Calling it quits!

Originally Posted by whizzard

On the balance of probability, I think you should borrow and invest but keep at least one year's worth of expenses as emergency cash in the bank.

(1) Your husband is in his thirties, hence young and healthy and should be able to sustain his career for a good number of years. Being a lawyer, the job security is much higher say compared to a banker.

(2) Mortgage loan is a cheap loan to use.

(3) You are using the money to invest, not consume.

What is the worst case scenario?

(1) The markets get into another turmoil hence your investments turn sour and the value of your home plunges.

(2) Your husband gets retrenched because of the slow business due to the economic turmoil.

Scenario (1) is to be expected and should that happen, you probably have sufficient buffer to cushion it. Take the loss on your equity investment and consider it a lesson learnt. The bank may make a margin call on mortgage loan (depending on how aggressively you leveraged it). The one year of emergency cash plus your husband's salary ought to be able to stave off this call. In any case, you could always negotiate with the bank to restructure the loan and as long as you can demonstrate the capability to repay, the bank will not foreclose unreasonaly as they are in the business of making loans, not making foreclosures.

What if scenario (2) happens? That would be very tricky for you, being solely dependent upon your husband's income to sustain the family. It would take a very sharp and prolonged economic crisis for scenario (2) to happen. Hence, the highest risk factor appear to be scenario (2). If you are comfortable with the likelihood of this scenario not panning out, go ahead and press the button.

However, always keep at least a year of emergency cash on standby. Yes, this is a drag on returns but consider it as an insurance policy in thesevolatile times that we are living in.

Would I do it if I were in your shoes? Probably yes but with that emergency cash set aside and a lower LTV of 70% instead of 80% for a little more buffer. You have time on your side even if you lose money on your investments and can afford to take such risks.

Thank you for taking time out to pen your advice, sir. It is much appreciated. My husband's firm has not fired anyone in the Asian offices even during the subprime crisis, so we are rather ok with the job scenario. Your recommendation of 70percent - is it because the banks would call back part of the loan if my property goes into negative equity? My understanding is that the banks would not call back loans unless we default.

My main motivation for taking this loan is really to buy another landed property should the market corrects. With the new regulations, I wouldn't be able to get a loan because I have no income and my husband cannot be my guarantor without his name on the title. His name can't be on the title because he is a permanent resident and cannot buy more than one landed property.

My strategy is to obtain funding now while my house is still able to fetch this high mv. Then try to be aggressive with the stock market. Ideally I would like a 25-30percent return on this amount before I purchase my second landed. It will be fully paid up.

It's not much different from having two housing loans which is commonplace, only I'm consolidating the loans under one property.

My question to you would be if I should be aggressive in the stock market with this money or should I cruise for a bit with FDs or indices and wait for the property market to turn? If I may ask and if you may reveal, what are some of the low risk investments would you recommend?

[whizzard]

Originally Posted by Unregistered

My main motivation for taking this loan is really to buy another landed property should the market corrects. With the new regulations, I wouldn't be able to get a loan because I have no income and my husband cannot be my guarantor without his name on the title. His name can't be on the title because he is a permanent resident and cannot buy more than one landed property.

My strategy is to obtain funding now while my house is still able to fetch this high mv. Then try to be aggressive with the stock market. Ideally I would like a 25-30percent return on this amount before I purchase my second landed. It will be fully paid up.

It's not much different from having two housing loans which is commonplace, only I'm consolidating the loans under one property.

My question to you would be if I should be aggressive in the stock market with this money or should I cruise for a bit with FDs or indices and wait for the property market to turn? If I may ask and if you may reveal, what are some of the low risk investments would you recommend?

I am also waiting to enter the markets and am waiting for the right levels. In the meantime, there aren't very many short term low risk opportunities to invest in for a decent return except to put it in FD to mitigate the negative carry whilst waiting for your entry point.

Your returns expectations of 25-30% will require you to take some risks. Maybe buy some ELNs of stocks you might want to pick up to boost your returns in the meantime? Stagger the maturities of each of these ELNs so that you have deposits maturing every week to utilise when your levels are reached?

