Ways to fund for free condominium
Are you thinking of buying a condominium? Or even upgrading from smaller apartment in Pasir Panjang? You have probably met few real estate agents notifying you to buy your dream house for free back then. Now, with the technology advance, you will be able to see some of the Facebook ads with the messages owning multiple properties with little or minimal money. Seems too good to be true eh because as the saying goes nothing in life ever comes free or there’s no free lunch. Here are some of the scenarios that can get you a free condominium.
Scenario 1: funding your property using CPF
Both you and your spouse have a sum of money in CPF Ordinary Account (OA) and have working to contribute to your CPF. Now that you have enough money in your Ordinary Account (OA) to finally pay up for your downpayment and sufficiently contributes your monthly mortgage repayment. In this situation, you won’t need to fork out any cash and your property agent claims or assumes you can own the condominium for free.
Though what may seems like a dream life but it comes with a flaw in the painting. Although using your CPF OA to fund your Pasir Panjang property has its merits. The money that is being used from your CPF OA is your own retirement money. However, the assumption here is that both you and your spouse have to continue working and have the ability to earn at least the same amount of salary or higher during the duration of mortgage. Hence, if either one of you loses a job, the bread winner will need to carry the financial burden more to service the monthly mortgage fully using your CPF OA.
Scenario 2: using rental to cover your monthly installment
Both you and your spouse owned a HDB flat with sufficient down payment for a condominium. You decided to upgrade your residential place to condominium and your property agent advises that you should not sell your HDB flat but keep it to generate income. Using HDB flat to collect rental and cover your monthly instalment for your condominium, in a way you’re staying in your condominium for free.
Sounds like a perfect plan? Well, there’s always cons in this strategy, it could backfire on the property owner. Firstly, the actual rental income you expect to generate from your HDB flat is most likely to be much lower than what you may have estimated where most of the new property investors do not take into account of agent’s commission, rent-free period, upkeeping and maintenance cost and taxes. When you add up all the costs, the net rental income received will be lower than the gross income rental generated by the HDB flat. Another assumption is that the expectation to let your HDB flat renting out at all times even after accounting for rent-free period of one month and you may need additional a month or two to find a suitable replacement as tenants. During these tough moments, you may need to consider and accept lower monthly rental fees to attract potential tenants.
By reducing the monthly rental, you may need to recalculate your net rental income with your expenses that you can still cover your monthly instalments.
Scenario 3: Buy a condominium and renting out to cover your instalment
Now that you have enough money to settle down payment for condominium. Your agent suggests that you can own a condominium by paying down payment then renting out to cover the monthly instalment and once you have fully paid the mortgage, the property owned is free.
This method is what many would call leverage. Leveraging your borrowed money to make investments larger than your capital size, fairly common in property investments. It could be a double-edged sword if the strategy is not used in a good place or circumstances. But if it’s used right, you can multiply your gains in your investments but if you make loses, it can be magnified. For instances, if you are paying for down payment of $400,000 for your $1million property and then selling it for a loss of 20% at $800,000, half of your initial capital ($400,000) would be lost. The use of leverage means incurring interest cost. The $600,000 loan for over a period of 20 year that costing you $142,000 in interest by the time the mortgage is fully paid up.
This strategy is based on the assumption that you’re able to rent out at all times during your mortgage duration with your desired rental income. If the assumption fails, you as the property investor is liable to pay for the mortgages.
Above all scenarios may sound like picture perfect for free property but it always come with risks that you should be aware of like liquidity risks, interest rate risks, market risks, policy risks and losing job risks. Through prudent property investments, the tips is to understanding the risks and gains that you’re facing and managing well to avoid over-leveraging yourself. It applies to all types of property, doesn’t matter condominium or HDB flats in Bedok or Pasir Panjang, managing risks are all you need.