We Have $1.8m In Cash & $1.1m In CPF: Should We Buy A 4 Bedder Condo And Small Investment Condo Or Commercial Unit?

Dear Stacked Homes

Being an avid reader of your materials, I was wondering if you provide some (free) advice on our situation:

01. We are already in the process of selling our current joint-named property.

02. The following will be the financial standing after the sale, clearing of loan, and the return to their respective:

Male (M) 

• ... 49 years old
• ... CPF OA = $790K
• ... CPF SA sufficient for FRS
• ... Annual income $180K

Female (F)

• ... 49 years old
• ... CPF OA = $380K
• ... CPF SA sufficient for FRS
• ... Annual income $60K

Total available cash 

... $1.8M

03. General Information

• ... We are a family of 5
• ... Husband + Wife + 3 teenage boys
• ... Considering to purchase and stay in a 4BR Condo
• ... Condo should be within 500M of an MRT station (giving up the cars)
• ... Prefer D3, D4, D5 districts
• ... Need more than 1300sqft

04. What are our options?

... (a) Low-Budget 4BR = Split the budget between 1x4BR (own-stay) and 1x2BR (rental-income)(not-considering-1BR)

... (b) Mid-Budget 4BR = Split the budget between 1x4BR (own-stay) and 1xCommerical-Unit (Less than 1M)(rental-income)

... (c) Max-Budget 4BR = Put everything into 1x4BR (own-stay)

... Do (a) (b) or (c) make better sense?

05. Any recommendations for condo projects in support of (a), (b) or ©

06. Additional information

... In consideration of splitting the budget between (a) Low-Budget 4BR = 1x4BR (own-stay) and 1x2BR (rental-income), we might be open to include D21 + D22 for the 4BR unit.

07. Objective

• ... Maximize potential capital appreciation for the 4BR in 5-10 years
• ... Maximize returns for an remaining funds
• ... We already have other investments in equity, so this is our "property" pool
• ... A little flexibility, in the case of a need for money (in writing this, I realize that Option (C) seems contradictory!)

Hope to be able to get your advice, either in print as a case study or otherwise.

Thank you!

---

Hello,

Thanks for writing in and for clearly structuring your question. 

Considering the proceeds from your property sale, you seem to be in a secure position. Additionally, having other avenues of investment further solidifies your strong financial footing.

Let’s start by assessing your affordability.

Affordability

Husband’s affordability (Presuming he buys the own stay property)

Maximum loan based on age of 49 with an annual income of $180K, at 4.6% interest	$1,119,775 (16 year tenure)
CPF funds	$790,000
Cash (We will allocate a larger share for the own stay property)	$1,000,000
Total loan + CPF + cash	$2,909,775
BSD based on $2,909,775	$115,088
Estimated affordability	$2,794,687

Wife’s affordability (Presuming she buys the investment property)

Maximum loan based on age of 49 with an annual income of $60K, at 4.6% interest	$373,258 (16 year tenure)
CPF funds	$380,000
Cash (We will allocate a larger share for the own stay property)	$800,000
Total loan + CPF + cash	$1,553,258
BSD based on $1,553,258	$47,262
Estimated affordability	$1,505,996

Combined affordability

Maximum loan based on ages of 49 with an annual income of $240K, at 4.6% interest	$1,493,033 (16 year tenure)
CPF funds	$1,170,000
Cash	$1,800,000
Total loan + CPF + cash	$4,463,033
BSD based on $4,463,033	$207,381
Estimated affordability	$4,255,652

Given that both of you already have the CPF funds required to fulfill the Full Retirement Sum (FRS), we will not have to worry about selling and buying your subsequent property/properties before you turn 55 years old. 

Since you have a substantial amount of cash to put towards the purchase, your individual affordability can be easily adjusted by moving the cash around.

Now that we have a better idea of your budget, it’s safe to say the options you’re considering are feasible. Let’s run through them! 

Potential pathways

Option 1. Buy a 4-bedder for own stay and a 2-bedder for investment

As your planned holding period of 5 - 10 years, is not exactly a very long amount of time, you can consider looking at leasehold developments but perhaps something that is younger so any lease decay concerns are mitigated.

And while you do have a healthy budget of $2.79M, the truth is that when it comes to 4 bedders, there are not many units that match all your requirements. Those that do match are older in age. 

