People always say that properties are a great way to invest your money.
After all, you can choose to stay in the property as a home before selling it. Or if you already have somewhere to live in, you can even rent the property out to offset some of the mortgage loan, netting you even more money when you finally sell it.
Kaching! Imagine all the profits you can make investing in properties
You sell your property dreaming of the luxury holiday you can finally afford, thinking about upgrading your property and living in a private condominium. Living off your investment profits.
But then the unimaginable happens.
You end up having to go to the bank to pay money instead.
“Huh? I did everything right what? The property even appreciated?! How come I ended up losing money?”
This is what we call Negative cash sales.
And really, it’s much more common than you think.
So What Led To This Negative Cash Sales?
As everyone knows, properties are great investments because of appreciation. The more the property appreciates, the more money you earn when you sell it.
Except it isn’t all that simple.
Every property appreciates at different rates. Naturally, prices for private properties (especially freehold), increase more and much faster than HDB flats.
And here’s where negative cash sales come into play.
If your property has appreciated slower (meaning: lesser) than either
- The interest rate on the housing loan and/or
- The accrued interest rate on the CPF usage
Then you’ve got the problem of negative cash sales on your hands.
And because of the varied appreciation rate, resale flats are extremely vulnerable to negative cash sales. Worried now? Why not talk to us to find out more about your property.
What Happens When You Buy a Resale Flat
Back when you were just looking for a property to stay in, maybe you decided to purchase a resale HDB in order to save some money.
After all, they might be selling at half the price of private properties while providing you with a larger living space.
So now, after living comfortably for around 5 years and paying a low monthly installment, your monthly salary has gone up and you decide that it's time to upgrade.
Oh how awesome would it be if the fairy godmother can just upgrade our properties like this.
But back to reality, before you upgrade your property, you will have to see how much selling your current property will net you.
Because of the low appreciation rate of resale flats, the price of similar properties nearby remains close to the price you paid 5 years ago.
“Hmm, okay at least I wouldn’t lose money from selling this flat. I’ll be able to use the proceeds from the sale to buy a nice private property”
Then let’s say you took a 10 year loan for your flat. After paying your monthly payments for 5 years, you have about $140,000 left outstanding.
“That seems manageable, I will be able to pay this easily after selling the property”
Lastly, you’ll have to check how much accrued interest you have to return to your CPF.
After checking, it seems that you have to return $400,00 to CPF when you sell your HDB flat.
It’s Time To Do The Math
Say you purchased the flat at $420,000.
The average prices of nearby properties (the price you’re expecting to be able to get) is $450,000.
“See! A $30,000 profit”
But when you sell your flat now, you will have to return $400,000 to your CPF.
Leaving $50,000 for you.
That’s not all though, You still have to pay the $140,000 outstanding loan.
$50,000 to pay $140,000.
You’re now at negative $90,000.
And this is the dreaded Negative Cash Sale.
Since you stayed at the flat for 5 years, that works out to be around $180,000 a year.
This means you paid $1500 a month to stay in your flat.
Instead of earning money from your property, you’ve now lost money from investing in your property.
If you had waited for a BTO or bought a private property instead of a resale flat then, You would have started to profit.
But, What Now?
Of course, everybody wants to make money. And if you already knew about all this before you bought that resale flat, you might have avoided that purchase.
You might have chosen a property that appreciated much more instead of choosing that resale flat.
But you didn’t know. You bought that flat because you found it suitable.
Now that you know, it’s time to take action. Of course, you can decide to keep that $90,000 as an unrealised loss and continue to stay in that flat.
Or you could take action now and invest in the properties that can actually earn you money instead of holding on to a hen that doesn’t lay eggs.
If you are already staying in a resale flat or are planning on purchasing a property, why not watch this video to explore various options.
It’s time for you to find a golden goose to lay you your golden eggs for retirement.