It is not hard to see advertisements on Facebook that shows how ordinary Singaporeans own multiple properties with no or little cash. While this may sound like a scam to you, it is not a scam but actually a form of creative financing.
The most common creative financing method is the idea of co-investing with other investors. Someone who intends to purchase a property may rope in other people – family, friends or other investors, to finance the deal together.
- If an investor is of old age or has a bad credit record which makes it impossible for him or her to get a bank loan, that individual just needs to fork out the money for the down payment in cash. This is often in exchange for a 50% stake in the deal. The remaining amount will be financed by the mortgage loan and the other investors will receive the other 50% stake in this deal.
- Some go to developers to negotiate a special discount on the property. If they are able to successfully obtain a discount from the developer, they can find other like-minded investors who are also interested and ask them to contribute according to the purchase price.
For example, a $500,000 property will incur a $100,000 down payment (20%) which equates $20,000 per investor if the deal is shared between 5 individuals. However, if you can attain a discount which lowers the purchase price to $400,000, the main investor could pass on the $80,000 down payment to the other 4 co-investors, where each individual pays $20,000 again. Otherwise, he can choose to share the burden with co-investors which helps to further lower the payment by each person.
- With an existing property, some people choose to approach banks to do a refinance and take out an equity loan on the property. With that extra cash from the bank, they are then able to afford the down payment for the new property that they are intending to buy.
- For investors who own plots of land, they can co-invest with contractors. The investor provides the land while the contractor provides the construction and renovation services. It is possible to subdivide the property into smaller units during planning.
‘No money down’ property typically involve commercial properties as commercial or industrial units don’t attract Additional Buyer Stamp Duty (ABSD) but instead buyers only need to fork out GST which is still significantly smaller than ABSD. Commercial and industrial units also attract higher rental yields and financing for commercial units is easier with higher loan-to-value (LTV).
That being said, such schemes are not without its fair share of risks and some of the more common ones include:
- Fellow co-owners may choose to not pay their part of mortgage
- Difficult to sell off your share of the scheme
- Investors may find it hard to gauge the competence of the scheme managers
- What happens to your money if the scheme is suddenly dissolved by the manager without reason?
Financing property purchases through creative financing is not a new concept but it is critical to carefully consider all the risks involved before proceeding. Have plans beforehand that allow you to mitigate the risks or any sudden changes in the partnership when relationships go sour.
Written by: Melvin Ho, CEO & Co-Founder for Bizsquare