So in order to get better matches, moving another $200K from the investment property towards the purchase of your own stay property (increasing your budget to $2.99M) would help. 

As such, these are some 4-bedroom units that are currently on the market which comes under the new budget:

Project	District	Tenure	TOP	Size (sqft)	Asking price
The Trilinq	05	99 years	2017	1,764	$2,680,000
One-North Residences	05	99 years	2009	1,615	$2,980,000
Meraprime	03	99 years	2006	1,313	$2,800,000

If you are open to walking a slightly longer distance of under 1KM to an MRT station, there will be a handful more options. 

Do note that these units are picked out purely based on the fact that they match the criteria you have brought up and fall within your budget of $2.99M. They may or may not be suitable and we strongly advise that you consult a property agent for further analysis.

Let’s now look at the costs involved. For calculation purposes, we will use a holding period of 10 years.

Assuming you buy a 4-bedder at The Trilinq. From January till date, there were 6 4-bedders sold, with 2 being penthouses. Excluding the penthouses, these units transacted at an average price of $2,302,525. We will use this as the purchase price. Do note that these transacted units ranged from 1,109 - 1,518 sq ft. 

Purchase price	$2,302,525
BSD	$84,726
CPF + cash	$1,990,000
Loan required	$397,251

Costs incurred

BSD	$84,726
Interest expense (Assuming an interest rate of 4%)	$118,560
Property tax	$49,510
Maintenance fees (Assuming $450/month)	$54,000
Total outcome	$306,796

Potential gains

We will use the annualised growth rate of private residential properties over the last decade of 2.21% to do a simple projection.

Time period	Price	Gains
Starting point	$2,302,525	$0
Year 1	$2,353,411	$50,886
Year 2	$2,405,421	$102,896
Year 3	$2,458,581	$156,056
Year 4	$2,512,916	$210,391
Year 5	$2,568,451	$265,926
Year 6	$2,625,214	$322,689
Year 7	$2,683,231	$380,706
Year 8	$2,742,530	$440,005
Year 9	$2,803,140	$500,615
Year 10	$2,865,090	$562,565

Potential gains if you were to buy a 4-bedder and hold it for 10 years: $562,565 - $306,796 = $255,769

We’ll now look at your investment property. 

These are some 2-bedroom units under $1.3M that are currently on the market and have a decent recent yield:

Project	District	Tenure	TOP	Unit type	Size (sqft)	Asking price	Avg rent (Jun - Aug)	Rental yield
Twin Vew	05	99 years	2021	2b2b	710	$1,300,000	$4,606	4.3%
Sol Acres	23	99 years	2019	2b2b	711	$998,000	$3,500	4.2%
Kingsford Waterbay	19	99 years	2018	2b2b	689	$950,000	$3,442	4.3%

Let’s assume you were to purchase a Sol Acres. From January till date, there were 68 2b2b units transacted at an average price of $1,043,860. We will assume this to be the purchase price. 

Purchase price	$1,043,860
BSD	$26,354
CPF + cash	$980,000
Loan required	$90,214

Typically, major banks in Singapore do not provide loans for amounts less than $100,000 to $200,000, depending on the specific bank selected. If the purchase of your primary residence does not max out your affordability, it is probable that you will still have surplus cash available to pay off the investment property in full. However, for the sake of calculations, let's assume a loan amount of $100,000.

Costs incurred

BSD	$26,354
Interest expense (Assuming an interest rate of 4%)	$29,845
Property tax	$60,000
Maintenance fees (Assuming $250/month)	$30,000
Rental income (Assuming $3,500/month)	$420,000
Agency fees (Payable once every 2 years)	$18,900
Total outcome	$254,901 (Gains)

We will also use the annualised growth rate of private residential properties over the last decade of 2.21% to do a simple projection.

