Friday, May 24, 2013

Good savings from SRS and CPF voluntary contribution

It is the time of the year to pay income tax. The company owners are happy to receive dividends instead of income as they are tax a maximum of 18% at corporate level. The income I receive from REITs and listed company has already been taxed at source. Hence, I do not benefit from the corporate tax structure. For ordinary middle income Singaporeans like you and me, we can contribute to SRS and CPF (special account) to save a little on tax.

I have completed my last module last year for my postgraduate course, which means I do not enjoy tax relief on course fees this year onwards.

It is a struggle to decide if I should be saving into my SRS and CPF SA account. It is upfront savings VS long term locked-in decision. However, I decided to contribute the maximum as I forsee myself living beyond 62 and the funds will be invested in unit trust and enjoy 4% risk free rate from CPF respectively. 

I did a rough calculation and by voluntary contribution of $19,750 to both my retirement accounts, I saved 4.9% upfront or $968 tax after rebates. I personally think it is an excellent way to save retirement money. Given that many people stash aside money to endowment plans (with nominal coverage), by contributing funds to SRS and CPF, I will be earning at least and average of 4.5% P.A, which is likely to be better than most endowment funds in the market. 

Click for bigger view

It is extremely important to invest your SRS funds instead of leaving it idle. For me, I am treating my SRS and CPF funds as "bonds" allocation, cash funds as equities allocation. Hence, I am mainly investing retirement funds in bonds (sounds silly, but target returns of 4.5% is to outperform endowment plans benchmark), which will double by the time I withdraw them. Don't forget, I start off with 4.9% upfront savings gains! 

0% sales charge from IFast
Decent performing bond fund after 6M

Tuesday, May 7, 2013

What happened to my Sembcorp put option trade I did in March?


After entering the trade on my ELN for SCI, my initial outlay for 11,000 shares was 54,604.28. It was converted to shares, instead of just earning the option premium. Just after it went XD, I sold it at $5.02, settlement amount was $55,107.73. Hence capital gain was about $500. I am also entitled the $0.15 per share dividend, which works out to be $1650. Hence the total gain was $2,150. In percentage terms, my gain was 3.9% over 1 month.
Given the current rising/range trading markets, I will be looking to invest into more ELNs to be given the opportunity to add blue chips into my portfolio at a lower market price.

Monday, April 15, 2013

SPH CRASHED 5.65% IN ONE DAY


Fortunately I closed my entire SPH position in one day when it reached $4.47. It is facing the stark fact that it is a sunset/declining industry, inching its demise towards paperless age. The REIT story was a nice opportunity to exit at a modest profit. Will it materialize? Perhaps not in the next 6 months. 
I have since reinvested the proceeds in unit trust, oil and gas, utilities sector and embarked on portfolio financing by pledging all my shares and unit trust to a bank. By end of May, I should be able to gear my portfolio to about $800,000 at 1.05% preferential lending rate given by my company.
By then, my monthly passive income should reach $3,000 per month after accounting for interest costs and net yield on my capital will be at least 8% P.A.
Stay tuned for my updates. 

Wednesday, March 13, 2013

Sold off all my SPH at $4.47!

I sold off my SPH at almost 5 years high of $4.47 pocketing a nice profit and the dividends since 2007. I received about 6% dividends every year while sitting of paper losses of between 100,000 to 10,000. It was a difficult period to hold on to such a stock with very limited upside.
During the Lehman brother crisis, the generous dividends gave me strength to buy ARA, Fortune Reit, Parkway Life, Starhill Reit, Lippo Malls, Cambridge, OUE etc, while all these counters have gave me nice dividends and I eventually sold off for a profit, SPH was always below my purchase price when it cut dividends in 2008 after Sky Eleven profits was fully recognized.
Currently I am back with more than $200,000 cash and waiting to reinvest SPH and the markets when valuations are lower.
One of the lessons I learnt investing in SPH is diversification. Previously, I have loaded 49,000 shares or almost $213,000 in a single stock. This goes against the principles of diversification and when markets tanked, no matter how defensive a stock is, it is going to go down as well.
I should have switched out of SPH into higher capital gains stocks like Capitaland, UOB or even STI ETF when markets were gloomy in 2009. However, I held on to it and waited almost 4 years to realize a modest gain. Although on an annualized basis, I have about 6% returns, the downside risk I have taken did not justify the modest return I was receiving.
Going forward, I will redeploy my proceeds into at least another 5-10 Singapore blue chips to diversify my dividend streams and market risk.
My targeted returns will be higher now, given I have more experience in the markets. I aim to achieve at least 7% returns from my SPH proceeds going forward.
The first trade I did was to sell a put option for Sembcorp Industries (SCI). The option premium was 7.84% over 1M. My conversion price is $4.9960 (97% of current trading price).
If on 23rd April, SCI is at $4.9960 or lower, I will receive 11,000 shares. However, as my settlement amount is $54,604.28 (after adjusting for option premium), my effective price to buy SCI is $4.964.
If I do not get the shares, I will receive $352 interest. The shares will go XD on 29th April. Hence if capital were to be converted to shares, I will be assured of $0.15 dividends. I do not mind holding SCI for the long term. The only drawback is the low ~3% dividend yield.
I will be looking to invest in put options to aim buying lower than trading prices of stocks.
Take note that as I am working in the derivatives industry, I am paying virtually no spread for my stocks/derivatives investment. For normal retail folks, the maximum interest you are able to receive is actually 3%-4% instead of 7.84%. My colleagues will not want to take in your trade at 0.64% spread (or about $20) to broker an option trade.  I do not wish to disclose my current company as well.
 Stay tuned on my investment journey.

