entire assets with the huge portion earning a more stable assured return. On the other hand, property investment remains the SINGLE LARGEST investment in most retail buyer's investment portfolio. This is a risky strategy imho. Of course everything hinged on their job income without which their property investment becomes unsustainable. A rising tide lift all boats, but a falling one, look at China property market now.
To chime in on the original point here regarding the depreciation of the lease.
It is also my understanding here that you are right that businesses need to factor in depreciation.
If you run a business, the lease depreciation needs to be factored in as part of your expenses in your P&L and likewise a reduction in asset value on your balance sheet. The specifics are slightly different depending on whether it is an owner-occupied property or investment property.
ON THE OTHER HAND, "P&L" for personal property investments is a loosely used term and there aren't fixed rules on how this should be calculated. The only thing that's mentioned is that depreciation of lease cannot be considered as expense in the eyes of IRAS when it comes to personal income tax. Furthermore, as there aren't fix rules on personal P&L, we are always mentally updating the "value of our asset" in our head when we see a paper gain (something which cannot be loosely done in a business P&L in SG context).
Just my two cents. I'm not an accounting expert, so if anybody knows better, feel free to fact-check me.
aren't u suppose to take all cost into consideration (mortgage, maintenance, taxes, etc) before u even put up a logical price for renting? but in any case, the property would pay itself off eventually (u should still be working in order to even have mortgage loan) and net cashflow would still be positive
True la, but the listing price is only one side of the equation mah. It also depends on what price the tenant is willing to pay.
Yes, eventually when the loan is paid off, you'll be able to achieve positive cash flow.
Property investment is getting tougher in Singapore. Only for the rich.
Yes, usually quite a hefty sum is required for the downpayment. Furthermore, there are also salary requirements to get a loan approved. Then you will still need to bleed cash every month.
Not true. There will be opportunities but one has to be ready in job and savings and with bank support to be able to exercise their options. Wish you good fortune.
How about the maintenance fee etc ? Shouldn't it be factored in?
Hi, factored in already. Pls see "hidden cost" section.
What happens, if property market crash ?
Asking the hard questions! It's not a simple question to answer, but let me try.
I think it really depends on the circumstances, cause and severity of the "crash".
If indeed such a "crash" happens, the textbook economics would be that property prices would come down. You could argue both ways about the rental market.
Since we can't control when or how this "crash" happens, if one chooses to go down this rental path, I think it's better to focus on what we can control instead:
1) Choosing a sound unit
2) Entering at a good price
3) Being prudent to ensure enough of a safety net to cope with the drop in asset value and;
4) Being able to cope with the reduction / loss of rental income.
Not forgetting the circumstances of this "crash" as this the could have an impact on personal income.
Rental income is worst than other returns in other investments products.. those who know knows
There are some calculations error in your slides. The -ve cash flow is not $20k, pls check.
Follow the concept lah. Don't get tied up in knots following his calculation. Everyone's situation is different.
Rental income need to pay income tax
Sad but true…
Some people will hope that your video does not reach the masses.
😲
My wife n me have 3 properties here n we r collecting good income every month leh. Maybe u don't know what u don't know.
Nice, that's good to hear