We Own A Fully Paid 4-Room HDB And A 2 Bedder Condo: Should We Invest In A 3rd Property With 30% ABSD?

Hi,

I am a subscriber to your Telegram – Stacked Homes and frequently read your well-written and in-depth articles.

Understand you provide advice to people whom reached out and hence I am also doing the same. Appreciate if you could provide some clarity/suggestions.

I am in a dilemma (and hence maintaining status quo til now) regarding my current property situation:

My wife and I both early fourties (Singaporeans) own (50/50) on both fully paid 4-rm HDB (14 yrs old Sengkang) and a 2 bedder private condo. No outstanding loans. We rent out the HDB (3K) and stayed in the Condo.

Our combined income is around 20K and savings of about 800K.

Based on the current market, we are not sure if:

1. We should invest in 3rd property meaning incurring ABSD of 30% – hoping for capital gain if market continues to appreciate

2. Decouple and invest in 3rd property incurring ABSD of 20%. Continue to reap the rental income

3. Sell off our HDB (cash cow), decouple, and invest in 3rd property.

Thank you!

(This is part of an ongoing series where we answer reader questions about the property market. If you have one of your own, send it to stories@stackedhomes.com.)

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Hi there,

Thank you for your kind words and we’re happy to hear that our content has been helpful. 

Owning two fully paid properties is certainly a comfortable position to be in, especially if you are considering taking on another mortgage loan without affecting your Loan-To-Value (LTV) ratio. However, we understand your dilemma, particularly if you intend to retain one or both of your properties.

Let’s first assess your affordability before delving into the options you’re considering.

Affordability

As there are some missing details, we are making the following assumptions for our calculations:

• You are both 42 years old
• You do not have any CPF funds in your OA

For the purchase of a third property:

Maximum loan based on ages of 42 with a fixed monthly combined income of $20K, at a 4.8% interest	$1,836,249 (23-year tenure)
Cash	$800,000
Total loan + cash	$2,636,249
BSD based on $2,636,249	$101,412
ABSD based on $2,636,249	$790,875

Based on the above, unless you have a significant amount of CPF funds available, you won’t be able to maximise your loan for the purchase due to the high costs of BSD and ABSD exceeding your cash savings.

With your available cash of $800K, and considering the BSD, ABSD, and the 25% down payment required, your maximum affordability will be approximately $1.3M.

Purchase price	$1,300,000
BSD	$36,600
ABSD	$390,000
25% down payment	$325,000
Cash	$800,000
Loan required	$926,600

Now, the next thing to look at is how HDBs and private properties in Singapore have been performing. This is because options 1 and 2 involve retaining your HDB, while the third one reallocates it to a private property.

This is where it’s important to highlight the key differences between having an HDB versus a private property as part of your portfolio.

Private properties are less regulated compared to HDBs, and so their prices tend to be more fluid and responsive to market conditions. This fluidity is influenced by a variety of factors including demand from both homeowners and investors, en bloc sales, and changes in economic conditions.

On the other hand, HDBs are meant to be affordable housing. It’s more susceptible to regulatory risks since it’s a government product.

This is evident when you compare both indexes side by side:

You can see that non-landed private properties started appreciating in 2018 – earlier than HDBs that only saw gains from 2020 onwards. Non-landed private property prices began to recover in 2017, driven by a surge in en bloc sales.

While the gap has narrowed, you can see that the PPI still made stronger gains in 2022-2023 than HDBs.

Private property transactions are not subject to the same stringent eligibility criteria and usage restrictions that govern HDB flats, such as income ceilings, minimum occupancy periods, and resale conditions. This makes private properties more attractive to a wider range of buyers. 

Having said that, while private properties offer greater flexibility and potentially higher returns, they also come with higher risks due to their susceptibility to market volatility. For instance, fluctuations in interest rates, foreign exchange rates, and international economic trends can significantly impact the demand and pricing of private properties. 

In contrast, HDB prices are more stable due to government regulations aimed at ensuring affordability and preventing speculative buying. Measures such as the Mortgage Service Ratio (MSR) cap, minimum occupancy periods, and restrictions on renting out flats help to moderate price movements and ensure that HDB flats generally remain accessible to the average Singaporean.

Another way to look at this is that private properties lead HDB prices. This is an indication that if you’re looking at capital gains, private properties are the way to go. HDB prices seem to catch up when this gap widens too much.

Let’s now run through the numbers for the options you’re considering.