Saturday, March 9, 2013

3 Bedroom or 3 Bedroom Dual Key


The dual key unit costs $975,000, which is about $250,000 more than the unit I bought. I was struggling whether to spend that $250,000 for the unit for investment. However I decided against it, not due to affordability issue, but rather value principles.

The dual key unit costs $250k more compared to 3BR, $300,000 more than a 2BR. Hence buyers are paying more than 1,000 psf for the 250 square feet studio. This costs the same as buying private condominium studios.


If Topiary appreciates, likely because of good rental demand, then dual keys unit makes perfect sense. But we won't know till 3 years later. Another alternative is to buy 3BR, if rental is good, the 3BR will appreciate to possibly about 1M. By then I can gear up back to 80%, get the additional cash out to buy another studio for rental investment. Meanwhile I can save the down payment, stamp duties, interest costs for shares investments.
Hypothetically, for my case, I bought at ~700k, loan ~560k. If valuation goes up to 1M, I will gear up back to 80%, which is 800k, less outstanding loan about 500k then and CPF used which is 15% or 105k + accrued interest + instalments to date using CPF. I still may have about 200k cash left over for a down payment for a full sized studio.

If rental is lousy, it means in the first place the dual key unit was a poor bet.

Dual key makes sense only when the property is completed and rental income is evident, especially if its near mrt. For my case, it may be a tad risky after some consideration. Who is the target segment of tenants? Professionals earning $5,000 a month? Are they willing to cramp in a hotel sized property? If rental is at most $1,500 monthly, it will take about 14 years to break even, the $250,000 studio unit. If I were to compare it to a 2 BR, the breakeven period will be even longer at 17 years. This is because the composition of the dual key unit is a 2 Bedroom + 1 Studio. Hence I will be staying in the 2 BR unit and renting out the studio. I have not even taken account into agent fees, utility bills of tenants (since I am effectively renting a room out), property taxes, wear and tear repair etc.


Topiary 3BR single key is a safer bet at the price buyers are paying and also ensures a more comfortable monthly repayment schedule. It is the Chinese saying of being defensive if you take a step back but allows you to be offensive if market is in your favour.
Of course my quality of life, from a space perspective will be better since my living space is bigger with single key 3BR than a dual key unit!

Finally bought a property! (Part 3)

Then, we chanced upon Topiary, which looked very far off on the Singapore Map near Sengkang, along Fernvale and Yio Chu Kang Road.

It is not within 5 minutes to walk to Fernvale LRT. It is a good 15 minutes. We walked over to Greenwich, which has a cold storage and a number of nice restaurants. The nearest MRT was Buangkok 3km away, followed by Yio Chu Kang, a 10 minutes drive away.

Clearly, the location was not the best. However, we noticed that new condo developments just across the road were selling for at least $1100 PSF. Even older developments can be rent out at about $3,000 for 1000 square feet condominium. There were not many condominiums in that area, being a new estate, but at seletar area, there are many landed properties, similar to Kembangan, Siglap area.  The area gives me a nostalgic feel, with Holland Village as a similar feel (before MRT was up then). I am likely to drive and continue to drive hence dropping off my wife then at MRT station in the morning will alleviate her transport woes.

The pricing was reasonable. On average, they are selling for $730 PSF. The unit I am eyeing for, a 21st level pool facing 3 Bedroom unit is selling for $716,000 for 915 square feet. This works out to be $783 PSF before grant. As our income is at $12,000, we are eligible for deferred $10,000 grant when my fiancée becomes citizen. This will further reduce our cost to $772 PSF.

