It's always an awesome feeling to see my writings published and read by keen real estate investors and fellow industry agents! A Huge Shoutout and Thank you to the Team (Sandy Goh, Sabrina Tan, Romesh Navaratnarajah, Denise Djong, Agnes Goh!) at PropertyGuru for the coverage!
Here's the full unabbreviated article below!
Singaporeans love properties. Let's face it. We love the idea of speculation, of long term capital growth of our savings and dream of one day retiring upon the comfortable monthly rental paychecks that we receive from our tenants. And once our time is up, this dream fulfilling portfolio can be passed down generations after to provide inflation beating income that our loved ones can comfortably rely upon.
This passion for property might be an understatement for some families i know of who own rows of shophouses and acres of land in downtown Singapore and yet are always suffering the itch of accumulating more. Not that it is a wrong mindset though.
After all, these families were first hand eyewitnesses to how, over the course of our 51 years as a nation, their parents and grandparents have seen their wealth skyrocket by buying into our national soil and airspaces early on in their lives. This belief becomes in-built in our culture and property becomes the natural vehicle many of us aspire to put our hard earned wages into.
The appetite for property investments though can be both a blessing and a curse. While a healthy appetite for properties can stimulate the economy through job creation and infrastructure spending, over consumption can wreak financial havoc upon individuals and spiral easily into a nation wide crisis. Something that we witnessed not too long ago in the Subprime crisis in the US.
Hence that is in part, the reason for the current climate of cooling measures we all face today.
With the various restrictions imposed on us by the Monetary Authority of Singapore for the purchase of properties, alternatives have been commonly sought by investors keen to get started on their investing journey.
In this article, we will examine 3 common alternative property financing strategies that different types of investors can ponder upon to aid in building their own dream fulfilling portfolios.
Many singles may have insufficient funds to buy their first property, and so one potential strategy is to jointly co-invest with another single friend. They can combine their cash and Central Provident Fund (CPF) savings to start investing immediately, instead of waiting several years to accumulate more savings while facing the prospect of a shorter loan tenure.
The main issue with co-investing is that if either party were to get married, they would not be able to apply for a Build-To-Order flat or executive condominium unit, unless they dispose of their investment property at least 30 months beforehand.
If they were to buy a private property as a matrimonial home, they would have to set aside half of the Full Retirement Sum ($83,000 at the time of writing) in their CPF Ordinary and Special Accounts before the excess savings can be utilised, and will not qualify for an 80 percent mortgage loan if they have an outstanding loan. They will also be liable for Additional Buyer’s Stamp Duty.
Also, this method is only suitable for life-long good friends whom have been through much ups and downs with you as you would require their consent and blessing too should you need to sell the property in the future. Take special note that in the event you were to settle down within the next 3 years and need to offload this investment property, you will also be liable for Seller Stamp Duty and not to mention, a potentially very upset buddy. So tread carefully if you decide to do so.
Equity loans, sometimes called Term Loans or Gearing Up, are commonly used forms of financing that allows a property owner to withdraw equity that has built up over time from his property and use it for his short term cash flow needs such as acquiring of inventory or upgrading of machinery. Some would use it as a low interest credit line (Rates are similar to mortgage loan rates) to pay off higher interest loans such as credit card and car loans.
The official stance on Equity Loans is that they are not allowed to be used for property investments. However, it is commonly known among savvy investors and without a doubt, the authorities themselves, that this is not actively enforced.
Individuals and families with property portfolios with low or no leverage typically employ this strategy in order to free up equity and recycle them into other investments. This helps them to optimize their Return on Equity (It's a REALLY Important factor. Discussed in another post. Go read), take advantage of low interest rates and redeploy the funds into higher yielding assets.
The caveat of using Equity Loans as an alternative financing approach is present and investors do face a risk from breaching the terms of the loan agreement. Apart from that, it is important to highlight that CPF cannot be used to finance the monthly mortgage of the term loan and that the purchaser would need to do so entirely in cash (Yes, no CPF can be used in this case.).
In the past, asset based lending were rife and investors who could show a couple of hundred thousands in the bank were eligible for multi-million dollar loans. All without the need for ascertaining their loan servicing ability. All these were put to a halt with the introduction of the TDSR measures in June 2013. The days of easy credit were over and investors griefed. Assets pledging are categorized into 2 types. Liquid assets such as Sing Dollar deposits and savings and others such as stocks, bonds, foreign currency deposits and gold.
This strategy of property financing works when the buyer has no or insufficient income to support his loan application. In such scenarios, although he may be cash rich, the lack of an income proves to be an obstacle for banks to grant him a loan. Hence, asset pledging helps to augment his income to levels that are acceptable by TDSR criteria and qualify him for purchasing a property which he otherwise might not be able to.
Assets that are pledged for at least 4 years are taken at 100% of its value while if it is pledged for any less than 4 years, an immediate haircut of 70% of its value is applied.
As a guideline, for an unemployed person, for every $100,000 loan applied for, $36,000 in liquid assets has to be pledged for 4 years or $120,000 if it is pledged for less than 4 years.
Hence, to employ this strategy, a buyer would have to have a significant amount of savings, assets or financial support.
To summarize, optimizing use of funds and structuring of financing strategies is an area that investors should continually explore to put their savings to work as early as possible. There are various creative methods that are shared at investment networking events that would be too intricate to be described in detail in this short article. Property Investment is a life long journey of learning and fine-tuning of strategies which pays huge dividends for the avid investor. I wish you all the best in your journey and may your investment portfolio prove lucrative and sustainable.