Time period	Price	Gains
Starting point	$1,043,860	$0
Year 1	$1,066,929	$23,069
Year 2	$1,090,508	$46,648
Year 3	$1,114,609	$70,749
Year 4	$1,139,242	$95,382
Year 5	$1,164,419	$120,559
Year 6	$1,190,152	$146,292
Year 7	$1,216,455	$172,595
Year 8	$1,243,338	$199,478
Year 9	$1,270,816	$226,956
Year 10	$1,298,901	$255,041

Potential gains if you were to buy a 2-bedder and rent it out for 10 years: $255,041 + $254,901 = $509,942

Total gains if you were to take this pathway: $255,769 + $509,942 = $765,711

Option 2. Buy a 4-bedder for own stay and a commercial property for investment

Generally, investors seeking commercial properties are often motivated by a desire to circumvent the Additional Buyer's Stamp Duty (ABSD) levied on residential properties. Fortunately, in your case, having the financial capacity to acquire two properties individually means that ABSD wouldn't be applicable to you. As demonstrated earlier, even with a budget of $1M allocated for the investment property, there are viable residential options available that can deliver decent rental yields.

There are several important things to take note of when it comes to buying a commercial property.

1. You will not be able to utilise your CPF funds for the down payment or monthly mortgage repayments

Given that you do have a healthy amount of cash, this may not be an issue. Additionally, if the unit is being rented out, you can possibly use the rental income to offset the monthly repayments as well.

2. GST may be payable

On top of the usual BSD, there is also a GST charge if you’re purchasing a commercial property from a GST-registered seller. The GST payable is dependent on the purchase price and is currently set at 8%. However, this will be increased to 9% in January 2024. The GST is also payable only in cash.

3. LTV and interest rates

You can potentially borrow up to 80% of the property's value, which exceeds the LTV limit applicable to residential properties, capped at 75%. However, the LTV ratio can vary and might be more conservative if you're acquiring a commercial property for investment purposes, as banks often perceive them as carrying higher risks. Additionally, it's worth noting that interest rates for commercial properties tend to be comparatively higher than those for residential properties.

4. Property tax

Unlike residential properties where the percentage of property tax payable varies depending on whether the unit is owner-occupied or otherwise, for commercial properties, the property tax is a flat rate of 10% of the annual value.

5. Change of use

Commercial properties are also subjected to various zoning as outlined in the URA Master Plan. Depending on the specific property type and its designated purposes, you might be required to seek planning permission from the URA should you or your prospective tenant wish to modify its intended use.

6. Property type and location

Commercial properties encompass a range of categories, including office spaces, retail premises, and industrial properties. Each category comes with its distinct set of factors to evaluate and potential risks to consider. Depending on the property type, location could be crucial for the success of your investment. For instance if you're investing in a retail shop, factors like accessibility, foot traffic, proximity to transportation hubs, and the overall business environment in the area may hold significant relevance. As a landlord, you may also find yourself having to deal with licensing agencies, so the administrative effort could be something you might want to think about.

7. Other risks

Commercial properties come with risks since the inherent use of the property may change for the worse. For example, if you intend to purchase an F&B for example that sells alcohol till 2AM, you might find yourself in a situation where residents from nearby homes complain later on about the establishment after your purchase. This could result in a reduced hours for how long your tenant can sell alcohol which also reduces revenue and in turn, reduces the rent you can charge.

Now that we understand some of the nuances with commercial properties, let’s take a look at the numbers.

Assuming you were to purchase a commercial property at $1M, let’s see how this will change your affordability.

Purchase price	$1,000,000
BSD	$24,600
GST	$8,000
Cash (Assuming you only pay for the down payment and take the maximum loan of 80%)	$200,000
Loan required	$800,000

As your wife is only eligible to take up a maximum loan of $373,258, the shortfall of $426,742 will have to be topped up in cash. This means the total cash required will be $659,342 (20% down payment + loan shortfall + BSD + GST). After paying for this, the cash remaining that can be put towards the purchase of your own stay property is $1,140,658.

Husband’s new affordability

Maximum loan based on age of 49 with an annual income of $180K, at 4.6% interest	$1,119,775
CPF funds	$790,000
Cash (We will allocate a larger share for the own stay property)	$1,140,658
Total loan + CPF + cash	$3,050,433
BSD based on $3,050,433	$122,625
Estimated affordability	$2,927,808

The difference in affordability between this scenario and Option 1 is marginal, and it wouldn't substantially expand your choices for your own stay property. Nevertheless, with a budget of $2.9M, you already have the capacity to secure a 4-bedroom property in your preferred districts, so this is not an issue.