Pathways under consideration

Invest in a third property, incurring a 30% ABSD

Based on the affordability calculations, you’ll be looking at a price point of around $1.3M. For calculation purposes, we will assume this to be the purchase price with a conservative rental yield of 3% annually and a 10-year holding period.

Purchase price	$1,300,000
BSD	$36,600
ABSD	$390,000
Cash	$800,000
Loan required	$926,600

Costs incurred

BSD	$36,600
ABSD	$390,000
Interest expense (Assuming a 4% interest and 23-year tenure)	$314,733
Property tax	$54,000
Maintenance fee (Assuming $250/month)	$30,000
Rental income	$390,000
Agency fee (Payable once every 2 years)	$17,715
Total costs	$453,048

Based on the calculations, it will take approximately 10 years of rental income just to break even on the ABSD, which is a considerable amount of time.

Excluding rental income, to break even on the ABSD alone over a 10-year holding period, the property needs to appreciate at an annual growth rate of around 2.7%. This seems feasible given the average growth rate of 2.9% for non-landed private properties over the past decade. However, this will vary depending on the specific development you choose.

But who wants to invest large sums of money just to break even? To achieve profits, the property would need to appreciate at a rate higher than the average, especially since this calculation doesn’t factor in other costs besides ABSD.

And let’s not forget – you’re forgoing the opportunity cost of investing your cash elsewhere. Over the 10 years that it took you to break even, this cash that went towards paying taxes could’ve been earning a 7% return elsewhere. At a 10-year holding period or more, this 7% is reasonable as you can take on more risk.

In addition, if you’re gunning for gains that can outperform the market so that paying the ABSD is worth it, then data has shown that buying a larger unit (one with more bedrooms) would result in higher returns. The current budget of $1.3 million is just not quite big enough to purchase a larger home that could result in a better return.

Here’s a look at Treasure At Tampines returns by size of unit:

Today, buying a 3-bedroom new launch would already cost more than $1.5 million. As for resale, many 3-bedders within this budget are usually old and leasehold that we wouldn’t expect to outperform in the long run unless there is some form of an en-bloc acquisition (which is unpredictable, and not to be relied on).

So when you take all of this into consideration, we’re less inclined to go down this pathway.

Now let’s explore the 2nd pathway:

Decouple and have one party purchase another property, incurring a 20% ABSD

Let’s first take a look at the costs of decoupling. Since we do not know where your condo is, we will use a hypothetical valuation and assume that both of you forked out the same amount of funds for the initial purchase. 

Assumptions made:

• Property valuation = $1,500,000
• CPF used plus accrued interest = $300,000 (individually)
• Both parties have no CPF funds in their OA currently

Party selling shares	Description	Party buying shares
50%	Shares	50%
$750,000	Valuation	$750,000
$300,000	CPF used plus accrued interest to be refunded into OA	–
–	Option fee (5%)	$37,500
–	Completion fee (20%)	$150,000
–	BSD	$17,100
–	ABSD	$150,000
$3,000	Legal fees	$3,000
$447,000	Cash proceeds	–
	Loan required (after deducting $800k cash)	$120,100

The minimum loan requirement varies between banks, but it is generally at least $200,000. Let’s say you were to take a loan of $200,000 instead, you’ll have cash left over of $79,900, which we will put towards the purchase of the third property. 

Do note that since the HDB is jointly owned by both of you, decoupling your condo ownership means the party buying the shares will incur ABSD, as it will be considered their second property purchase. However, the ABSD will only apply to the 50% share value.

Assuming both of you are 42 years old and each earning a monthly income of $10K, your individual maximum loan eligibility for a private property at a 4.8% interest rate is $918,124.

So after taking into account the loan amount, BSD, ABSD, and the down payment, the affordability for the party who sold their shares is:

Purchase price	$1,350,000
BSD	$38,600
ABSD	$270,000
25% down payment	$337,500
CPF + cash	$826,900
Loan required	$831,700

*$300,000 (CPF refunded) + $447,000 (cash proceeds from decoupling) + $79,900 (cash left over)

Please note that the figures used here are hypothetical, and your actual situation may vary based on the outcome of decoupling your condo.

In this scenario, you will have two mortgage loans to manage instead of one. Assuming you continue to reside in the decoupled property while renting out the third property at a 3% yield, let’s consider purchasing the third property at $1.3M, this time with a larger sum of CPF and cash, to fairly compare it with option 1.