Assuming ECs will trade at a 15% discount to nearby similar age properties, there is at least a $100 PSF upside for Topiary. This allows me to floor my downside risk of purchasing market at current levels. Assuming I am able to rent out my condo after 5 years at $2800/month, my gross yield will be 4.76% after grant, before interest costs.

My cash portfolio of stocks generates at least $20,000 per annum of dividends returns, which can comfortably cover the monthly installment of the purchase.

This allows me to continue my cash investments and not be afraid of losing my job. At most I become a tuition teacher, taxi driver or full time blogger; I will not lose the condo over my head. Both my wife and I can work in a $2,500 job and still afford the monthly installments without touching our retirement nest egg.

My CPF investments can continue as well as I am only utilizing $60,000 from my OA account for the down payment and stamp duty, the rest shared with my partner.

The calculations are as follows:

5% cash = $35,800

15% CPF = $107,400

3% Stamp Duty - $5400 = $16,000

Total = $159,200

Loan = $573,000

Monthly installment base on 2.5% = $2,270.

Risks:

We are actually buying at the peak of the property cycle. I must be prepared for a 20% downside for my property. Hence, I am likely to liquidate my property counters to avoid taking double layered risks.

My partner and I have about 3 years more before we move in. We need to ensure that we can wait till then and not break up before marriage or we will lose 20% of the property price.

There are at least 2 more sites reserved for ECs, thus limiting upside for Topiary. I do hope that developers bid higher prices for the land so as to translate to higher selling prices.

The next post will be on why we chose a 3 Bedroom instead of a 3 Bedroom dual key and forgo the potential for rental when Topiary is just minutes away from the Seletar Aerospace hub.


Finally bought a property! (Part 2)


Upon deciding to purchase Riversail, I brought my family members, fiancée, colleagues to view my chosen unit. They all feel it is a good buy, given current market situation. My fiancée who started work 6 years ago also said she could contribute some money for our future (be it for own stay or investment). All the better, then I will include her in the mortgagor as well. We did our sums and financing was extremely comfortable; she has about $70,000 CPF and $20,000 cash to contribute, I can cover the rest plus monthly installments till property is completed and ready to move in. It will be a tenancy in common 40%-60% arrangement.


We place a cheque with the agent and chose the highest floor unit.

However, if it is not meant to be yours, it will not be.

One morning I woke up and went to the IRAS website. I realized that because my fiancée is a PR, we are subjected to pay ABSD of 5%, even though I am a Singaporean. This pissed me off big time. I spent 2.5 years in NS and just because I am not married and want to get an unsubsidized private property, I have to pay 5% additional stamp duty? If we factor the usual 3%, we have to cough out almost $57,000 as taxes to the government! This is an excess of $39,000 in cash to the government. We were quite upset as this is no way to treat a SIngapore citizen, who refused to buy subsidise housing meant for more needy Singaporeans but will be treated as a PR instead. It is not about whether we can afford the condo unit, but rather whether we are willing to pay the tax that is a deadweight loss to us and society. It creates no value to anyone except the government.

We decide to retrieve back our cheque and look elsewhere for better valued properties.

We rationalised that since government wants to tax us, we will go the conventional way to enjoy subsidies on housing by leveraging my Singaporean identity and pink IC.

We were not keen at BTO, since the locations are poor and construction takes forever to complete. 2017 for the earliest in non mature estate. I will be a old man by then.

We went to look at the Design Build Sell Scheme at Parkland Residences, which was marketing almost $700,000 for a 2nd level 5 room flat. We decided that DBSS stands for Don’t Be So Silly (DBSS). It is simply not worth the premium when your competitors are just BTOs and by paying a little more, you will be able to get a similar location but smaller sized Executive Condominium (EC).

We went to look at Heron Bay, which left only west sun facing units and low levels dual key 3 bedroom units. The finishing was decent, but the leftover units did not excite us enough to even stay more than 10 minutes at the showflat.

We went over to 1 Canberra. The showflat was already there for about 1 year. Most of the units are west sun facing. If you choose units that are not facing the west, your balcony view will be blocked partially by the unit that covers your west sun. The layout of the condo development was extremely packed, possibly constrained by the small and trapezium shaped land.

Prices are not cheap, selling for 750 PSF with eight courtyards beside selling for 810 PSF. It does not seem to be of value and capital appreciation will be capped by the full condo beside 1 Canberra. The nearest eatery is koufu a good 10 minutes walk away.  There was some defects in the showroom, which we were appalled, given that even a showroom can have defects, we have little confidence in the actual delivery of the unit. The developer is from China, which has little track record in Singapore.

We decided to focus on looking for EC, given the subsidies by government and cheaper PSF would allow us to purchase a unit comfortable and not rush into marriage till 2-3 years later.

The next post will talk about our purchase of EC.