Monday, 23 November 2015

Your Residential Property is a Liability, not an Asset!

In my previous post about how I can immediately achieve financial independence now (click here), I talked about downsizing my house. Some people may think it is due to the profit earned from downsizing. Actually, that is only 1 part of the equation. If you think harder, you will realised that your residential property (The one you stayed in without renting out) is a liability. Yes, it is the biggest liability for most people in Singapore (Maybe worldwide?).

Contrary to what your finance course taught you (If you attended one), your residential property is not an asset! You have to pay the mortgage/loan hence, money going out of your pocket. It only becomes an asset when it puts money into your pocket. The majority of us thinks that buying a house (liability) that increase in prices will make them rich. I hope you will not faint when you look into your mortgage loan that include your interest paid in your lifetime (If you are paying via CPF, you will be even more surprised with the accrual interest you owed to your older self when you sell your property). For example, a HDB 4 room BTO flat bought at $300,000 at 2.6% interest will cost you $432,185.93 after 30 years! This exclude any opportunity cost and property taxes too.

Let us illustrate an extreme example, if everyone has a place to stay for free or sleep on the street, we would actually have half a million more in your pocket. Moral of the story? Sleep on the street? Of course not! The less liability you owed to your residential property, the richer you are.

Here, some people will think I am short-sighted because you can make some money from buying and selling of residential flat. Come on, seriously?
Let us take a quick example of most cases of selling and buying a residential property. Here, you bought a $300,000 HDB 4 room BTO flat and after 5 years, you sell it at $400,000. You would have paid interest of maybe about $36,800 at 2.6% for 30 years loan and you renovated it for $30,000 for the first flat. Your profit will be $63,200. Then, you will need to renovate your new flat, say another $30,000, your profit will only have $33,200 left. This exclude the property taxes you have paid thus far. A rule of thumb, riding the property cycle of high and low prices, you sell high, you buy high. The same for when you sell low, you buy low. You will not benefit much from the property cycle if you still need a property to call it a home.

So, how do I profit from my flat? I have to say I am lucky that I gotten a BTO beside a MRT station and with high floor unit. I will be able to command a higher selling price than average, I guess. In the above scenario, I will sell it, say, $600,000. Then my profit will be $233,200. This profit will help me to get a free 3 room BTO flat at most location in Singapore and with some cash back. This is how the mathematics work.

Nothing is free, but if you can let go, everything is free. - Frugal Daddy


  1. Frugal Daddy,

    A little irony post?

    First say property is not an asset.

    Then show how you profited from it ;)


    1. Hi SMOL,

      The keyword is there : "lucky". You think most ppl can get duxton or high floor bto near mrt and sell at a premium to gain?


    2. Generally need more luck for property. One unit and only one. But for shares, we can buy, you can buy and they can buy too. Not one unit and only. ha ha

  2. 1st property is not an asset if u stay in it and don't generate income from.
    Basic rule from Rich dad Poor dad.

    1. Hi apenquotes

      Didn't read the book. But he is right. Many thought that it is a good thing to have their hdb prices rising. It don't benefitmost people who still need a property to stay. Sell mil for a 4 room and buy another 4 room at 900k? You could pay more for interest.