I have just finished a busy week where I have just helped a client May sell her condo and purchase a another condo unit. This purchase being her 2nd property, she will have to pay Addition Buyers’ Stamp Duties(ABSD) of 7%. Being a little surprised by how swiftly she made her decision to buy after she saw her dream home, I asked her:

“Why did you want to buy at this time and pay for the ABSD of 7%? Why don’t you wait till the government lift this requirement in future?”

She told me that past experience tells her that  its impossible to time the property market. But she firmly believed in its long term growth and that she has done all her sums and considered all situations eg if interest rates were to hit 4% after the next few years…

She calculated that with her initial investment of $375,000, if she were to hold the property for the next 10 years, it is very likely that she will gain 100% of this initial investment. She has kindly provided me with the full calculation:

 Price of property: $1.25m

Interest Rate: 1.5%

Loan Period : 30 yrs

Rental Yield: 3.8%

Monthly rental: $4000

 Monthly installment is at $3451

Additional Buyers’ Stamp Duties +Buyers’ Stamp Duties= $125,000

20% down payment = $250,000

Total Investment Outlay=$125,000+$250,000

                                                =$375,000

 

At the end of 10 years if she sells at the same price of $1,250,00 presuming there is no increase in price at all, which is quite unlikely, guess how much will she take back from this sale?


Scenario 1:  No gain in property price.

       Sell at $1,250,000 (0 profit)

 

Interest 1.5%

Interest

2%

Interest

2.5%

Interest 3%

Interest

4%

Monthly  installment

 

$3451

$3696

$3951

$4216

 

$4774

Sell after 10 yrs at $1.25m

 

$1.25m

$1.25m

$1.25m

$1.25m

$1.25m

Outstanding bank loan after 10 years

 

less

$721,000

less

$734,500

less

$747,000

less

$760,000

less

$783,000

Sale Proceeds ($1,250,000 less outstanding bank loan)

 

=$596,000

=$515,500

=$503,000

=$490,000

=$467,000

Total cost of investment is :

30% $1.25m= $375,000

Less

$375,000

Less

$375,000

Less

$375,000

Less

$375,000

Less

$375,000

Gross profit=Sales proceeds less initial investment of $375,000

 

=$221,000

$140,500

$128,000

$115,000

=$92,000

Return on Investment(ROI)

 

58%

37%

34%

30%

24%

 

 The yellow highlighted column shows the most likely average interest rates that a buyer will be paying. Of course it would be wonderful if interest rates stayed at 1.5% forever!


Scenario 2:       20%  in property price.

Sell at $1,500,000 (20% profit from $1,250,000)

 

Interest 1.5%

Interest

2%

Interest

2.5%

Interest 3%

Interest

4%

Monthly  installment

 

$3451

$3696

$3951

$4216

 

$4774

Sell after 10 yrs at $1.25m

 

$1.5m

$1.5m

$1.5m

$1.5m

$1.5m

Outstanding bank loan after 10 years

 

less

$721,000

less

$734,500

less

$747,000

less

$760,000

less

$783,000

Sale Proceeds ($1,250,000 less outstanding bank loan)

 

=$779,000

=$765,500

=$753,000

=$740,000

=$717,000

Total cost of investment is :

30% $1.25m= $375,000

Less

$375,000

Less

$375,000

Less

$375,000

Less

$375,000

Less

$375,000

Gross profit=Sales proceeds less initial investment of $375,000

 

=$404,000

$390,500

$378,000

$365,000

=$342,000

Return on Investment(ROI)

 

107%

104%

100%

97%

91%

 

So there you have it, taking the conservative estimate that property prices only increase by 20% in the next 10 years, it will still be worthwhile buying a property now even though the 7% ABSD seems to be a huge obstacle!

Please call me at 9022-8919 if you need more information or if you have any questions!

Click here to find out how some HDB or private property owners can still buy 2 properties without paying ABSD!

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