No property count under your name and exploring investment options with minimal cash outlay? A 4rm HDB might just be the answer. In this article, we look at the returns we can expect from investing in a 4rm HDB and the cost required.
Why 4rm HDB?
Since May 2018, the maximum number of occupants allowed in a unit is capped at 6. Most room rental tenants come in either single pax or a pair. A 4rm HDB, having 3 bedrooms and lowest room-to-price ratio, would be the ideal unit type to maximize rental yield.
Credit: ValueChampion
Upfront cost
Upfront cash starting from $18,000 assuming sufficient CPF OA for the downpayment, stamp duty and legal fee.
Grants
These are "free money" given in the form of CPF OA top up to help you with the property purchase. There are three types of grants available:
EHG - $5,000 to $80,000 depending on income
Family Grant - $30,000 to $50,000
Proximity Grant - $20,000 to $30,000
Singles are eligible for half of the above-mentioned grants.
COV (Cash over valuation)
When the property price is above its valuation, the difference has to be paid in cash (known as COV). This can range from $0 to about $40k.
Option and Exercise Fee
When an agreement on the price has been made, you have to pay up to $1,000 as option fee to secure an option from seller for the purchase. You will have 21 days to obtain a valuation of the unit (cost $120), apply for bank loan and exercise the option by paying an exercise fee of up to $4,000. The option and exercise fees made form part of the downpayment which will be mentioned in the following sections of loan.
Resale Application Fee: $80
HDB Loan
HDB allows loan up to 85% of the property’s valuation and the remaining 15% (downpayment) can be paid using CPF OA or cash.
Bank Loan
You can loan up to 75% of the property’s valuation and for the remaining downpayment, 5% must be in cash while the other 20% can be in CPF OA or cash.
Stamp Duty, Legal Fee and Agent Fee
Buyer Stamp Duty – between 1% to 3% of the property price
Legal Fee – about $2,000
Agent Fee – 1% of property price
Buyer Stamp Duty and Legal Fee can be paid using CPF OA or cash.
Renovation and Furnishing
Depending on the condition, most resale flat, being previously occupied, are liveable and does not require much renovation. A fresh coat of paint would make the space look new. Other miscellaneous cost includes professional cleaning, aircon servicing and faulty light / switches.
Paint work - $1,000 for 4rm HDB
Miscellaneous - $2,000
Some owners are agreeable to selling their place furnished. But assuming you took over the unit unfurnished, you will need to provide basic items like bed, fan, fridge, washing machine and TV. Head over to Carousell and snap up pre-loved furnitures and appliances at a bargain.
Furnishing - $5,000
Returns
If detailed calculations are too mind-numbing for you, skip the assumptions and look at the important figures like Monthly Cash Inflow, Total Expenses and Net Gain highlighted.
Assumptions:
Property Price: $500,000
Monthly Mortgage Payment: $1,482 (Bank loan with interest at 1.4%)
Monthly CPF OA Contribution: $945 (Salary: $4,500)
Cash Required For Mortgage Payment: $537
Common Room Rent: $850
Master Bedroom Rent: $1,050
Utility and Conservancy Fee: $243
Senario 1: Renting out 1 common room and 1 master bedroom:
Rent Collected: $1,900
Monthly Cash Inflow: $1,363
Senario 2: Renting out all 3 rooms
Rent Collected: $2,750
Monthly Cash Inflow: $2,213
Senario 2 can only be legally carried out after you fulfilled the 5 year MOP.
Case Example
Daniel bought a 4rm HDB in Jurong at $500,000. For the first 5 years, he rented out 2 bedrooms and subsequently all 3 bedrooms after he fulfilled his MOP. At the end of 10 years, he decided to sell the 4rm HDB and buy a 3rm HDB in central region.
Total income from rental: $279,000
(less) All expenses incurred from property transaction and rental: $107,211
Net gain over 10 years: $171,789
Thinking Further
If you further invest this stream of cash, you can get much more than this $213,818 at the end of the 10 years period. I have to make a disclaimer that this is not a professional investment advise; just purely a suggestion for you to explore how to make better use of this extra stream of income than just putting it in the bank.
If price fluctuation is not something you can handle well, putting the money into stable coins (like USD Coin) and staking them on an exchange can give a boost to your gain. Of cause, if you are not comfortable with crypto currency, there are other investment products that beat leaving your money in the bank.
Curious to see how does 12% p.a., compounded monthly, looks like? For Daniel’s case, if he invest the net monthly cash flow consistently every month, he can expect his investment value to grow as illustrated in the table below.
Total income from rental being invested: $382,962
(less) All expenses incurred from property transaction and rental: $107,221
Net gain over 10 years: $275,751
Conclusion
A 4rm HDB can be a great investment property for individuals who wish to commit lower cash up front. Owner can expect a return of $170k over 10 years and with the rental returns re-invested, the gain can be significantly higher.
Rental demand is expected to remain robust in the forseeable future as housing supply is low, borders further open and demand for space rise due to the “new normal” of working from home.
Abstract from CNA atricle:
Source: CNA 03 Jan 2022
Have any doubt or query on any of the points mentioned in the article? Feel free to have a non-obligatory chat with me via a call or click on WhatsApp if you need help with regards to:
· Financial assessment
· Choosing the right property
· Timeline and payment schedule
· Planning and execution
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