Zhan Hong was promoted to the position of managing director of an international bank. He needed an outlet to invest his wealth. After intense negotiation, he managed to secure a price of $1,861,667 for a condo in district 15. He would have to pay a monthly MCST fee of $390. As it was a property for investment, he has to manage his bottom line and his renovation and furniture expenses were only $10,000.
As his job paid well, he managed to flex his salary to get a 75% loan to value of $1,394,251 at 1.5%pa. As a banker, he loves leverage and took 30 years loan. He only had to pay a deposit of $465,416 which he didn't bat an eyelid. His earnest property agent managed to secure a new tenant immediately with a rental commission of 0.5 month for every year rental. The rent was $3,460.
Zhan Hong has a wife who is working as a partner in the Big four. Hence, their existing property is under her name and Zhan Hong didn't have to pay any Additional Buyer Stamp Duty. All he had to pay was the Buyer Stamp Duty which was $59,067.
As Zhan Hong is a hotshot banker, he always had an exit strategy. He plans to exit this investment in 10 years and so avoiding the seller stamp duty if he was to sell within 3 years. Along these 10 years, he would have paid a total property tax of $4382, total rental commissions of $17,300, total mortgage interest payment of $180,607 and total MCST fees of $46,800. He earned $415,200 in rental income throughout the 10 years.
Zhan Hong has been thrown many curveballs in his life, hence he assumes he sells his property at the same price as he bought. Any capital appreciation is a bonus. His earnest property agent will earn a 2% sales commission of $37,233.
|Series of cashflows|
His total upfront cash outlay is $534,483 for this property. This comprise of the down payment for this property, the buyer stamp, ABSD duty and renovation and furniture expenses.
From year 1 to year 10, this is the his rental payments, netting off his mortgage payments, rental income tax, rental agent commissions and monthly maintenance like MCST fees.
At year 10, when he sold his property, this will include the property price, netting off the agent commissions, SSD and balance loan repayment.
After 10 years, his returns per annum ( IRR) is 0.75% p.a.
Did Zhan Hong, the hot blooded, high achieving alpha male make the right investment decision?
Could he have invested in another investment instrument which makes him more than 0.75%p.a?