Now you may think that I’m completely crazy, but before we get into the details, let’s take a look at the background.
If you’ve read my most recent article comparing the investment returns of my rental property vs investing in index funds, you would know that I own a private property in Singapore – which I rented out up until very recently.
Well for a long time something has always been bothering me. My money is sitting there idle, locked up inside the property when it could instead be put to work!
I am, of course, referring to the amount of equity that has been built up inside the property over the last few years that I’ve owned it. That equity came from 2 main sources:
- The capital appreciation of the property as it went up in value; and
- The fact that we’ve been paying down the mortgage on the property (we didn’t use CPF until very recently, which is an important detail.)
Since the condo went from roughly S$870,000 when we bought it in 2011 to now being valued at S$1,080,000 and the remaining mortgage is worth -$563,527.21, the total equity that I have sitting in the condo is worth S$516,472.79.
More than half a million dollars just sitting idle! When I know that the average market return is conservatively 8% per year, this just didn’t sit right with me.
So I looked for a solution – this post will walk you through the details of what I ended up doing.
Disclaimer: I am not a professional financial advisor, this post does not constitute financial advice. Please perform your own due diligence before investing.
Getting the money out of the property, and the financial merits
The first thing I had to do was to figure out how to get the money out of the condo and there’s really only 2 options for that:
- Selling the property; or
- Doing a cash-out refinancing – which is basically using the equity to borrow money from the bank.
Now I’d rather not sell the property for several reasons:
- It’s a lot of work to list the property, which is quite troublesome.
- I’d rather live in the property myself given that I was living with my in-laws.
- Selling the property means I will miss out on any of the price appreciation that the property will have in the future.
Plus, given the current low-interest environment due to the COVID-19 economic downturn, borrowing money is super cheap. The interest rate for the cash-out refinancing was only slightly above 1% – which is insanely low! This is likely also why property prices have been going up like crazy.
If I were to get the conservative 8% return over 30 years, I would be getting a 7% margin on this deal.
In addition to making that 7% margin, I would also still own the property that will also likely continue to appreciate in value. In the end, the property will still be completely paid for while the funds we took out will also have grown from being invested in the market.
Overall this is an overwhelmingly better option than just selling the property to get the funds out.
Now the only caveat is that because this is a loan, I will not be able to take out the full value of the equity. That is the only drawback of this option.
Whoa whoa, are you crazy?!
Now some of you may be shouting at me wondering if I’ve completely lost my mind. After all this is my own house that I’m talking about, the place me and my wife are living in! How could I take out a loan on it and then taking this undue risk with it?
“What if you can’t pay back the loan and end up having the house reposessed? You’ll be living on the streets!” some might say.
First of all, this isn’t as crazy as you think. This is exactly the same as choosing to invest in the stock market while you still have a mortgage instead of paying it back as fast as possible. The most optimal way to handle a mortgage is to drag out the payments for as long as possible while pouring as much money as possible into the stock market because mortgage interests are so cheap.
A mortgage is one of the lowest interest rate loans that you can ever take out in your life because it is secured against a property. This is especially true in Singapore where property prices are highly controlled and are extremely stable, this is why the rates have been lower than 2% for the last several years.
If this was any other types of loans (i.e. Personal Loans) with higher interest rates, this would not make as much sense nor would it be as attractive.
So it makes a lot of sense to get as much loan on the property as possible with the low interest and invest the funds into a higher returns vehicle. I hope that makes sense.
Ahem, now where were we? Oh right, so how much can be taken out?
How much can be taken out?
The rules for cash-out refinancing in Singapore only allow us to borrow up to 70% of the total value of the property, and this already includes any of the remaining mortgages that is already taken out.
So this means the formula looked like this for my property at the end of 2020:
|Property Value (As of Dec 2020)
|70% of Value
|Remaining Mortgage (As of Dec 2020)
|Theoretically Available Cashout Amount
In the end, the bank rounded this down to S$180,000 to keep it simple and also err on a slightly more conservative side.
For this amount and the low interest, my monthly repayment comes down to just a bit over S$500, which is very very reasonable.
There was also an additional cost for the lawyer fee of S$1,200 and the valuation fee of S$321 to execute this refinancing which should be accounted for to accurately calculate the returns for this action.
And so after submitting all the forms and signing the refinancing contract, I received the refinanced funds in my account at around the middle of February 2021.
Now I need to decide how to invest this huge lump sum of S$180,000 in cash.
Note: This is only available if your property is a private property and the portion that can be withdrawn must not have been paid for using CPF. So if you’ve always used your CPF to pay for the mortgage, it’s unlikely that this would be an available option for you.
How the funds were invested: Lump Sum or DCA?
Although this was a sizable investment amount to make, the decision on how to invest this sum was rather straightforward.
A lot of people would be worried about investing all this money at once and would prefer to invest the funds over time by using a Dollar Cost Averaging approach. This is especially true in February since the market seemed to be at an all times high after a huge run-up from March 2020 – right after COVID-19 shutdown the entire global economy. Many believed that the market was at its peak and a correction or a sharp drop was due soon. So breaking up the amount into multiple smaller portions to invest it over several months would have seemed prudent.