For the commercial property with a $1M budget, a diverse range of options is available. According to a PropertyGuru article, commercial properties typically yield an average rental return of approximately 5%, surpassing that of many residential properties. However, it's essential to consider that their maintenance costs are also higher, falling within the range of $0.80 to $1.50 psf/month.

For calculation purposes, we will assume the purchase of a 300 sq ft unit at $1M with a 5% rental yield and monthly maintenance of $1.50/sqft.

Cost incurred

BSD	$24,600
GST	$8,000
Interest expense (Assuming maximum loan of $373,258 at an interest rate of 4%)	$111,399
Property tax	$79,980
Maintenance fees (Assuming $450/month)	$54,000
Rental income (Assuming $4,166/month)	$499,920
Agency fees (Payable once every 2 years)	$22,495
Total outcome	$199,446 (Gains)

Let’s take a look at the price movement of commercial properties over the last 10 years.

Year	Commercial property avg PSF (resale)	YoY
2012	$1,201	-
2013	$1,418	18.07%
2014	$1,320	-6.91%
2015	$1,283	-2.80%
2016	$1,230	-4.13%
2017	$1,332	8.29%
2018	$1,374	3.15%
2019	$1,157	-15.79%
2020	$1,065	-7.95%
2021	$1,348	26.57%
2022	$1,243	-7.79%
Annualised	-	0.34%

In contrast to residential properties, commercial real estate has shown relatively subdued performance in the past decade. The surge in online shopping has diminished the demand for retail space, considering it is an overhead that businesses can forego. Additionally, the pandemic, which prompted a significant shift towards remote work, resulted in reduced demand for office space. It's crucial to note that the associated risks will fluctuate based on the specific type of commercial property you choose to invest in.

We will use the appreciation rate of 0.34% to do a simple projection.

Time period	Price	Gains
Starting point	$1,000,000	$0
Year 1	$1,003,400	$3,400
Year 2	$1,006,812	$6,812
Year 3	$1,010,235	$10,235
Year 4	$1,013,670	$13,670
Year 5	$1,017,116	$17,116
Year 6	$1,020,574	$20,574
Year 7	$1,024,044	$24,044
Year 8	$1,027,526	$27,526
Year 9	$1,031,019	$31,019
Year 10	$1,034,525	$34,525

Potential gains if you were to buy a commercial property and rent it out for 10 years: $199,446 + $34,525 = $233,971

Since your affordability for the own stay property remains more or less similar to Option 1, we will assume the same gains.

Total gains if you were to take this pathway: $255,769 + $233,971 = $489,740

Option 3. Combine funds to buy a 4-bedder

Given your primary objective of maximising profits, opting to pool your funds for the purchase of a 4-bedroom property for your own stay may not be the most ideal choice since this approach relies solely on potential capital appreciation.

On the contrary, by keeping your own residence and investment property separate, you effectively diversify risks. Additionally, the rental income generated from your investment unit can serve to offset expenses incurred.

Moreover, at the current level of interest rates, maximising your affordability also means taking a much bigger loan which could affect your long-term profitability.

So how should we tackle this question?

There’re two cases we’d like to explore here

• First is maximising your budget which means you’ll need to take a bigger loan. This naturally increases costs.
• Next is to consider a cheaper 4-bedroom project that doesn’t maximise your affordability to see the difference.

In both cases, we’ll assume you set aside an arbitrary $200,000 because you mentioned you’d like to have some cash available on the side.

Let’s explore the first case - not maxing out your affordability which also limits the amount of loan you’ll be taking. In this case, you can purchase a condo that’s around $3+ million.

Here are some 4-bedroom projects that went for $3+ million:

Project	District	Tenure	TOP	Size (sqft)	Asking price
Highline Residences	03	99 years	2018	1,292	$3,300,000
Echelon	03	99 years	2016	1,572	$3,300,000
Skyline Residences	03	Freehold	2015	1,474	$3,280,000

Assuming you purchase a $3.3M 4 bedder at Highline Residences:

Purchase price	$3,300,000
BSD	$137,600
CPF + cash	$2,770,000
Loan required	$667,600

Cost incurred

BSD	$137,600
Interest expense (Assuming an interest rate of 4%)	$199,245
Property tax	$117,200
Maintenance fees (Assuming $450/month)	$54,000
Total outcome	$508,045

As before, we will also use the annualised growth rate of private residential properties over the last decade of 2.21% to do a simple projection.

