A picture paints a thousand words, they say, and this picture, which has been trending on my Facebook (Meta) feed for the past 24 hours, showcases a SGD $1 million condominium winner. Mr. Chow, the 70-year old retired hawker spent S$3.41 on aloe vera gel and a digital voucher for nasi lemak and unexpectedly won a condominium worth $1,000,000 for himself in the recent Lazada 11.11 Lucky Draw.
The winnings sparked off many conversations with my friends-- some telling me they will sell off the condominium and some telling me they will keep it. I decided to dive into some research and realise it is not THAT easy to just simply sell it off. Here are some of the costs involved in a typical property transaction:
The taxes involved:
1. (Additional) Buyer Stamp Duty
If Mr. Chow were to keep the house and currently owns a house or HDB, assuming he is a Singaporean, he likely will have to pay Additional Buyer Stamp Duty (ABSD) of 12% (second property) or 15% (3rd property and beyond), Yes. it is in addition to the standard 4% stamp duty. In short, He will have to fork out close to $160,000 to $190,000 (inclusive of conveyancing fees) in order to acquire the $1,000,000 condominium. The taxes would have ebbed away close to 15- 20% of the profits.
2. Seller Stamp Duty
If Mr. Chow were to exercise the option to purchase the house and subsequently sub-sells the house within the first year, he is liable to pay 12% Seller Stamp Duty (SSD). The amount of SSD payable is dependent on the tenure that Mr. Chow holds on to the property
Up to 1 Year | 12% |
>1 year to 2 years | 8% |
>2 years to 3 years | 4% |
>3 years | No SSD |
The differing viewpoints of my friends (who are largely working professionals)
a. The Keep It Mentality
A quick check on rental yields of surrounding apartments indicates that the potential monthly rental of the house would likely fetch about $3,000, which means that Mr. Chow would eventually get rental yields of about 3-3.6%p.a. Also, it being a Building under Construction (BUC) project, it is widely perceived that there will be more capital upside upon obtaining its Temporary Occupation Permit (TOP) which is estimated to be 2023.
Assuming that there is a further appreciation of $100,000 (10% upside) on the house after renting it out for 1 years after TOP, Mr Chow could then sell the property and not be liable for SSD (since it would have been >3 years of holding the property). He will then fully realise the $1,000,000 cash price, despite paying for ABSD. The only opportunity cost to him is time as he would have to wait for 4 years to realise the $1 million asset.
Solution:
2021: 1 million house + 16% tax (including conveyancing fee)= 1.16m (Nett Cost)
2023: TOP achieved= rents out at 3.6%p.a for 1 years= $36,000;
2024: Property increases by 10%= sells it at $1.1m
Nett returns: $1.1m (Sale price) + $36,000 (rental income). Breakeven is somewhat reached
b. The Sell it Mentality
In some lucky draws, there may be provisions and conditions that in the event, the prize cannot be realised, there could be a replacement giveaway of equivalent value. However, if such conditions are not drawn in the terms and condition, to dispose of the house, Mr. Chow technically would have to pay buyer's stamp duty to be the rightful owner of the house first, before deciding when to dispose of the unit.
If he wishes not to own the house, I suspect, on a very exceptional goodwill basis, he could negotiate with the developer to find a willing buyer to take over his unit- and if the developer gives a deadline to this transaction, Mr. Chow may be pressured to let go of it at a lower price. After all, it will not be fair for the developer to hold out the exercise date of the Sale and Purchase agreement.
On such an exceptional assumption that he is able to achieve such a negotiation with the developer, Mr. Chow may then sell it to liquidate the positions into cash. After all, a bird in hand is worth 2 in the bush.
Should Mr. Chow sell it off slightly off market price at $900,000, he can technically place it into any financial instruments which can yield him any rate from 1.8% (latest Temasek bond) to 3.5% (IG bond funds) or 5% (SREITs)*.
The people who are proponents of this mentality believe that the funds should be worked immediately and that Mr. Chow could realise immediate yields/ dividends instead of waiting for the property to be built up (opportunity cost) and to break even.
There are some assumptions made however:
1. Mr. Chow is able to let go of his unit without further taxes imposed or he is able to replace the prize in equivalent monetary terms.
2. Mr. Chow chooses an investment instrument in the financial markets instead of leaving the cash prize idle in his current or savings bank account.
Why Sell?
Proponents of this view believe that time in market bodes well in the longer run and hence money should be put to work immediately. Let us assume that Mr. Chow is able to encash $900,000 of prize money, and places money in this Singapore REIT** and assume that it will perform in a similar manner over the next 3 years,
Initial investment amount $900,000/ $2.52=357,142 units
Today's Valuation: 357,142 units X $3.04= $1,085,714.29
Historical blended Dividend= 4.5%p.a.= $40,500
Dividend collected over 3 years= $121,500
Total Returns: $121,500+$1,085,714.29= $1,207,214.29
The total return of investing in this particular instrument, does seem allow Mr. Chow to have both dividend income right form the start and capital appreciation as well. How is the financial market able to achieve that? Time in Market.
Time in Market
Time in the market takes on a longer term approach and does not involve short term predictions and constant trading of the market. This strategy requires patience in the market and allow compounding effects and growth take its natural course over time. While the market can be volatile in the natural cycle, there will be steady long term growth and it is trusting the natural cycle of the market progress and believing that it will trend higher over time to achieve our financial goals.
In short, don't get upset if you are losing a bit in the short term... in the long run, the markets are likely to look better and higher.
To illustrate this point, I will use the example of the performance of Corporate Investment Grade Bond ETF** over the past 10 years:
Another example of the performance of Country Equity funds** over the past 10 years:
Final Reality Check: What if Mr. Chow has to go through paying for ABSD of 16% and and SSD of 12% and is left with $720,000?
Of course, we made the assumption that Mr. Chow was able to liquidate $900,000 cash--this could be a far cry from reality. Would the Math be different if Mr. Chow is now left with $720,000 cash?
Let's take a look (based on the earlier Investment Grade Bond ETFs)** over the past 3 years' performance. Taking a blended growth of about 25% over time, and assuming markets perform for the next 3 years like this, his $720,000 will become $900,000; of course, the returns would differ across different financial asset classes.
If we take a look (based on the earlier Country Equity Funds)** over the past 3 years' performance. Taking the lower band of about 50% over time, and assuming markets perform for the next 3 years like this, his $720,000 will become $1,080,000.
What would you do if you were Mr. Chow?
If you were Mr. Chow, what would be your choice? To be a newly minted Normanton Park owner or to sell it off? I am sure some of us will still be divided on this.
In any case, I am pretty sure Mr. Chow is elated -- he had sold fishball noodles soup to support his family of five for more than 30 years before he retired and at 70, the additional assets will be more than welcomed. It is truly a great reward for a hard-working man in his retirement years. Whether he keeps it or not, it is a happy problem.
*Disclaimer: This article does not constitute any recommendation or financial instrument selections and are purely an expression of my personal opinions. They do not constitute the opinions and outlook of the companies I am representing. For better understanding of legal rights on mortgages and taxes, it is best to consult your lawyers and tax consultants.
** Past performances are not representative of future performances-- It is best to check with your financial advisor or wealth planner on the fundamentals of investing.
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