4 Condo Strategy that may Backfire When Buying Property

Below are 4 popular condo strategy commonly used by investors. Every condo strategy will have their pros & cons and may not be suitable for everyone. Without property planning or guidance from professional, they may backfire and create problems for inexperienced buyers 

======================

     Table of Content

• 99-1 Strategy
• Pledging & Show cash
• Rental Yield vs Capital Appreciation
• Buy for En Bloc

======================

📌 1. 99-1 Strategy

• When a couple buys a condo, by default, they will own the property under Joint Tenancy.
• Those who aspire to own a second property will choose Tenancy-in-Common instead and hold the first property in 99-1 manner.
• The key purpose for 99-1 holding is to save on both buyer stamp duties and additional buyer stamp duty (ABSD).
• Refer to my article “3 Tips when Co-investing in a Private Condo with your Spouse” for details.

Common Challenges

• During decoupling, buying spouse (99%) realized he (she) is unable to take over the full loan amount for first property.
• The buying spouse (99%) needs to refund the CPF + accrued interests used by the outgoing spouse (1%) 
• The outgoing spouse (1%) does not have enough income to qualify for the bank loans needed to buy the second property.

📌 2. Pledging & Show cash

• Total Debt Servicing Ratio (TDSR) is applied to loans for the purchase of private properties.
• Under MAS Notice 645, your cash, fixed deposits and shares can be included as part of your gross monthly income.
• Buyers who fail TDSR will not qualify for the loan amount they needed to buy their dream property
• They may attempt to use pledging or show cash methods to improve their TDSR and take higher loan amounts

Common Challenges

• The objective of TDSR is to encourage buyers to be prudent and not take excessive loans.
• Pledging and show cash are legitimate methods to help buyers take higher loans but they should be used with discretion and care
• Buyers who are financially overstretched will find it tough to service their higher monthly mortgage later, especially when bank interest rates rise.

📌 3. Rental Yield vs Capital Appreciation

• Some buyers like to look at rental yield as the key factor when deciding which property to buy
• Besides rental yield, I feel capital appreciation factor must also be considered together
• For example, there are many freehold condos in Geylang that promises high rental yield @5%.
• Its unique location, food offerings and rich culture is a draw for many tenants.
• However, due to stigma and bank loan limits, the capital appreciation potential there tends to be lower than other parts of Singapore

Common Challenges

• Besides rental yield and capital appreciation, you should also have an exit strategy, especially when you are investing in overseas properties.
• I have seen overseas projects using “guaranteed rental returns for X years” to attract Singaporean investors. 
• However, the question is after X years, “Is there rental demand?”, “is the rental yield sustainable?
• Many overseas investors also overlook the presence of the secondary markets e.g., who are the future buyers of your property?

📌 4. Buy for En Bloc

• A recent study observed a price increase when condos reach 31 to 40 years old.
• This is because of their higher en bloc potential.
• In Singapore, not many condos survive beyond 40 years
• En bloc Investors will aim to enter at the lowest price possible.
• They will buy the cheapest units e.g., low floor units in original conditions.
• When there is a collective sale, every owner will be paid based on share value, regardless of floor levels or interior conditions.
• After completion, these buyers will spend the minimum for renovations, then rent out unit and wait for the collective sale.

Common Challenges

• En bloc is a long-term game and is not for everyone.
• It is not suitable for short term investors or buyers with a fixed time frame
• While older condos are good en bloc candidates, we do not know whether the collective sale will happen 5, 10 or 15 years later or maybe not at all.

Like this “Condo Strategy” Article or Video?

Check out more Condo Tips here