Though it may have seemed scary, I know that based on various research, lump-sum investing tend to beat Dollar Cost Averaging 66% of the time. So that’s what I did, I invested all S$180,000 of the funds within 4 days of receiving the funds.
You can refer to the various research around lump sum vs dollar cost averaging here:
- Dollar-Cost-Averaging Vs Lump Sum Investing: Which Is Better? (singsaver.com.sg)
- How to invest a lump sum of money | Vanguard
- Don’t bother dollar cost averaging your bonus, invest it all at once! – DCA vs Lump Sum Investing Analysis (STI ETF) — FIRE-Path Lion (firepathlion.com)
- The dollar-cost averaging myth: why lump sum investing usually wins – Morningstar.com.au
- How to invest a windfall: Lump Sum or Dollar Cost Averaging? – Early Retirement Now
Now that we know I tried to get the funds deployed as quickly as possible, let’s take a look at what I ended up buying with it.
What the funds were invested in
If you are a long-time reader of my blog, you would know that I am a strong proponent of Index Investing. I tout the 3-Fund Portfolio as the best approach to investing for the long term and the majority of my portfolio consists of index ETF.
So it should not surprise you that this would also be my approach to investing this fund.
Here’s the breakdown of the investments and my reasoning behind it.
78% invested in IWDA (1,373 Shares)
Nothing out of the ordinary here. In line with my target allocation, wanted 80% of my portfolio to be invested in the developed market ETF. So I ended up investing S$140,000 of the funds directly into IWDA. You can find out why I chose to use IWDA in my 3-Fund Portfolio post.
14% invested in QQQ (61 Shares)
I admit that this may be an odd one… truth be told, this 14% (about S$25,000) was supposed to go into EIMI for the developing market allocation of my portfolio. However, after I purchased IWDA, I tried to make a purchase of EIMI and I was not allowed to. It turns out that Phillip Capital has reclassified EIMI as a “Restricted Counter” that can only be traded via their “night broker” whatever that means. This also means that I will be paying higher brokerage fees for the trade via the broker.
I tried calling the number that was given to me but received no response… so since they were making it so hard and expensive for me to make this trade… I admit that I just gave up and ended up using that allocation and invested it into QQQ instead.
I’m not proud of it and this definitely goes against my own advice here – but this is a small portion of my portfolio and I think the tech sector still has room to grow. We shall see if I am right or wrong here.
8% invested in AAPL (87 Shares)
Now this one is completely a bet I’m making just for fun using a small portion of the funds – about S$15,000. I have no justification for this investment except that I like the company, haha. As long time readers would know, I hold a bit of Apple in my portfolio against my own advice. So far it’s been doing extremely well for me and my portfolio. I do believe that the company has room to grow and has very strong fundamentals – but of course, I also believe I know nothing about individual stock picking and can be completely wrong.
I do not in anyway recommend others to follow me on this one.
There you have it, only 3 tickers for all S$180,000 – most of it in IWDA and the rest betting on tech – all invested in the middle of February.
So… how has it done so far?
Performance so far
Although this funds is now incorporated into my portfolio, I intend to be able to track the performance of this section of funds on its own against all the repayments that I will be making to the back as an “experiment.”
I wanted to see how good the returns on this investment is. If my hypothesis is correct, since the market will be providing higher returns than I have to pay back to the bank, this should be a highly profitable investment decision.
I will be tracking the total value of the invested funds against all the cash repayment to the bank, the principle amount that’s paid back as well as the interest component. This way I can calculate the rate of return.
And here is what that looks like so far as of the 6th of July:
|Current Investment Value (As of 6 July)
|Remaining Loan (As of 6 July)
|Built Up Equity (S$180,000 less remaining loan)
|Total Value (Investment + Equity)
|Gain / Loss
|Total Interest Paid
|Annual Rate of Return (As of 6 July)
Even though right after the funds were invested in February the market stayed relatively flat for a while, today after less than 5 months we already have a gain of more than S$20,000 – over 10% of the initial amount. The market has been doing exceptionally well.
So at the moment, the calculated annual rate of return based on these short 5 months for this investment is sitting at above 30% – which is extremely high. I don’t expect this to continue and should eventually drop down to more reasonable levels. I’m expecting something lower than a 20% return year on year. However, we’ll have to wait and see. Only time will tell.
So what’s next?
Well, that’s it! I intend to keep following up on this series with progress reports every few months – maybe every 6 months. So the next time we check in on this will likely be in January.
I am excited to see how well this experiment will pan out.
I do have to mention that this post should not be taken as a recommendation for everybody to go out and take a loan to invest – there is a huge downside if you make a mistake. In this case, if something goes wrong and I am not able to repay my refinanced loan, my property is on the line. Plus, since I currently live in it now, there definitely is a non-zero chance that I will end up with no place to live (although based on my financial situation it is extremely unlikely even if the market completely tanks.)
I do expect this experiment to do very well over the long term, though in the short term it could be a coin toss. So I’ll see you back here in 6 months! Wish me luck!
Update: My first update is now out, you can read it here House Gamble – Update 1 – February 2022
Until next time,