Market is expected to be volatile as everyone is waiting for the Fed to scale back on its quantitative easing. Thus bonds are risky now unless you keep the duration real short but then you won't get much yields. Equities seem to be the best place.

I'm surprised reading some of the postings here. Youngsters nowadays are so daring, taking high risks. Taking loan on home equity is very dangerous as you can lose your home. Don't ever gamble with your home. If you have a home which is fully paid up and have spare cash to buy an investment property, by all means do so. But to take a home equity loan on your only home to invest in highly risky equities and property markets is pure madness. There are many people who were once successful businessmen and professionals but can become bankrupt overnight. In this world, don't be too sure about things. You can die or become a vegetable overnight and lose everything.

Originally Posted by Unregistered

I'm surprised reading some of the postings here. Youngsters nowadays are so daring, taking high risks. Taking loan on home equity is very dangerous as you can lose your home. Don't ever gamble with your home. If you have a home which is fully paid up and have spare cash to buy an investment property, by all means do so. But to take a home equity loan on your only home to invest in highly risky equities and property markets is pure madness. There are many people who were once successful businessmen and professionals but can become bankrupt overnight. In this world, don't be too sure about things. You can die or become a vegetable overnight and lose everything.

You have a good reason to think this way considering where you are coming from. In 2004, I wanted to buy a property but I was just out of school two years so my cpf and savings were not great. Wanted to borrow a mere 30k from dad to top up whatever I had so i could put the down towards a 400k condo. My dad was furious that I entertained this thought. He was less worried about the 30k than he was about my defaulting on the housing loan as my slary was low then and I was just out of school. I convinced him after much badgering. When is a better time to take a loan than when one is young? Will I retire or decide I don't wanna work at age 24? That's not likely. I did the sums for him. My salary would increase, CPF is enough to pay for the repayment of loan. Rental can cover if all else fails. As luck would have it, I stayed in the condo for a year and rented it out for a few and then sold it for a huge profit. I made sixfold on my cash down. My point is my dad has a different risk appetite than I had. Also if I had not done the brave thing to own my own condo at age 24, then today I will be like my friends who missed the boat. I may be in a hdb flat and not landed if I had to followed my heart to buy my first property when I was 24. It made me my first pot of gold, which I was able to utilize to make my first million five years later. In some years maybe the banks wouldn't loan us because of our age (above 40?), so we should use leverage while we can. We are no different from my peers who put up 20 percent on their property and service the rest with a loan. It happened that we put down more cash into this property because we were holding other properties when we bought this one. We have since divested the investment properties and want to gear up to the normal 80 percent like our peers, that's all.

Sahm, you are using your past successes to predict your future performance. You are lucky that the market from 2004 till now was in a uptrend, with corrections along the way. What makes you so sure the market will not turn and crash? Are you prepared for such a scenario. Don't look down at your dad. You are lucky. If the market went down instead after you bought your first property, your old man will be the one who will bail you out. Stop thinking you are so good, you are just plain lucky. Be a grateful daughter.

Originally Posted by Sahm

You have a good reason to think this way considering where you are coming from. In 2004, I wanted to buy a property but I was just out of school two years so my cpf and savings were not great. Wanted to borrow a mere 30k from dad to top up whatever I had so i could put the down towards a 400k condo. My dad was furious that I entertained this thought. He was less worried about the 30k than he was about my defaulting on the housing loan as my slary was low then and I was just out of school. I convinced him after much badgering. When is a better time to take a loan than when one is young? Will I retire or decide I don't wanna work at age 24? That's not likely. I did the sums for him. My salary would increase, CPF is enough to pay for the repayment of loan. Rental can cover if all else fails. As luck would have it, I stayed in the condo for a year and rented it out for a few and then sold it for a huge profit. I made sixfold on my cash down. My point is my dad has a different risk appetite than I had. Also if I had not done the brave thing to own my own condo at age 24, then today I will be like my friends who missed the boat. I may be in a hdb flat and not landed if I had to followed my heart to buy my first property when I was 24. It made me my first pot of gold, which I was able to utilize to make my first million five years later. In some years maybe the banks wouldn't loan us because of our age (above 40?), so we should use leverage while we can. We are no different from my peers who put up 20 percent on their property and service the rest with a loan. It happened that we put down more cash into this property because we were holding other properties when we bought this one. We have since divested the investment properties and want to gear up to the normal 80 percent like our peers, that's all.

