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!

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