No money down deals in Singapore property market

Property investment need not cost you dearly. All you need is to apply the no money down strategies.

Private property in Singapore is a costly investment. Having to come up with a large sum for downpayment – at least 5 percent of the property price in cash and 5 percent of the property price in CPF, many average Singaporeans do not see private properties as something they can actively invest in. Therefore the notion of “no money down” deals is so appealing as it overcomes the key limiting factor for property investing – affordability.

So what are “no money down” deals and are they applicable in the Singapore property market?

Let us first take a look at how buyers finance their private property purchases in Singapore. The property market was in the doldrums in the early 2000s, and in 2005, the Singapore government made changes to the property regulations to stimulate it. The Loan-To-Value (LTV) limit for mortgage loans was raised from 80 percent to 90 percent and the minimum cash payment for properties was reduced from 10 percent to 5 percent of the property price. As a result, a Singaporean buyer could buy a property with as little as 5 percent of the property price in cash upfront.

Ultimately, “no money down” is simply a form of creative financing that enables the investor to buy a property without having to come up with any upfront cash. There are three common strategies to “no money down” creative financing. The first strategy is to borrow money to finance the downpayment required to purchase a property. The investor can borrow money from friends or relatives by offering to repay the loan with interest. Alternatively, the investor can borrow from temporary credit lines or refinance an existing property that has appreciated significantly in value to obtain the money needed for the downpayment.

The second “no money down” strategy is to co-invest in a property with other investors. Supposing ’Investor A’ has sufficient cash for the downpayment but is unable to secure the mortgage loan for the remainder 80 percent of the property price, while ’Investor B’ is able to support the mortgage loan but has insufficient money for the down-payment. These two investors can co-invest in the property, and to ’Investor B’, he will be taking a share of the property with “no money down”.

The third “no money down” strategy is to negotiate with property developers for a special discount. By obtaining the property directly from the developer at a discounted rate, the investor can find others who are keen to invest and get them to contribute based on the listed price. For example, you want to buy a S$500,000 property, and the 20 percent cash downpayment amounts to $100,000. If you are able to find four other investors, each of you will only have to come up with $20,000. However, if you are able to work out a private arrangement with the developer and get the same property for $400,000, you will only have to pay $80,000 for the 20 percent cash downpayment. Instead of passing the discount over, you can still get the other co-investors to come up with $20,000 to make up the $80,000 down-payment. In the end, you would have a stake of the property with “no money down”.

Although “no money down” deals can make properties more affordable, there are some inherent risks that investors should be mindful of. For the first strategy, the risk is overleveraging as an investor would have to repay both the mortgage loan as well as the loan taken for the downpayment. Any problems in cashflow would have a more significant impact on his ability to repay the loans. For the second strategy, the risk comes from the different investment goals of the co-investors. For example, an investor in urgent need of money may face difficulty in getting his investment back if the other investors do not agree to liquidate the property. For the third strategy, special discounts from developers are often reserved for selected clients and may not be available to the average Singaporean buyer.

Ultimately, a cheap property does not necessarily mean that it will make money in the long run. We not only should look at affordability, we should look at market timing as well as property location. By simply focusing on finding “no money down” deals, we are only addressing part of the requirements needed to find money making deals. As Warren Buffett succulently puts it, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” I believe that the same applies for properties as well.

by Getty Goh

source:(http://www.property-report.com/em_archives_singapore.php?con_id=689&date=022009)