I would say your current financial position puts you in a midway point, the saving grace of situation would that your husband has a good salary and should have the earning power to help if things go south.

Personally to leverage up to 80% on your personal residence seems quite risky to me, 04 till now the market has been riding an uptrend so though you made a good deal on your first property I would not use that as comparison to the current situation (I bought my 1st property in my mind 20's as well in 2006)

No one can tell ultimately how savvy you are with investing (equities or stocks) and using your personal residence to bet against the future is your choice, but if you do borrow up to 80% I would caution you keep at least 500K cash in case the banks do come round knocking for a top up if the economy (no one can 2nd guess what banks will do in such situations)

Ultimately any asset that does not generate revenue but consumes your cashflow is still a liability until disposed. I have also borrowed on the increased values of my properties but as they are all rented out its the rental sustains the mortgage. (mortgaged at 50% of valuation)

I suggest you create a variety of scenarios i.e increase interest rates, overall expenditure vs income, potential loss of income scenarios and see what you are most comfortable with.

Originally Posted by Sahm

You have a good reason to think this way considering where you are coming from. In 2004, I wanted to buy a property but I was just out of school two years so my cpf and savings were not great. Wanted to borrow a mere 30k from dad to top up whatever I had so i could put the down towards a 400k condo. My dad was furious that I entertained this thought. He was less worried about the 30k than he was about my defaulting on the housing loan as my slary was low then and I was just out of school. I convinced him after much badgering. When is a better time to take a loan than when one is young? Will I retire or decide I don't wanna work at age 24? That's not likely. I did the sums for him. My salary would increase, CPF is enough to pay for the repayment of loan. Rental can cover if all else fails. As luck would have it, I stayed in the condo for a year and rented it out for a few and then sold it for a huge profit. I made sixfold on my cash down. My point is my dad has a different risk appetite than I had. Also if I had not done the brave thing to own my own condo at age 24, then today I will be like my friends who missed the boat. I may be in a hdb flat and not landed if I had to followed my heart to buy my first property when I was 24. It made me my first pot of gold, which I was able to utilize to make my first million five years later. In some years maybe the banks wouldn't loan us because of our age (above 40?), so we should use leverage while we can. We are no different from my peers who put up 20 percent on their property and service the rest with a loan. It happened that we put down more cash into this property because we were holding other properties when we bought this one. We have since divested the investment properties and want to gear up to the normal 80 percent like our peers, that's all.

Originally Posted by Unregistered

Sahm, you are using your past successes to predict your future performance. You are lucky that the market from 2004 till now was in a uptrend, with corrections along the way. What makes you so sure the market will not turn and crash? Are you prepared for such a scenario. Don't look down at your dad. You are lucky. If the market went down instead after you bought your first property, your old man will be the one who will bail you out. Stop thinking you are so good, you are just plain lucky. Be a grateful daughter.

Those are some harsh words. I do want to clarify that I do not look down on dad. I wanted to point out that we have different risk appetites due to our age difference and where we are in life. Markets are cyclical. That's 101. If things turned worse then, at least I had a job that could make the payments. What better time to take risk than when you are young and without dependents. As for being lucky. We all can make our own analyses and become more skillful over time and with experience. However at the point of making a decision to do something, aren't you also taking a bet that the outcome will be a certain way, given your analyses? Im not sure what investments you have done but if you made money, then you have the luck as well since there's always a chance and probability, however small that things turn the opposite way from your bet. I wouldn't say I'm "plain lucky" but there's an element of luck accompanied with lots of homework done, loads of conviction in my choice and some guts as well.

I'm here for advice not sweeping statements and judgements and critical-parent type advice.

Originally Posted by dives

I would say your current financial position puts you in a midway point, the saving grace of situation would that your husband has a good salary and should have the earning power to help if things go south.

