Since my post touching on freehold versus leasehold, I’ve had a couple of enquiries on investing in certain leasehold developments with what I’d term “enbloc aspirations”. I’m not going to go into a full-blown post on enbloc today, let’s just say that developers’ primary duty is to make profits for their shareholders. They will only pay to enbloc owners a price that makes economic sense to them, so make sure your buy-in price is a good margin below that, else it’s not worth the effort and uncertainty of waiting out for an enbloc.
Moving on, I’d like to do a little post on planning your exit strategy instead. As any seasoned entrepreneur will tell you, you must have an exit strategy if you intend to make any serious money. The other thing to bear in mind? Always, always have a Plan B for when things don’t immediately run in your favour.
For a property investor, this means setting a target sale price/ profit level upon which you will cash out on the investment. In setting your target price, place yourself in the shoes of a future prospective buyer (whether as a private or collective sale transaction) of the property you intend to acquire. A lot of people have trouble letting go of a property because they reckon it “can still go higher”. They may very well be right in saying so. ( I think this is the very Singaporean “Kiasu” mentality at play.) But the converse is, if it’s so darn obvious that the property has hit the maximum price it’s ever going to reach… who will buy it off of you?? Which is why my husband & I were content to lock in double-digit annual returns on an old leasehold property, comfortable in the fact that while it might still have a way to go, the rental rates and occupancy levels for the place were definitely heading south in the foreseeable future. I would much rather pass on the bone to someone else while there’s still a little meat on it, than risk being left with a dry bone that nobody wants! I can then take my profits and go buy a juicier slab of meat!
If you’re buying a leasehold, it’s also important to keep close tabs on the critical period when the 99-year property hits 39 years or more and sell ahead of this. This is because banks require a minimum balance lease of 30 years upon the expiry of the mortgage loan tenure. Thus for a leasehold with say 55 years balance lease (ie. 44 years old), the buyer would only be able to take a loan of maximum 25 years. Do also note that a 99/103-year lease begins before the project’s TOP, and occasionally begins several years prior to the TOP. My general advice (note: general advice, there are always exceptions to the rule) would be to avoid leasehold properties older than 20 years of age unless there are hugely compelling reasons like, I don’t know, the plot ratio is heavily underutilised and thus represents an extremely attractive acquisition target for developers. (I doubt there are many such examples in existence.)
The need for a safety net, or a Plan B, is also why I tend to avoid buying properties that are not scheduled for TOP in the near future. I don’t deny that there is potential to make awesome profits on such projects, but I’m pretty conservative in this respect and will pick and choose my targets. If the market starts heading south, my downpayment is already stuck in the investment, and while you only need to make progress payments as and when the various stages of development are completed, there will still be at least a year or two of paying monthly installments while not enjoying any inflow of rental money. Even come TOP, a lot of owners are often surprised to find that their “brand new” properties are not as attractive to prospective tenants as they had hoped and may not be tenanted for 1-3 months. Who wants to move into a place if they see rows of vacant units and/or hear all the noisy renovation works going on in the building. (If you think it’s unbearable when one of your neighbours is carrying out renovations, just think about living in a development where at least 20-80% of the units are carrying out works of some kind!) Another negative experience we had with renting out a newly-TOPed property was that the tenant failed to inform us of certain defects that developed in the unit until after the 12-month defects-liability period had passed. (So do remember to highlight to tenants of your brand-new unit to keep you informed of any defects ASAP!)
And in the meantime whilst you wait for the property to appreciate, make sure you don’t get so emotionally attached that you are unable to part with it when the time comes! Of course, if you’re buying with the intention that you, your kids, and your future generations of descendants are all going to live their lives out in this property, you can pretty much ignore everything that I’ve said today. Just don’t be too disappointed if Junior decides he and his wife prefer to live elsewhere.