Time period	Price	Gains
Starting point	$3,300,000	$0
Year 1	$3,372,930	$72,930
Year 2	$3,447,472	$147,472
Year 3	$3,523,661	$223,661
Year 4	$3,601,534	$301,534
Year 5	$3,681,128	$381,128
Year 6	$3,762,481	$462,481
Year 7	$3,845,631	$545,631
Year 8	$3,930,620	$630,620
Year 9	$4,017,487	$717,487
Year 10	$4,106,273	$806,273

Total gains if you were to take this pathway: $806,273 - $508,045 = $298,228

Now as a hypothetical example, let’s say you were to get a 4-bedder for $4.25 million which maxes out your affordability. Here’s what the numbers would look like:

Purchase price	$4,250,000
BSD	$194,600
CPF + cash	$2,770,000
Loan required	$1,674,600

Cost incurred

BSD	$194,600
Interest expense (Assuming an interest rate of 4%)	$499,785
Property tax	$207,800
Maintenance fees (Assuming $450/month)	$54,000
Total outcome	$956,185

And here’s the gains assuming a 2.21% increase year on year.

Time period	Price	Gains
Starting point	$4,250,000	$0
Year 1	$4,343,925	$93,925
Year 2	$4,439,926	$189,926
Year 3	$4,538,048	$288,048
Year 4	$4,638,339	$388,339
Year 5	$4,740,846	$490,846
Year 6	$4,845,619	$595,619
Year 7	$4,952,707	$702,707
Year 8	$5,062,162	$812,162
Year 9	$5,174,036	$924,036
Year 10	$5,288,382	$1,038,382

Total gains if you were to take this pathway: $1,038,382 - $956,185 = $82,197

What should you do?

Let’s do a quick summary of the costs incurred and potential gains for all 3 options. 

	Option 1. Buy a 4-bedder for own stay and a 2-bedder for investment	Option 2. Buy a 4-bedder for own stay and a commercial property for investment	Option 3a. Combine funds to buy a $3.3M 4-bedder	Option 3b. Combine funds to buy a $4.25M 4-bedder
Costs incurred	$51,895	$107,350	$508,045	$956,185
Potential gains	$765,711	$489,740	$298,228	$82,197

Out of the 3 options, it’s clear from the table above that Option 1 entails the lowest costs. By being able to produce rental income, you’re afforded some level of safety since you will be realising the returns in the form of rental income.

As a result of that, it’s also the option that yields the highest potential gains.

Additionally, if the investment property's purchase price is below $1M, there may be no need to be saddled with a loan, resulting in further expense reduction - particularly crucial given the prevailing elevated interest rates.

In the case of Option 2, the rental income from the commercial property does help mitigate costs, but the lower appreciation rate translates to comparatively reduced potential gains when compared to Option 1.

Furthermore, the inability to utilise CPF funds for the commercial property purchase means that available funds are not fully optimised. The higher cash investment in the commercial property keeps the budget for your primary residence unchanged from Option 1, so your options are not widened. Additionally, the smaller buyer pool for commercial properties, comprising mainly businessmen and investors, may prolong the time needed to sell in the future.

Finally, Option 3 yields the lowest outcome. The main reason why this is the case is because you’ll be putting all your eggs in one basket, fully dependent on the capital appreciation over 10 years. All this while having to pay an interest expense of 4% which is more than the assumed gains. You can clearly see this with the more expensive property where the potential gains are a lot lower because the interest expense already erodes about half the profit. Moreover, we assumed that the more expensive property would have a higher property tax which eats into the profits.

Considering all of these options, we would prefer Option 1 in trying to maximise your affordability to meet your goal of capital appreciation in 5 to 10 years. It’s also playing the safer side given you can at least enjoy some rental income.

Option 2 is not something we would consider on the grounds that buying a commercial property is fundamentally different from being a residential landlord given the risks and downsides we’ve highlighted earlier. The returns are also potentially worse than Option 1 which seem to be an easier choice than managing a commercial unit.

Finally, Option 3 would be our least preferred choice given it’s very dependent on capital appreciation. It’s also highly dependent on how interest rates move.