Wow - is it true?
Because this agent is a friend, I am open to hearing more, and I was promised an analysis between property investment and PLR. As I have a HDB, the comparison will be between the 2.
As I receive the analysis, I opened it up, and was immediately sold by the great benefits of this product. Let me share it with you.
Actually I was being sarcastic. These kind of "analysis" actually pisses me off more than anything.
The analysis is quite biased and did not present a balanced view of both products. There is only the supposedly good points of the product and the cons of property investment – to me, this is more a sales pitch than any fair analysis
For example, and just to name a few:
(1) There was mention of an upcoming oversupply of HDB flats. This failed to mention the governments intent of increasing population in Singapore.
(2) Failure to mention that we are in a rising interest rate environment, which would adversely affect the product (given the element of premium financing).
(3) ABSD was mentioned that is incurred in purchasing a property – a noticeable omission was the mention the equivalent distribution cost associated with purchasing the PLR?
This to me gives a very indication of where the 'advisor's' interest lies - whether in providing an unbiased comparison of 2 products, or only interested in talking up 1 particular tied product. I think the answer is very obvious.
Fortunately, I also received the Benefits Illustration. This is a product that has an element of premium financing. That is, I put in an initial $800,000 (based on my property value) for a total premium paid to Great Eastern of $2,392,912
So I compared the cash bonus (or passive income goes the sales pitch) vs the net rental
It is obvious to me that rental income from the HDB yields overall better passive income. And I need to remind myself that the passive income from PLR has the added advantage of leveraging, and the indicative rate is the higher end rate with 2% borrowing cost constant. How true is that? I will leave you to judge.
For transparency, I am using a monthly rental of $2,500 - given a 5 room HDB in Bukit Merah, rental increasing at 2% p.a, y.o.y. In URA's website, we can see that the rental at 2007 is approximate $2,000 vs $3,000 in 2016. Instead of the 4% increase, I used a more conservative rate of 2%.
The surrender value of the HDB (sale in this case), vs the PLR is quite different though as there is an element of leverage. If all goes well at the end of 40 years (at 4.75% rate by Great Eastern), the surrender value is $2,615,066. Would my HDB be worth the same 40 years later? Probably not. However, this is not an apple to apple comparison, given the leverage involved.
What would be more comparable is if I sold my HDB and purchased 2 properties with leverage. In that case, I am sure the pay-off changes again.
Is it a good product? Did I bite?
No - qualitatively, I doubt that the motivation of the 'advisor' is for my well-being. Quantitatively, PLR takes a higher risk profile as an asset and still fail to beat the passive income element.
I did not thank the agent for introducing this product as I felt like I wasted time analysing on an inferior product. Thinking back - perhaps I should thank the agent, because it gave me a topic to write upon.
It really drives home the point of how no one cares for your money more than yourself.