One veteran real estate property agent told me this.
There are some prospective clients that he finds difficult to convince them to sell his HDB.
Don’t get him wrong.
He is not the scam sort that tries to scam these folks with “right” theories to sell their HDB flats.
The difficulty to him to shift their thinking is this:
They bought their HDB flat in very early years and bought their 4 room or 5 room flat for less than $75,000.
In this more corrected property rental market, these flats rent for $2.2k/mth (26.4k/yr) to $2.6k/mth(31.2/yr).
The YIELD ON COST, which is the gross rental yield on cost of home purchase is: 35%-41%.
When they see the yield like that: it reinforce their views that this property should NEVER be sold.
To my veteran property agent friend, if you can collect 20 years of rent upfront, you should sell it and switch it to another better prospective investments and be done with the HDB flat.
My thoughts on this is this:
HDB is a unique and subsidized asset that
- follows inflation well
- provides a better rental yield in the same location versus private properties after factoring the cost of purchase
- you can only have 1
- once you sell and you have a private property after that, you can’t get it again
Due to that its a very valuable asset.
Evaluate based on Yield on Market Price
Evaluating based on yield on cost will lock you in a mindset that everything pales in comparison to this asset.
It is not a fair comparison.
A better comparison to use when debating with yourself, your family or with your agent is the gross yield on market price.
You will realize that the yield on market price is 4% to 5%.
When you look at it this way you can:
- compare it to history. is this yield lower than the yield in the same place in history (means your property could be higher than what its actually worth, good to sell)
- compare it to other HDB or private properties. There could be better properties yielding 6-7% with the same amount of risk and opportunity
- compare it to other assets such as stocks. If you look at this list of blue chip stocks, REITs and business trust, you will realize 4-5% might not be that appealing as a golden goose any more
My opinion is that if you intend to build wealth wisely, you should always have a consistent asset evaluation model. This will entail you to hold, buy or sell assets in a VERY SOUND MANNER.
Evaluate based on Value
Everything has a intrinsic value and a price people are willing to pay for it.
At times, prices people willing to buy gets blown way out of proportion.
What if your Seng Kang flat things, get blown out of proportion and they are willing to pay $700k instead of the prevailing $480k for it.
There are advantages selling here:
- You pocket 7 years of rent upfront, and not have to bother about vacancy, maintenance risk
- Selling the property above its intrinsic value allows you to ALLOCATE WISELY to an asset that is more value and attractive
- Doing #2 well compounds your wealth faster
The problem for most is that for #2, most people have a problem judging value.
The correct form of thinking is to shift away from a “I will search for a Golden Goose and hold on to it forever” mindset
“I am well equipped to evaluate assets based on price I pay versus the true value of the assets and consistently optimize my wealth based on this premise”
HDB is something that folks find it hard to shake away, but easier for private properties.
The same principal applies.
It is also the reason folks having Starhub at $2 yielding 10% will never sell their shares.
If you would like to know more about my mental model to optimize a portfolio of assets, be it property, stocks, bonds, cash, stamps and collectibles you can read my evaluation model article here.
Let me know if you agree with this thinking.
I know HDB is something close to heart for many. For me I tend to agree with my veteran property agent friend, just that not many would think this way.
There is a fear of selling off your golden goose and you cannot find another.