Personally to leverage up to 80% on your personal residence seems quite risky to me, 04 till now the market has been riding an uptrend so though you made a good deal on your first property I would not use that as comparison to the current situation (I bought my 1st property in my mind 20's as well in 2006)

No one can tell ultimately how savvy you are with investing (equities or stocks) and using your personal residence to bet against the future is your choice, but if you do borrow up to 80% I would caution you keep at least 500K cash in case the banks do come round knocking for a top up if the economy (no one can 2nd guess what banks will do in such situations)

Ultimately any asset that does not generate revenue but consumes your cashflow is still a liability until disposed. I have also borrowed on the increased values of my properties but as they are all rented out its the rental sustains the mortgage. (mortgaged at 50% of valuation)

I suggest you create a variety of scenarios i.e increase interest rates, overall expenditure vs income, potential loss of income scenarios and see what you are most comfortable with.

Thanks for sharing. To better understand your second last para, do you mean that you have also borrowed on the increased values of your residence and other properties to buy more properties, and then have rental income that would cover all or at least most of your loans including pri residence loan, thereby putting you close to a position of financial independence assuming that housing loans are the biggest non discretionary expense you have?

Hi,

Yes I have also borrowed on the increase values of my properties but to fatten my cash reserves, if the market dips drastically then I will likely re-enter the property market.

Currently I can say I achieve financial independence of about 7.5 K per month on pure rental if I paid off all my loans with my cash reserves (leaving nothing for future investments). So I ran several scenarios as I mentioned previously on my job income/rental income/outgoings (mortgage payments/Cars payments/housing tax etc) before I decided how much I should borrow to keep at an optimized level (cash vs investments etc). (accounting for worse case scenarios i.e no job, no rental income, high interest rates etc)

Everyone is different I am more conservative when it comes to taking too much risk, I know of friends who scoff of this and over leverage to a point of bankruptcy if things go south. You have worked hard to get to where you are so myself and few forum members are just cautioning you to be mindful of your investments, especially given that its your primary residence that's at stake.

Originally Posted by Sahm

Thanks for sharing. To better understand your second last para, do you mean that you have also borrowed on the increased values of your residence and other properties to buy more properties, and then have rental income that would cover all or at least most of your loans including pri residence loan, thereby putting you close to a position of financial independence assuming that housing loans are the biggest non discretionary expense you have?

[whizzard]

Hi Sahm,

Besides making your calculations on how much leverage you can afford, do build in some contingencies so that if any unforeseen events occur, you would have some buffer to counter them. I have some investment properties which are leveraged and the rentals are more than adequate to cover their mortgages but I made sure that I do not rely solely on my rentals to meet the mortgage payments because in a recession, rentals do come off and sometimes, it may take a while between tenancies. From my own experience, the Singapore property market is fairly efficient and rental vacancies are usually not too long but you'll never know for sure. Also from my personal experience in investing in overseas properties, the rental vacancies can be very long especially so when you can't afford to be on the ground to manage them even if you have agents managing the properties for you. That was the main reason why I decided to sell them off and take my capital gains, not really worth the trouble to eke out the extra returns.

Besides putting away some spare cash, perhaps you may want to consider getting a Mortgage Reducing Term Assurance ("MRTA") for your husband (if not already done so). I am not trying to imply anything other than in the investment community, sometimes we require the main driver of the business to get a key man insurance just in case anything happens to him/her, there's an insurance payout. In your case, the mortgage will be covered by MRTA in case anything happens.

In essence, what you are trying to do is to buy a second property on leverage. It's a pretty common aspiration amongst Singaporeans. Based on what you described about your family's income, even if you lose all the money from the mortgage in the markets, it would not kill you. Painful yes, fatal no!

Your family is still young and you can afford to take some risks. However, a lesson I learnt is to exercise restrain and patience i.e. even if I have loads of spare cash, if I don't see any compelling investments, I'd stay on the sidelines. I am not a fund manager who needs to beat the index so I can afford to stay out if I don't have any compelling views and only jump in when the proverbial moons are aligned. I have learnt, especially applicable to me personally, that having a loaded gun ready to fire is a dangerous thing unless one has strong discipline.