How to avoid being property ‘rich’ but cash poor

How to avoid being property ‘rich’ but cash poor  

https://www.straitstimes.com/business/invest/how-to-avoid-being-property-rich-but-cash-poor

2024-05-04

Tan Ooi Boon 

The Straits Times 

Invest Editor 

It’s all very well buying a second property to help fund your retirement, but if you deplete your savings in the process and leave yourself without enough cash to meet expenses, you could be forced to sell the property – a fate that befell one couple here recently.

The couple had owned a condo unit for over 10 years while they still lived in their HDB flat.

The property was rented out, but the income was not enough to live on and they had to sell it in 2023 to reap much-needed cash. It was during the sale process that they discovered a relative had staked a claim on the $1.3 million in proceeds.

While the claim was dismissed by the High Court, the couple’s predicament shows that having an extra property is not a done deal for retirement if buying it depletes your savings.

Another couple featured in Invest recently were caught in a bind when interest rates started rising in recent years.

They had also bought a private apartment with the hope of earning rental income, and continued to live in their Housing Board flat. But soaring interest rates meant most of the rental income went into servicing the mortgage, so there was not much left over for their own expenses.

To make matters worse, they did not plan for medical care and so were hard-pressed to pay for such expenses. They were unable to ask their grown-up children for more support because the children had their own families and expenses to worry about.

As a result, the couple had no choice but to rent out two bedrooms in their HDB flat to supplement their income.

Here are three things you should know before putting your money into an extra property.

1. Recurring costs

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If you buy a private home, you will not receive any government subsidy to help you defray property-related costs. This means you have to meet maintenance fees that can be up to a couple of thousand dollars a quarter.

If the estate’s common facilities need fixing or replacing, the costs come from the residents’ “sinking fund”, which must be topped up if it is running low.

If you are late with maintenance payments, you will face high interest charges that could hit 20 per cent or more. There is also the higher property tax to consider if you are not living in the unit.

2. Rental income

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You cannot spend your rental income without considering the costs of being landlords. In addition to taxes on such income, you may also have to pay expenses related to the replacement of appliances and maintenance cost.

If your unit has a mortgage, a large portion of the rent is likely to go towards monthly repayments.

Make sure you do your sums properly and that you can still service the loan, even without the rental income, because there is no guarantee that you will always find a tenant.

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3. Sustainable lifelong income

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If your purpose in buying another property is to fund your retirement, you should first consider the benefits offered by CPF Life, which offers a better and “cheaper” option to get lifelong income.

From 2025, those reaching 55 can opt to join the national annuity scheme at its highest tier, by topping up their Retirement Account to the new Enhanced Retirement Sum of $426,000. This will provide up to $3,300 monthly from the age of 65.

So couples who plan together can enjoy a lifelong income of over $6,000 a month, tax- and fuss-free, by setting aside about $850,000.

Those who are older can also top up to the new sum, but their monthly payouts will be lower as they will start receiving them earlier than the cohort in 2025. Use the CPF Life Estimator online tool to check your numbers.

Just remember that it is always smarter to plan for continuous cash flows that come without any fuss because the task of managing assets will become more burdensome when you are older.

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