Purchase price	$1,300,000
BSD	$36,600
ABSD	$260,000
CPF + cash	$826,900
Loan required	$769,700

Costs incurred

BSD	$36,600
ABSD	$260,000
Interest expense (Assuming a 4% interest and 23-year tenure)	$261,440
Property tax	$54,000
Maintenance fee (Assuming $250/month)	$30,000
Rental income	$390,000
Agency fee (Payable once every 2 years)	$17,715
Total costs	$269,755

We will also consider the interest expense on the loan for the property that you have decoupled. 

Interest expense (Assuming a 4% interest and 23-year tenure on a $200,000 loan)

$67,933

Total cost if you were to take this pathway: $170,100 (decoupling costs) + $269,755 + $67,933 = $507,788

Sell HDB, decouple and have one party purchase another property without ABSD

In this scenario, you will maintain the same number of properties as you currently have. When considering property investment, typically two strategies come into play: banking on capital appreciation or generating rental income.

HDBs generally offer better rental yields due to their more affordable price points. However, for capital appreciation potential, the right private property holds promise for higher returns, as evidenced by average growth rates over the past decade.

If you’re contemplating this route, it only makes sense if the private property you’re eyeing offers superior yield compared to the HDB, or demonstrates stronger potential for appreciation.

Reviewing transactions of 4-room HDBs in Sengkang completed in 2010 over the last 6 months, the average sale price stands at $649,000. Let’s assume this is your selling price, evenly split between both of you. Since it is fully paid off, this amount will be returned entirely in CPF and cash.

Using the same decoupling parameters as previously mentioned, but excluding ABSD since the HDB is sold, we can calculate the affordability for the party who sold their shares:

Maximum loan based on the age of 42 with a fixed monthly income of $10K, at a 4.8% interest	$918,124
CPF + cash	$1,151,400
Total loan + CPF + cash	$2,069,524
BSD based on $2,069,524	$73,076
Estimated affordability	$1,996,448

*$300,000 (CPF refunded) + $447,000 (cash proceeds from decoupling) + $79,900 (cash left over) + $324,500 (HDB sale divided by 2)

As before, let’s assume you continue residing in the condo you’ve decoupled and purchase another unit for investment at $1.3M to maintain consistency in our calculations. We’ll also assume the same 3% rental yield and a 10-year holding period. Let’s presume you take the minimum loan of $200,000, which will leave you with $14,800 of excess cash.

Interest expense (Assuming a 4% interest and 23-year tenure)	$67,933
BSD	$36,600
Property tax	$54,000
Maintenance fee (Assuming $250/month)	$30,000
Rental income	$390,000
Agency fee (Payable once every 2 years)	$17,715
Total gains	$183,752

Total cost if you were to take this pathway: $170,000 (decoupling costs) + $67,933 (interest expense for decoupled property) – $183,752 = $54,181

Alternative option: Remain status quo and invest cash savings elsewhere

Since you already own two fully paid properties and appear to be content with your current residence (all three pathways under consideration involve retaining your existing private property), you might explore investing your funds in alternative avenues with lower associated costs.

For instance, if you were to invest in stocks and shares, which typically offer a 4-7% Return On Investment (ROI), the potential returns on an $800K investment over a 10-year period would be as follows:

ROI	Gains
4%	$384,195
5%	$503,116
6%	$632,678
7%	$773,721

Expanding on this, investing in stocks and shares provides liquidity, diversification, and potential returns that can complement your property holdings. This approach also minimises the management and upkeep responsibilities associated with owning additional properties.

What should you do?

Let’s do a quick summary of the 3 pathways you’re contemplating:

Pathways	Number of properties owned	Costs	ABSD payable (included in costs)	CPF/cash remaining
Invest in a third property, incurring a 30% ABSD	3	$453,048	$390,000	$0
Decouple and have one party purchase another property, incurring 20% ABSD	3	$507,788	$410,000	$0
Sell HDB, decouple and have one party purchase another property without ABSD	2	$54,181	$0	$339,300 (from HDB proceeds + cash left over)

Based on financial numbers alone, option 3 would involve the lowest costs but would also mean one less property in your portfolio. This strategy would only be advantageous if the private property you intend to purchase can either yield higher rental returns than the HDB (not likely), or offer superior potential for capital appreciation (which is where private property stands out).

For options 1 and 2, the substantial ABSD incurred would require a significant period to recover through rental income.

In this case, we think that maintaining the status quo and exploring alternative investment avenues might be more beneficial. There’s just too much risk and unnecessary finances you have to stretch just to acquire a 3rd property. Remaining status quo involves less effort, less risk, better diversification and a lower opportunity cost since you do not pay the ABSD up front or the other costs associated with property ownership.