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Resale HDB vs condominium: Are flats a bad investment?

If you’re deciding whether to invest your money in a HDB flat or a condo, here are some things to consider.

When agents are advising you whether to choose a resale HDB flat or a condominium, the commonly heard refrain is, “Resale HDBs are a bad investment. If you sell, confirm lose money”.

The agents have a very good reason to believe this. Investing in private property is one of the best ways to make money in Singapore.

After the government made clear that HDBs do expire after their 99 year lease, the prices of resale flats have tanked. One thing is clear: HDBs will always be affordable housing for the masses. Don’t expect any massive price appreciation any time soon – or ever.

READ: Should you buy a BTO or resale HDB flat? What to consider if you're a first-timer

Condos, on the other hand, are a different story. They’re also pretty decent in the short term, too. If you take advantage of a developer’s early bird discount – which is sometimes as much as 10 per cent – there’s a lot of money to be made. After all, 10 per cent of a S$1 million condo is already S$100,000.

So, why is a HDB flat a good investment?

1. THE RENTAL YIELD ARGUMENT

Yes, apart from BTOs and other newish flats (and some other special cases), the future seems bleak for the HDB resale appreciation. If you buy a HDB with 50 years’ of lease left on it, it is certain that you will sell it at a loss.

But, hang on – property investment isn’t all about capital appreciation. It’s also about rental yield.

And when it comes down to it, HDBs can have far better rental yield compared to their condo counterparts, simply by virtue of how affordable they are. (Note: This depends on the rental income generated as well. Condos do tend to generate higher rental income than flats, which can sometimes offset their higher costs.)

Suppose you get a really affordable three-room S$280,000 flat at Mei Ling Street – one of those with approximately 50 years left on the lease. If no renovation is needed, that’s actually only S$230,000 after your S$50,000 resale grant. Assuming you rent it out after five years for a modest S$15,000 or S$18,000 a year, that’s actually a pretty decent rental yield – far better than what any condo can achieve – simply because of the sheer low quantum. 

READ: Minimum Occupancy Period: What you can do with your flat after the 5-year period ends

Even assuming that you spent up to S$300,000 paying interest, renovation charges, taxes, conservancy fees and maintenance fees, that would still be a 6 per cent rental yield.
You’ll break even in approximately 16 years, maybe even sooner, if rental rates keep up with inflation.

That leaves a remaining 34 years left for you to collect rental income.

“Wait – 16 years just to break even? Isn’t that a bad investment?”

If you look at that alone, yes, sure. That S$280,000 HDB resale is not a great investment. Historically, some condos appreciated 300 per cent during the same time frame.

So, yes, if you could afford a condo but went bought a resale HDB, you would be giving up on some pretty insane capital property appreciation.

“And where are you going to stay if you’re renting out your HDB?”

Good one. You got us there. To even rent out your HDB, you’re going to need to buy another property or live somewhere else. If you buy another house, you’d be subject to ABSD.

So, all in all, this whole “rent your HDB” idea is pretty optimistic – realistically, only two groups of people can take advantage of the high rental yield for HDB flats: Those who live with their parents, and those who don’t intend to live in Singapore.

That brings us to the second argument.

2. A HDB WILL NEVER MAKE YOU MONEY. BUT IT WILL TIE UP LESS CAPITAL.

(Note: No form of property investment truly gives you liquidity, as the asset class is by definition illiquid. There is no easy way to cash out in an instant). Assuming you bought a S$770,000 condo today in 2019, you would have locked up S$225,000.

If you bought the S$230,000 HDB resale, you would have only locked up S$57,500. Now, that’s a difference of S$167,500.

For the first option, you would be putting all your eggs in one basket (a pretty safe basket). You’d be giving up on other forms of investment – namely, the stock market.

Here’s what S$167,500 might look like if invested into popular global index funds over the past 10 years (starting in 2009), versus a condo.

(Image: 99.co)

In terms of capital appreciation, the stock markets have shown the potential to beat the crap out of condo appreciation. Though with condos, you have to take account leverage into account. So that 67.91 per cent capital appreciation, leveraged four times because of a 25 per cent downpayment, will definitely be competitive with stock market gains.
The point is this: A HDB is an investment in your liquidity. Put that money elsewhere, and there’s the potential to match the gains made by any condo.

“But wait, all this depends on whether or not you buy the right stocks.”

You’re right. But the same argument can be made for property. Whether or not you make huge gains or painful losses depends on whether you buy the right property.

In the same way, you could argue that someone who bought a unit at The Sail and made 300 per cent in three years could have made 90 per cent by buying Tesla stocks over the past three months. (Also, everyone knows hidden costs of the condo can add up to devastating amounts over many years, so if your condo doesn’t appreciate, you will lose money.)

Now what? We’re not saying property investing is a bad idea. We’re also not saying you should sell your home and buy Haidilao stocks (up 72 per cent since January at time of writing). Each asset has its pros and cons. What we’re saying is this that this notion of “buy HDB, sure lose money” can be pretty dangerous.

Why? Because it pushes people to over-stretch for a condo when their finances don’t allow for it. In some cases, it might even result in property being the only thing people invest in, which results in a lack of diversification. It sees things purely from the eyes of a property investor, and even though we love property, “buy HDB sure lose money” isn’t a fair statement to make because it assumes the HDB buyer won’t make any other sort of investment.

To oversimplify things, we’ll say this: If you like commitment, aren’t concerned and can afford it, buy a good condo to invest in. But if you can’t afford a condo yet, don’t fret. It’s better not to overstretch yourself. Save your money up.  Buy an affordable HDB. Invest in the stock market – the gains are not to be scorned, either.
You can always buy that condo later.

PS: If you buy a condo first and then want to get an HDB, it’s not easy to reverse the decision. You can’t apply for a flat while you have a condo, so if you want to downgrade, you’ll need to sell the condo, and then wait 30 months before you can apply for an HDB flat. If you need a flat for some reason within the first three years of buying (e.g. You want to get married and a shoebox condo is too small), there is the SSD to contend with, and the state of the market at the time you sell. 

On the flipside, if you buy an HDB first and decide it’s a mistake, it’s not too hard to sell it and upgrade to a condo later (just wait for the MOP). If you buy a condo and realise you’ve run out of money, then it’s much more problematic to downgrade.

This story first appeared in 99.co.

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