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"Your home is not an asset."
This quote is taken from the book "Rich Dad Poor Dad" by Robert T. Kiyosaki, written in 1997.
Is your home an asset? According to the author, an asset puts money in your pocket. Liability takes money out from your pocket.
The notion that a home is an asset is often debated in Singapore, particularly in the context of financial literacy and investment strategies. The idea that "your home is not your asset" stems from a financial perspective that distinguishes between assets and liabilities based on their ability to generate income.
As such, an owner-occupied home is not an asset as it goes not generate income, and you need to service the mortgage, maintenance, and taxes, thereby classifying it as a liability rather than an asset.
Let me share with you a true case scenario.
Mr and Mrs Lim sold their HDB flat in 2010 for $400,000. They upgraded to a 3-bedroom condominium for $1 million. After staying there for 5 years, they sold their condominium for $1.5 million and upgraded to a bigger 4-bedroom property at $1.8 million.
The couple are both 45 years old now and they want to know if they should cash out on their 4-bedroom condo. They are also concerned if they should upgrade again and take out a bigger loan at their age.
Over the years, Mr and Mrs Lim upgraded their homes several times, each time taking on larger loans to afford more expensive properties. While they realized capital gains from selling their previous homes, these gains were reinvested into new properties, requiring them to take on additional debt, and with the fact that this is the property they and their family are staying in.
Does this make their home an asset since they are not generating income?
Let's discuss the different options Mr and Mrs Lim can take for their next property move.
Option 1: Buy a more rare property
The graph above shows the average price trend for non-landed and landed properties. Prices of landed properties grew by 58.1% compared to non-landed properties, which grew by 38.2%.
Landed properties are more rare than condos and apartments. In a land-scarce country like Singapore, the supply of landed properties is limited, thereby increasing their value.
Based on Mr Lim and Mrs Lim's age (45) and combined earnings of $38,000 per month, they can take a loan of around $3.4m for a tenure of 20 years.
A loan of $3.4m allows them to purchase a property around $4.5m,
Their existing 4-bedroom condo is valued at $3 million, and they have an outstanding loan of $1.4 million. Mr Lim's CPF used (including accrued interest) is $300,000, while Mrs Lim's is $200,000.
If they sell their existing property, their cash proceeds will be around $1.1 million.
Mr and Mrs Lim can upgrade to a landed property at around $4.5m. Their cash proceeds and cpf from the sale of their existing property are enough to pay the 25% downpayment, and they have comfortable savings for their renovation etc.
By upgrading from a condo to landed property which has a higher growth potential, Mr and Mrs Lim maximise the capital gain they could potentially get from their home.
Option 2: Buy in locations within URA Growth Hotspot
The graph above shows the price trend of District 8 vs District 19 in the past decade.
District 19 experienced 37% growth due to growth drivers such as the URA's masterplan of Punggol Digital District and the vast number of HDB MOP upgraders.
District 8, on the other hand, grew by only 16% as it is a mature estate with fewer growth drivers.
New and upcoming neighbourhoods are generally good areas to invest in as major infrastructure rejuvenation will occur.
Some of the current URA growth areas are Jurong Lake District, Greater Southern Waterfront, Lentor and Bayshore.
Mr and Mrs Lim can invest in a 4-bedroom condominium in such areas. Being an early mover means they can take advantage as the development pace picks up.
Option 3: Sell 1, Buy 2
Another option is for Mr and Mrs Lim to buy 2 properties. They can stay in one, and rent out the other one for passive income.
Based on Mr Lim's age (45 years old) and income ($20,000 per month), he can take a loan of around $1,8m, tenure 20 years.
Mrs Lim is 45 years old, earning $18,000 per month. Based on her age and income, she is eligible for a loan of around $1,6m, tenure 20 years.
Property 1
Mr Lim will purchase a 4-bedroom condominium at around $3 million, for their own stay.
The 25% downpayment of $750,000 can be paid comfortably using his CPF and cash proceeds. Other cost like Buyer's Stamp Duty (BSD) and legal fees can also be paid using cpf/cash.
Property 2
Mrs Lim will purchase a 2-bedroom condominium at around $2million. This condo is for rental so she will earn passive income.
The 25% downpayment of $500,000 can be paid comfortably using his CPF and cash proceeds. Other cost like Buyer's Stamp Duty (BSD) and legal fees can also be paid using cpf/cash.
By using this option of Sell 1 Buy 2, Mr and Mrs Lim are able to leverage on financing to purchase 2 properties - one for own stay and the other to rent out, thereby transforming part of their real estate portfolio into an income-generating asset.
CONCLUSION
In Singapore, the perception of a home as an asset is nuanced and depends largely on individual financial goals and circumstances.
While home ownership is a significant milestone, it is essential to recognize the financial implications and opportunity costs involved. A home might be a liability because it does not generate income; however, choosing the correct property will give maximum capital growth.
Have a question on your next property move? Make an appointment with me and let's chat!
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About The Author
Vivian joined the real estate industry in 2002.
Over the years, she has transacted numerous property deals, including HDB and private properties. She is well-versed in policies and regulations involving selling and purchasing residential properties. She has also handled complicated transactions like contra, divorce, administration/probate cases, and decoupling / part-share purchases.
Aside from her professional achievements, Vivian is a dedicated mother to 2 boys. Her role as a real estate mom has allowed her to strike a balance between her career and family, spending quality time with her children as they were growing up. Both boys are passionate footballers, and she takes great joy in supporting them at their school and club games.
Vivian is an active real estate salesperson and team leader. Call her at 98577714 for your real estate matters or if you are looking to join the industry.