Wednesday, October 17, 2012

A prudent taxi driver

I asked a taxi driver, who is in his 50s, if he has fully paid up his HDB flat. He shared his personal experience.

He bought a 3 room HDB flat for $29,000. Eight years later, its value increased to $60,000. He sold it and bought a resale 4 room HDB flat for $80,000. He took an additional loan for $20,000 and paid a monthly installment of $150 (or thereabouts) for 15 years. He has fully paid up his 4 room HDB flat, which is more than adequate for his needs. His children have grown up.

I said that he had managed his finances wisely.

He shared the experience of a neighbor who sold the first HDB flat, took out the profit and spent it away. The neighbor took a full loan on the resale HDB flat and now had to pay $1,000 a month up to age 75. This was very stressful.

Another friend sold the HDB flat on two occasions and took out the profit. He invested in the stock market and lost the money entirely. He could not pay the mortgage on the 5 room HDB flat which was repossessed. Now, he had to downgrade to a 3 room HDB flat, and was in a worse condition than the taxi driver.

Another relative could not pay the mortgage installment for more than 10 years. The HDB did not repossess his flat but continue to add interest and lawyer fees. As the value of the 5 room HDB flat was above the money owed, he was allowed to continue living in the flat. When he sells the flat, the net amount, after paying the loan, would not be sufficient to buy a 3 room flat today.

The three cases of over-spending on HDB flats are quite common and has harmed the finances of many Singaporeans.


Jeremy Ow said...

It is good to invest in a residential property (be it HDB or private property for own stay or to be rented out) if one is prudent with the mortgage loan and amount of monthly installments that one needs to pay over a suitable loan tenure period. However, it may become disastrous when one is rushing into buying residential properties when others are also doing so in a herd mentality fashion. The emotional aspect may take over the rational aspect when making such buying decision and one may think it is alright to stretch one's finances to buy a property. However, there is no 100% guarantee in life as one may not be gainfully employed throughout one's life as retrenchment, changing health conditions or even accidents may affect one's ability to earn a work income to sustain the monthly installment payments plus other property related expenses.

Black swan events like this can hit anyone. If one has a high amount of monthly mortgage installments to pay and cannot meet the payments, this is when one is forced to sell the property at a price which may be unsuitable resulting in a loss as one will lose the bargaining power as he needs to dispose of the property promptly to settle his mortgage debts and property expenses which he has problems paying.

Investing in a property is good but one must ensure prudent use of mortgage debt and not be overly optimistic that everything will always work out as one has planned as one never knows when emergency black swan events may strike one when one least expected such as retrenchment, health problems or accident affecting one's ability to secure income.

Buying term insurance to protect against loss of income due to accident, health problems or death is possible to mitigate the financial obligations of the mortgage debts should anything happen to the borrower.

Even if one is renting out property, it is not always guaranteed that the unit will be 100% occupied by tenants everytime. There may be periods of vacancy when it is epecially difficult to secure a tenant such as during economic downturns. Rents may also get compressed during hard economic times possibly resulting in negative cash flow of the rented unit and one still needs to top up the shortfall for monthly payments for the property to meet the financial obligations of holding the property. As such, when investing in property intended to be rented out, there is a need to set aside cash to meet at least six months of monthly payments for the property in case the unit remains vacant.

This setting aside of emergency cash is also true for own stay residential units to prepare for emergency times when one still needs to meet the financial obligations of the monthly installments. As always, be prudent as property investment is a huge investment if not managed well can affect one's finances and well-being drastically. There is not only the upside but also the potential downside which one needs to manage carefully in carrying out property purchase.

yujuan said...

Trading in HDB flats is like weaving in and out of stock market trading.
It's gambling instinct at play, and like a stock trader, will end up the loser.
Some HDB owners argue it's alright, buy high, sell previous flat high also, but they dun think, what happens you buy high now, later may be forced to sell low in a property downturn due to reasons like unemployment in a bad economy, unable to service instalments.
Like buying a stock at tip top prices on margin, then when market collapses, forced to sell at a big loss.

bert said...

i waited till i had 150k in my cpf ordinary account before i bought a 148k 4-room flat from hdb 4 years ago. i have no worries about mortgage payments. if i lose my job i'll just rent out 2 rooms and i can get by. this reduces my stress. knowing that i am 'safe' i can work better and am more productive.

Unknown said...

Its' amazing that people sometimes take risks with these things. Its' not a short-term investment or a trading vehicle! Really, yujuan above is right. If you buy high with the intent of selling, you are basically relying on the "Greater Fool" theory. Only you risk becoming the victim yourself. If you want to gamble, go to casino!
alternative investments

Unknown said...

I am so delighted to view this post. Thanks..

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