[twlewis]

I'm about to kick off a new job and relocation to HKG. I don't expect to stay in HK forever but at least 3 years (...could be longer, as we arrived in Asia after Univ in 1997 "for a year or two" ..and still haven't returned!). Have done some looking around and we're considering to live in Discovery Bay in about 1600+ sf, open plan, newish flat.

Started some number crunching re: financing the purchase of an apartment meeting the above criteria because renting just makes me ill Have done it for too long as an expat. I allocated the same budget to a mortgage payment as for monthly rent - approx. 65K per month. So roughly, I could pour in 780K per year into a DB property for as long as I live and work in HK. And upon departure - let's say 3 years - and considering of the alternative with rent down the drain, I will be happy to take a haircut on my 3 years' worth of payments (2340K) if I can exit the market.

Some of the assumptions that I've used - feel free to comment.

Calc assumptions:
1) 10 year lease period (can anyone give comment on periods generally offered in HK ? Regardless fixed or floating)
2) Fixed rate of 7.5% (not sure what I'll qualify for... any experiences ?)
3) Purchase price of 7.0 million
4) Mortgage of 5.4million
5) Downpayment of 1.6million (30%).
6) 3-yr opportunity cost of upfront downpayment outlay of 6% pa

Risk Assumptions during period:
1) DB property value will not decrease over culmulative 3-year period. It will hold flat or appreciate. Effectively this assumes that there isn't some sudden increase of new DB flats or a new expat family destination in HKG that competes significantly with DB within the next 3 years.
2) I don't die or get fired. At least life insurance covers 1 of the two - but my incompetencies are uninsurable unfortunately.
3) Property sales & purchases in DB are ongoing in terms of still being executable in a reasonable amount of time.
4) The HK $ does not significantly depreciate against the USD. This is a crap shoot to guess or hedge. I would be happier dealing in yuan if I had the choice because it will go up. Comments/crystal balls welcome...
5) Early repayment fees, legal fees, stamp duty etc... don't collectively make this idea sink. Anyone got any idea what early repayment fees are like ? Legal, stamp etc.. I can get easily.

Based on scenarios I've run - but without all fees - if the property holds in price and we can sell - I know, big ifs - then it should be fairly straightforward and there will be upside vs. renting. A rental (but with no risk for financial disaster) would nett an outlay of -2340K over 3 years but a purchase with financing and subsequent resale (and bearing the possibility of being born under a bad sign and having many more things go wrong) would spit back about 840K, netting 37% more than the money pit of renting, which is 0 return.

Any feedback on the above logic, understanding of the markets/rules or the math is appreciated. I'll get more details on potential costs, add in any feedback and then the spreadsheet can be shared with whoever else wants to run their own scenarios.

Thanks-

[freeier]

are u assuming the amount you put in for mortage payment and rental per month to be the same ?

[z754103]

What are you assuming for maintenance and repair costs for the property you buy?

[cendrillon]

If you know you're going to be here for the 3 years, then property is pretty attractive. It will work out costing less than rent given you have a 30% deposit. Don't forget that interest payments are tax deductable against your income, which brings the effective interest rate down to 4.2% or so.

The real question in my mind is how long will you hold the property, and what are the entry/exit costs. Holding property longer means the entry/exit costs will go down, but also your effective level of gearing will drop too as the LVR goes down with appreciating property value. One way around this is to redraw 70% of any capital gains and then use that money to invest in the property market, keeping your gearing level on the property at a constant 70%.

The real question is, at 70% gearing and the expected return in property, will you get a higher return than stocks which can be comfortably up to 70% aswell, and which will probably have a higher return. With property you don't have the risk of margin call which is a plus. Also the stock market right now is pretty volatile, which could be seen as good or bad depending on if you see it as a problem or opportunity

Another question is, would you be better off buying an investment property somewhere else. In many places you can borrow up to 95% LVR, getting a much higher gearing ratio, and without the extremely expensive price of mortgage insurance the banks in HK will hit you with (it's 4% of principle if you want to borrow 95% LVR!!!).

Personally I spent the last few months trying to compare property vs. stocks. It's quite hard to do and depends on so many factors, tax issues etc. I think in HK the stock market is pretty attractive given that u don't have to pay capital gains tax or tax on dividends. With property you may lose 15% of your capital gains on 'profit tax' depending on the mood of the tax department

Originally Posted by z754103

What are you assuming for maintenance and repair costs for the property you buy?

[twlewis]

Freeier... yeah, basically. But, technically this does mean it's a bit of an apple vs. orange because there's a difference in quality. A 55K rental is not the same quality of property that works out to be what a 55K per month mortgage payment buys. It can be tweeked to try and narrow the difference, but it isn't a simple comparison. Generally, 55K in rental is a nicer and bigger property.

Znumbers... Ultilities, gas and water I have yet to include but I've heard this can vary from as low as 1000 in the winter months up to 10000 in the hottest months. Anyone else got suggestions ? Not sure really but this shouldn't break the model. As for maintenance, I'm figuring on 2000 HK$ per month. Again - anyone have suggestions for numbers - new vs. old apts ?

Cinderella....lots of good points....

1. Do you mean that from a 7.5% rate you can get it down to 4.3% with the tax deductibility, or are you starting off from a different rate than 7.5% ? I presume you've started with a different one/a current one - happy to know what you think a good rate for general estimates, obviously different in each actual case.

