Sell 1 HDB, Buy 2 Condo: No or Go?

With the rising retrenchment and unemployment rates, and the government’s gloomy economic forecast, is the “sell one HDB, buy two condos” a wise property investment move right now?

We’re sure you’ve seen this before: “Sell 1 HDB, Buy 2 Condos! NO ABSD!”

It was a sales pitch among local property agents that peaked late last year, attracting both sellers and buyers who saw a way to expand their property portfolio without incurring the Additional Buyer’s Stamp Duty (ABSD).

The idea was simple and typically aimed at Singaporean couples. Sell your HDB flat and use your sales proceeds for the down payment on two condominiums, which you are to purchase separately under your respective names.

Here’s how you “sell one HDB, buy two condos”

First, you have to remember that you can get a bank loan to finance up to 75 per cent of your property purchase. Another 20 per cent can come from your CPF Ordinary Account (OA) savings, and the other five per cent, you can pay in cash.

Let’s say you and your spouse co-own an HDB flat. After some deliberation, you decide you want to grow your family and start trying for children; but you realise your home is not big enough and you’re too far from your parents in case you need help.

Once you find a more suitable home, you sell your HDB flat for $400,000. After paying off the remaining loan, fees, etc., say you are left with $120,000. So, you and your spouse each buy a condo unit:

You use $75,000 for the down payment on Condo A—big enough to fit your growing family, good location—that’s worth $1.5 million, entirely under your name.

Your spouse then uses the remaining $45,000 to buy Condo B—smaller, probably a one-bedder, good location—that’s worth $900,000, under his or her name.

Now your growing family has two properties, and you did it without having to pay the ABSD.

Why do the properties need to be under two separate names?

The main thing is, you can legally avoid paying the ABSD. If you go the traditional route, say, you sell your HDB flat and buy a single condo unit with your spouse. As co-owners, you would have to pay the ABSD for the second property you buy. For Singapore Citizens, it’s 12 per cent of the property price or value (whichever is higher).

Another contributing factor is, you can get the full financing of up to 75 per cent for your home loan. Most Singaporeans who are buying their second property will find that the minimum down payment for their next home purchase rises to 45 per cent of the prize. This sizable amount, in addition to the ABSD, can be too financially challenging for a majority of second-time buyers. Hence, the attraction towards “sell one, buy two”.

But for “sell one HDB, buy two condos” to work, you need:

1. To be in a dual-income situation with your spouse

Each spouse has to be earning a steady income to qualify for individual home loans, such as the Loan-To-Value (LTV) limits and the Total Debt Servicing Ratio (TDSR). For example, when calculating the TDSR, one party’s single income is taken into account, not the combined household income. Thus, in the unfortunate event that one spouse is retrenched, the other could have a tough time paying off two mortgages at the same time.

2. To have sufficient savings for the relevant stamp duties and cash down payments

This includes having enough cash and CPF monies available for the next 20 per cent of the down payment, as well as sufficient proceeds from the sale of your HDB flat to pay back whatever funds you used from CPF.

The benefits to “sell one, buy two”

With two different properties in your portfolio, you can choose to live in Condo A and rent out Condo B to gain passive income or vice versa. You can also swap later: Once your children are older and find their own place, you can decide to rent out Condo A and live in the smaller unit, Condo B, to support your retirement. (Do note that it’s not wise to place all your bets solely on your second property for your retirement portfolio, either.)

However, take note that just as there are benefits to the “sell one, buy two” property investment method, there are also risks.

The risks to “sell one, buy two”

Speaking to Business Times (BT) last year, the Monetary Authority of Singapore (MAS) warned Singaporeans to “be aware of the risks involved”, including “potential changes in the economic environment and their ability to service their mortgages, if, for instance, there are changes to their employment status or prospects.” This warning is as valid today as it was then.

It might not be evident now, with private property prices rising and demand surging for resale flats. Still, property analysts have remarked that there is an inevitable snowball effect of property prices falling—as is historically the case following the start of a significant gross domestic product (GDP) contraction. The government has already predicted the GDP to shrink between five to seven per cent in 2020.

The multiple stimulus packages provided by the government and the deferred repayment of residential property loans, which relieved many homeowners from servicing their mortgage, will not be there forever. It’s unclear whether the government will continue the relief measures after 31 December 2020.

The increase in the retrenchment and employment rates this year should also be a cause for caution. According to the Ministry of Manpower (MOM), about 8,300 permanent employees were let go in 3Q 2020 compared to the 2,240 in 3Q 2019. About 800 term contract employees also lost their jobs this quarter compared to the 230 in the same quarter, last year.

In addition to the job-loss disparity, lower-income earners ($2,999 and below) also experienced a significant drop in salary, as reported by the Development Bank of Singapore (DBS).

What works for highly-affluent Singaporeans may not work for you

With many Singaporeans losing their sources of income, and the unstable state of the economy, it becomes glaringly clear that only a select group of people can qualify to “sell one, buy two properties”.  Many industry leaders have remarked that selling one HDB flat for two condos is better suited for the highly-affluent, those who are financially stable and have a fairly high income.

Home ownership is a long-term commitment that should not be taken lightly, and you should consult a qualified financial planner to assess your situation and guide you in your property journey.

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