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Is Your House a Home or an investment?

12 May 2016 
SOURCE: Wong Sui Jau

Housing is an important part of retirement planning mainly because it often takes up such a large amount of our resources. The two things which are most expensive in Singapore is housing and cars. And of the two, housing is more expensive (unless you are planning on buying and owning supercars.).

The firm belief that many Singaporeans have, that in the long term, housing will always appreciate in value though, has caused many to view their house as the most important source of their wealth. Some pin all their retirement hopes on housing. However, I would advise against doing so.

A house is a rather illiquid asset which is not easy to buy and sell and there are hefty commissions involved for transacting a house. It is not something which can be traded so easily like other investments such as stocks, unit trusts or bonds. Also, because it is generally expensive, most people can't afford to own several properties.

This is then one of the biggest drawbacks of relying solely on housing for your retirement. I would say that if you only have one house, it should be seen as the home that you live in, and much less the source of your retirement which you are pinning your hopes on. You can't eat your house…

Many Singaporeans are house rich and cash poor. However, this is actually not a desirable position to be in. For the majority of your life, the house you live in will be drain money from you, it will not be providing you with regular income at all. Each month, a possibly substantial amount of money will be going into your housing instalments.

Only when you are reach age 60 or above would you likely have finally paid off your house. In fact, through the years, as you spend money on renovations, furnishings and maintenance, you will likely be pouring even more money into your house. Housing is a key thing we can't do without. If you sell your home for a retirement nest egg, then where are you now going to live?

This is not to say that property cannot be used for retirement planning or even as an investment. However, if you have only one property, then I strongly advise not to treat it as an investment. If you have two property, then your second one can be seen as an investment. It can be ruthlessly sold, traded for another one, or rented out for a source of passive income. All these are not what you can easily do with your own home.

 

How do you avoid becoming house rich and cash poor? The key method is not to overcommit yourself into your house. Don't go and buy the most expensive house that you can afford, or worse, a house beyond what you can afford. This is especially tempting during property booms when it seems like the prices of houses just keeps on rising every year. However, property prices fluctuate in a cycle and you must be always prepared that housing prices can come down as well as go up. Property cycles can be very long, so while the boom years can last for a long time, so too can the down years. If you overcommit to a house you can't afford, then it will be extra stressful trying to service it if you are caught in a multi-year downturn in the property cycle.

There are ways to get money out of your house, but again, these should be meant for a second property you own rather than the one you live in. You can rent such a property out, sell it to cash out, or mortgage it to the bank for more cash. Considering such options for the existing and only house you own should really be seen as a last resort.

But what if you are house rich or cash poor, nearing retirement and really need to consider retirement planning? Then, perhaps you have no choice but to consider such options. You can sell your house and move to a smaller house. The difference can then be used as a nest eff for your retirement. For example, if you have paid off your house already, and it is worth 1.5 million, you can sell it off and buy a HDB flat for $500,000 and you would now have 1 million dollars you can use for your long term retirement nest egg.

You can also move to a smaller, cheaper place and rent out your existing home. So, for example, if you rent out your current house for $4000 per month and you move into a smaller place that only costs $2000 per month in rental, then you still retain ownership of that house while you will now have $2000 extra every month to use as retirement income.

If you have paid off all of your mortgage already, or if your house has appreciated in value, another way is to approach the bank to request for a loan using your house as collateral. For example, if you have fully paid off your home already, and it is worth 1.5 million, a bank could loan you $500,000 or even more while using your house as collateral. However, what you are effectively doing, is borrowing money from the bank. This money would need to eventually be repaid with interest! The only positive of this method, is that you don't need to move out your property to get a sum of money.

As you can see, these various methods of getting money out of a property are generally not things you want to do to your existing home. People get very attached to their homes if they have lived in them for years. I see many old couples who stay in a huge house after all of their children have moved out simply because they don't want to move. They probably never expected they would be so reluctant but when you have lived in place you call home for years and years, you tend to get very attached to a place.

Thus, don't make the mistake of being house rich and cash poor. Change the mind set of seeing the house you live in as an investment. It should first and foremost, be a home, whether you make money on it eventually should be secondary because you aren't going to be cashing out on it for a very long time anyway (if ever).

On top of the house you are staying in, have other investments and assets which you can rely on for retirement planning. So, if you already committed towards one house, start diversifying by starting to build up assets in other areas like stocks, bonds, unit trusts, etc.

Don't continue to bank everything on just one property. Strike a good balance between more liquid assets like stocks, unit trusts, bonds versus property. This will give you a lot more options in the long term when you are doing retirement planning.

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