Analysis

Is It Worth Paying A Premium For A Pre/Post-War Flat In Tiong Bahru? We Break Down The Numbers

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Sean

Sean has a writing experience of 3 years and is currently with Stacked Homes focused on general property research, helping to pen articles focused on condos. In his free time, he enjoys photography and coffee tasting.

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Astrid
Astrid
3 years ago

YOLO! I dun think the buyers care about conserving their capital and not losing money when they buy leasehold with 50 years left.

Herb
Herb
3 years ago

Hey Sean, I am curious about the method you used to determine, that the return on the 44 year lease pre war flat is 63.5%.
If you had used the downpayment of 260K and put in a fixed deposit at 4% interest. After 44 years of compounded interest, it would have $1.4 million inside.
The net rental received after 44 years is $1.5 million. Considering you get to spend that rental money every month, and the high probability the rental will increase due to inflation along the 44 years a person holds it, the returns are much higher. Based on this line of thinking the returns are 600%

Stacked Homes
Admin
3 years ago
Reply to  Herb

Hey Herb! We took into account that over time, not only would the downpayment be considered the initial investment, but so would the principal payments every month. When the loan is paid each month, there’s interest costs that reduces your returns, while the amount invested goes up. This is why the returns curve slopes down – consistently earning rent with an ever increasing base of investment. Eventually at the end of the 20-year loan, your total investment would equate to the $928,000 which makes sense since that’s what the flat costs. As the interest cost goes to 0 over time, and the principal payments are not made, the consistent rental earned over a constant base of investment results in a bump in the return, but it decreases over time due to the increasing depreciation. Moreover, there are other costs too. Income tax, maintenance fees, stamp duty, agency fees to find tenants. At the end of this 44 years, your flat is worth $0 too. The returns calculated each year already reflect the fall in the flat’s value, so this 63.5% you’re left with assumes your total gains (rental – interest cost – stamp duty – taxes – maintenance – agent fees – depreciation) over what was invested ($928,000). We did not take into account inflation, as it would apply across the board to all the costs over the years, so we kept it simple.

A more simplified working would be:
Total rental: $48K x 44 years = $2,112,000
Less total cost of the flat at the end of 44 years = $2,112,000 – $928,000 = $1,184,000.
Immediately you’ll see that the returns are just $1,184,000 / $928,000 which is 127%.
Less all the other costs like interest expense and it dwindles down to just 63.5% at the end of it.
Hope this clarifies!

Herb
Herb
3 years ago
Reply to  Stacked Homes

If the deposit required was $1 and the net rental returns after interest, paying back principal etc was reduced to $100K. Would the returns now be 100/928 = 10.7%?
Or have i used $1 to make $100K?

Stacked Homes
Admin
3 years ago
Reply to  Herb

Hey! It would be the 10.7%, as the total investment is 928 as we calculate the total amount invested, not just the deposit.

Sonja
Sonja
2 years ago

Hello! Thank you for the interesting summary. Would it be possible for you to send me the link for the sources or the name of the website? That way I can look into it in more detail. Many thanks in advance.
With kind regards

Stacked Homes
Admin
2 years ago
Reply to  Sonja

Hey! We used data directly from HDB and Squarefoot Research.

Mike
Mike
5 months ago

Hi Stacked. Would one be able to purchase one of these privatised SIT units if you already own HDB? I’m assuming it is no longer considered Govt housing so shouldn’t be an issue owning both?

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