How You and Your Spouse Can Transform Your HDB Into 2 Condos

When you were in your mid-twenties, you exchanged vows with the love of your life, then waited eagerly for your matrimonial HDB to be built. Fast forward a decade and two children later, this is still where you call home.

Sometimes, you glance over at your happy little family and your heart swells with joy, but you can’t help but wonder if you could give them a life better than this, considering that the world has gotten more competitive and things are getting more and more expensive each year.

What if you could give them not just a better life, but the best?

With careful and calculated planning, can be easily Transform your HDB into 2 condos. Here’s how.

First, sell your HDB and free up your names. You and your spouse are now separate entities and can procure two condos, one in each of your name respectively. This avoids getting slapped with the dreaded ABSD, otherwise known as the bane of those who aspire to own multiple properties.

Condominium purchases require a minimum of a 25% down payment, where there is a mandatory cash deposit of 5%. Now here’s the cool part– the remaining 20% can be fulfilled via CPF! Now that’s a way to utilise the seemingly untouchable funds accumulated over aeons.

With that settled, your family can now move into one of the private properties and be wowed at the whole new quality of living it provides. Your children will definitely appreciate the sparkling pools, private BBQ pits, clean gyms and the multitude of other amenities offered.

Another benefit of residing in a more prestigious environment includes being in a gateway of higher-standard networking channels for your family. Building rapport and connection with equally (or more) successful people would help in business, getting ahead in your career, or even opening new opportunities.

On the other hand, what happens to the other condo?

It might have had the bulk of its down payment financed by CPF, but renting it out results in receiving cold hard cash. Additionally, these returns cover the instalments significantly, dissolving any stress from setting aside a huge portion of earnings every month. Eventually, your and your spouse will be proud owners of two fully-paid condos which not only are luxurious accommodations but also boast attractive resale value. The other investment property will also provide a passive income in your golden years.

The chart above clearly demonstrates the difference in sticking with the HDB and saving up the spare cash, versus selling the HDB and owning two private properties. The latter choice creates an avenue for a steady stream of passive income.

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How could someone with two properties have no home? The simple answer is because they couldn’t live in them. To help them purchase their home, which is their third property, cost-effectively, we had to do so under a trust.

Background

A couple came to me with their problem in 2018. They each own one private property under their own name. But they couldn’t live in either of these properties.

In fact, they own these properties even before they got married. Coincidentally, their respective parents brought the properties for them when they were still a fairly young adult.

Property A was brought with cash and paid in full. That property was meant to be a source of passive income for the parents. For some reasons I won’t disclose, the parents can’t own the property in their names.

Nor did they brought the property under a trust. Although owned by their son, the rent collected was meant to be pass-through to the retired parents.

Property B was more of a gift and a leg up for the daughter. So the parents paid the deposit, and she was to take up a mortgage for the balance. It was rented out to help pay the mortgage to the bank.

Financing strategy

Allow me to side-track a little to discuss a little about this interesting strategy adopted viz-a-viz Property B.

If the parents had a $250,000 gift for the child, rather than gifting it now in cash. And risk losing it through volatile investments, or worse still, being squandered.

This sum could form the down payment for a $1 million dollar property with the balance $750,000 coming from a bank loan.

As she was young and had time on her side, she can leverage the longest loan tenure and let the tenant service for the monthly payment. At the end of the tenure, the fully paid asset would likely be worth around $1,728,000*.

*Based on a 1.84% p.a. inflation on housing and utilities from a time period of 30 years from 1989 to 2019. Source: Monetary Authority of Singapore (MAS) inflation calculator

That initial $250,000 could have grown by an annual compounded rate of 6.66% to a sum of $1,728,000. And on top of that, by 30 years time, this asset would be generating monthly cash flow providing passive income.

Of course, the above figures were obtained with some major assumptions. Firstly, it assumed that the inflation rate for the last 30 years will be the same in the next 30 years.

Secondly, it also assumes the rent is uninterrupted and is greater than the various costs plus the principal repayment.

Costs here include interest charges, maintenances, any repairs or upgrades, fees and miscellaneous.

A final assumption that the property doesn’t get en bloc during the course of being paid up.

The above scenario was outlined in one of my Financing Strategy Videos. Visit my YouTube Channel for more such strategies!

The Problem

They have been married for close to 6 years but is being held back from setting up their own home.

This is because they faced hefty Additional Buyer’s Stamp Duties to own a second property. Moreover, their ability to get a mortgage loan is severely restricted due to the various property cooling measures.

One apparent solution is to sell off Property B and free one of their name to purchase their dream home. However, this property happened to be undergoing en bloc negotiations.

When I enquired as to the progress of the negotiations and whether they can wait for the conclusion of the en bloc before buying their new home, they said no.

They can’t wait any longer. Moreover, the en bloc negotiations seem to be facing lots of obstacles and may take years. They’d rather move on, they have some savings which they think it will be sufficient for a new home.

With that, we had a sit-down and went through the sums.

Without going into too many details. The savings they have coupled with the hit from the cooling measures meant that they could only get a new condo in the suburbs. Which is far from their ideal of a freehold, city fringe and large-sized unit.

The issue here is that this new purchase will attract a 12% ABSD. That saps a large chunk of their savings which they need for renovation. As their requirements would surely lead them to old, resale units that need a major overhaul.

In addition, we could only purchase the new home under one name as the other spouse still have an outstanding mortgage loan for Property B. Under MAS ruling, the available loan-to-value for such a case would only be 45%.

Moreover, CPF usage is also reduced as they need to set aside half of the prevailing minimum sum. Having only one borrower limits the loan as it will be based on one income.

It is starting to feel like we are stuck between a rock and a hard place.

After further discussion and a reveal of the fact that Property A is actually fully paid, we started considering the option of setting up a trust. And purchase the new home under their children’s name. As they are only 2 and 4 years old, setting up a trust is the only way.

But any purchase under trust has to be in cash and paid in full. That is a huge sum for the type of properties we have shortlisted and were viewing by then.

The Solution

Then, it dawned on me!

Why not do a mortgage withdrawal loan on their existing properties. This akin to taking a loan on the new purchase. That solved the issue of having sufficient funds for the purchase and the renovation.

As the new purchase will be under trust, it has to be fully paid and wholly-owned by their children. After highlighting the consequences, restrictions, rules and potential pitfalls of using trust. They are all clear and good to go.

The next step was to pay a visit to the lawyer to set it up.

And within weeks, I’m happy to report – they got their new home!

They need not dispose of their existing properties and they saved a huge sum towards their home purchase.

If they had to pay additional taxes on their purchase and couldn’t finance the bulk of it, they could not have had a home near their parents.

Most importantly, having the ability to free up cash and take a loan gave them the confidence and ability to own their own home.

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