Relying on rental income for retirement

Albeit a very big and expensive one

A high-yield golden goose

A perennial question some Singaporeans have is why HDB owners are allowed to hold on to their HDB flats after upgrading to private properties, but private property owners are not allowed to hold on to their private properties should they buy a HDB flat. Not fair, cries the latter group, while others say the first group shouldn’t even be allowed to do so to begin with.

In an interesting reply to The Straits Times Forum a few weeks back, HDB clarified that the rules are actually very consistent. This was their explanation, which I had to reread a few times to make sure I understood fully:

A private residential property owner who buys a resale flat will have to meet the minimum occupation period before he can own a private property concurrently. He is therefore given six months to dispose of his private property after the purchase of the flat.

Similarly, an existing flat owner can only own, buy or invest in a private residential property after he has met the minimum occupation period.

In other words, the same rules on ownership of private residential property apply to both resale flat buyers and existing flat owners.

The consistency here is that, whether going from HDB to private or private to HDB, you must serve out the MOP when you buy an HDB flat. And during this MOP, you can’t own a second property. For the HDB flat owner buying a private property, since he only does so after having completed the MOP, there are no issues with keeping both. For the private property owner buying a HDB flat though, he could not have completed the MOP yet since the five-year period only starts after the purchase, so he has to sell his private property and is given 6 months* to do so. A rather unusual way of explaining, but it kind of makes sense.

(*Hypothetical question: Does this mean that if I’m an HDB owner who has not completed the MOP, I can still buy a private property as long as I sell off the same private property within 6 months? Very unlikely scenario, but maybe if I want to flip it? This will be consistent with the rule allowing private property owners to hold both properties for 6 months during MOP.)

Not satisfied with the reply, a few folks have responded in the Forum to insist that they are being unfairly penalised. There are three letters here I wish to highlight that I have reproduced at the end of this post.

It is an entirely fair point if these writers still think the rules are inconsistent and wish to argue with it, but they claimed that many retirees need a rental income generated from their private property (highlighted in bold below) or they may face difficulty due to a lack of regular income stream for their retirement. Indeed, this is not the first time we have heard such an argument. But is that really the case?

First of all, they are holding a private property that should be worth easily half a million dollars, and likely a lot more, in the current market. For many retirees, their homes are usually all paid up or close to being so, meaning there is very little or no remaining loan to pay off. Even if we don’t make such an assumption, these properties would have seen significant price appreciation over the years to pay off any outstanding loan. In addition, the fact that they are asking to be allowed to buy an HDB flat while keeping their private property suggests that they have substantial cash — at least $200,000 for a 2-room or studio resale flat — sitting in the bank, because no bank will grant them a mortgage if they have no other income. So if they are forced to sell their private property, could they not invest the proceeds in annuities, dividend-paying stocks, REITs, unit trusts or other income generating products?

The truth is these alternatives are not as attractive due to current low interest rates and a volatile stock market. So it’s not because these retirees are facing financial hardship; they just want the high rental yield while holding on to an ever-appreciating asset that they could pass on to their children.

Also, to suggest that one needs a rental income to survive is itself problematic. Any financial advisor will tell you the need to diversify. What happens when you can’t rent out your property? You will find that your regular income stream is not so regular after all, and end up being forced to sell as a result of circumstance, not due to any government policy. What happens if the property market has crashed by then and you have to sell at a loss? You may find yourself in trouble then because you had decided not to sell when the market was peaking to hold on to the fat rental yield.

Granted, these retirees are not asking for government handouts, only for greater fairness in rules and the permission to hold on to two properties. To suggest that they won’t have a comfortable retirement if they aren’t allowed to do so, however, is less than convincing. In a saturated housing market, the government has to prioritise and determine who has the genuine need and who is playing the “retiree card”. It might also be wary of opening the floodgates to cash-rich retirees scooping up HDB flats for investment, because by then the follow-on argument may be: if HDB to private upgraders can stay in their private properties while renting out their HDB flats, why can’t we?

Minimum occupation period not the issue

I REFER to the Housing Board’s reply last Friday (“Home ownership rules: HDB replies”) to Mr Daniel Tong Wee Jin’s letter (“Different rules on flat ownership”; Aug 14).

If an HDB flat owner decides to buy a private residential property after the minimum occupation period, he gets to keep the flat, which he can rent out for income.

But if a private residential property owner decides to buy an HDB resale flat and is happy to comply with the minimum occupation period requirement, he is still required to sell his private property.

The minimum occupation period is not the issue; it is about private property owners being unfairly penalised.

There are retirees who own private property but have little, if any, regular income. To live out their golden years with a greater degree of financial security, many would not mind living in HDB flats and renting out their private property for a stable stream of rental income. But this option is currently not available.

It would appear that they are being penalised for buying private property during their younger days.

If home owners can add “private” to “public”, why not the other way round?

I hope the relevant authorities will review the rules to bring about greater fairness, and more importantly, to give retirees more investment options to foster financial independence and security.

Give retirees with private property a fair deal

MRS Chloe Loke (“Minimum occupation period not the issue”; Forum Online, Wednesday) highlighted an issue which was overlooked when changes were made to laws governing the purchase and ownership of residential property in Singapore.

The spotlight usually falls on the HDB sector, with barely any mention of private property.

In this instance, the issue was the minimum period of residence before the HDB flat owner can sell on the retail market or buy a private residential property and have the option of retaining both thereafter.

The minimum period changed twice in 2010, increasing from one year to the current five years without any requirement to sell the HDB flat.

On the other hand, private property owners do not have a choice, in particular, the older retirees who live in private property and wish to downsize to an HDB flat and rent out their private property to earn income to face the rapidly rising cost of living and medical and mandatory health insurance costs.

They are required to sell off the private property within six months of buying an HDB flat. And if they wish to buy direct from the HDB, they have to sell the private property first and then wait 30 months.

These requirements are difficult to reconcile with the Government’s call to help Singaporeans in their 60s and above who helped build modern Singapore.

The pioneer generation deserves a fair deal, whether they live in HDB flats or not.

Ensuring fairness in home ownership

THE current policy requiring private property owners to sell their homes if they buy HDB flats affects many retirees who want to downgrade and rent out their residences (“Home ownership rules: HDB replies”, Aug 23; and “Minimum occupation period not the issue” by Mrs Chloe Loke, Forum Online, last Wednesday).

In contrast, HDB flat owners, after satisfying the minimum occupation period, can buy private properties and choose to keep their flats. They have the benefit of renting out either their HDB flats or private properties.

With the huge supply of private properties coming on-stream over the next few years to cater to the rental market, perhaps it is timely for the HDB to review its policy of allowing the rental of whole HDB flats.

It should continue to allow an HDB flat owner who buys private property after satisfying the minimum occupation period to retain the flat – but he must continue to live in it.

To ensure fairness, a private property owner who buys an HDB flat must also live in it.

Since both HDB flat owner and private property owner must live in their flats, this will leave them the option of renting out their private properties, ensuring sufficient private homes in the rental market.