2. Re: leverage... yup, understand the need to squeeze the lemon and ensure leverage is at a constant LVR but that's a bit tough in property. Much more easily achieved in stock portfolios where investments are smaller on a per unit basis. I think this will be tough unless it is structured as a personal line of credit. Problems include the fact that mortgage payments are being paid back on a pari passu basis (even payments throughout) but the principal paid down is not, and the appreciation will be hard to measure and update efficiently and frequently. Personal line of credit and other loan payment profiles should be considered.... maybe later. If there is a way to free up cash and one wants to maintain the LVR and exposure then maybe topping up with REIT units might be the answer for a theoretically constant exposure.

3. Just to confirm - mortgage insurance is required for loans equivalent to more than 70% in HK, yes ? If it is higher, does anyone know what I would be best to use for mortgage insurance premium costs? Is it usually paid upfront or can it be coughed up at settlement ?

4. Re: investing somewhere where LVR can be much higher... that's an idea - but I can't afford both an investment payment and a home payment (rental or mortgage). I know I'll have a home payment - I gotta live somewhere - so I am looking to combine the two.

5. As for property investments abroad - holding for long term is better and I would like to do it somewhere that might also pose as a home base, but in my home country of Canada this poses a threat to being deemed a Canadian tax resident. As a long time expat, I have read up on this at length and hired tax advisers to plan my return to Canada for the past 10 years. Yes, it is possible to structure, but I can't be bothered to take the chance of having the Canadian Revenue Service having a retroactive crack at any of my accrued worldwide assets/income.. not until I decide to move back, then they are free to go ahead and tax my income.

6. Investing in property anywhere results in landlord responsibilities, and being abroad, means paying someone to keep an eye on it. With my own property - I'm there and able to play the role of landlord and tenant and ensure that the needs of both are being maximised and are complimentary.

7. Finally - can you explain about the capital gains on home sales in HK ?

[KnowItAll]

No capital gains tax .. if that is what you meant.

Also, it is fairly normal to get P-2.5% or more type loans.

I tend to fall a sleep when all these numbers are discussed.

When we bought, it was a simple decision (and yes, it was an emotional decision) -- HK is home, property prices are low and we'd be paying more in rent to someone else than what our monthly mortgage payment was / is (of which a fair bit goes into the equity).

Maintenance and repair costs on newish propety is negligible, specially if you've redone the flat when you bought it.

[KnowItAll]

Early repayment fees (Standard Chartered) 3% in year 1, 2% in year 2 and 1% in year 3

[twlewis]

Thanks KIA - all really helpful.

So, year 4, no early repayment penalties, or likely just a smaller one ?

[KnowItAll]

>> property value will not decrease over culmulative 3-year period

Note that I took out the DB part .. I think 3 years is too risky to assume that, given that every ten-twelve years... something or someone tends to screw up global economies.

[cendrillon]

Hi Twlewis,

Are you currently living in Hong Kong? I'm not sure where you are getting your numbers from, but I think they're way too high.

For example you can get mortgage rates as low at 4.6% currently. With the new income tax reduction income tax is around 13%, and since interest can be deducted, that brings your interest rate down to 87% * 4.6 = 4%, which is about on par with rental yields.

For gas and elec I pay around 200 all up per month, even in summer for a 2 bedroom apartment. Water is negligible, usually around $2 HKD per quarter

Maintanence I'd say is way below what you estimate. Labour is cheap in HK, as are materials, and unless you're renting to orangutangs, my guess is your place wont get too trashed A paint and a few small repairs each time the tenant changes should be enough.

These are estimates for new appartment, for old ones I think maintanence could be considerably higher. For a new place, I reckon 500 per month would be more than enough.

Keeping LVR high is tricky in HK. In Oz it's pretty easy, just get a LoC attached to your property and revalue and draw down every few years to fund other investments (some people even draw down to support themselves ie. living off equity, or draw down to cover holding costs, although they tend to be pretty radical approaches).
HK seems to be a little more tricky, since the banks are a PITA. Drawing down up to 70% should be possible though.

For mortgage insurance have a look here http://www.hkmc.com.hk/eng/pcrm/ourb...ip-annex4a.pdf
I think you'll need to pay this to the bank as part of the mortgage setup, ie. along with your downpayment. You only need this for LVR above 70%. It's really a mater of balancing higher entry costs vs. higher gearing based on your views on how rapidly the property will appreciate.

Personally I love gearing and would be willing to pay the 4% insurance to lend at 95% LVR, but the locals tend to be alot more risk averse. The property crash in 1997 may be something to do with that

Regarding home vs. mortgage, I don't really buy into the whole 'rent money is dead money' line. Either you pay rates, management fees, maintanence, interest (all lost) or you pay rent. Financial it works out pretty similar, so I tend to go with whatever is more convenient, although in HK you'd be better off living in your property, since u can deduct the interest payments.

In Australia it's the opposite, no deduction of interest can be done on your principle residence, but interest payments on investment properties can be deducted off both the rent and your salary. Basically means that interest costs get halved.

On the tax, I hear you loud and clear. Do you ever get the feeling that countries feel their citizens belong to them? I thought there was something (at least in the US constitution) that said all men are born free. Why then are we treated like slaves?

This is somewhat immoral, but my personal goal is to die without repaying my uni fees and without paying the equivalent in taxes. So far I'm on target

Indeed living in your own place cuts down the hassle. Similarly I rent to my dad in Oz which is alot less hassle then renting to strangers. But then I also get the hassle of chasing up my old man if rent isn't paid (that sucks!) and getting below market rent

People will tell you there are no 'capital gains taxes' in HK. But there is 'profit tax' of 15%. So if your are deamed making 'an adventure in trading' then they'll hit you up. Basically it's at the tax offices discrecion. You should be OK if you live in it the whole time, but every case I've seen on the internet where people went to court they got ruled against. It's basically one of those things were the tax department tries to determine your 'intention', if your 'intention' was to make money (I guess some people buy houses with the intention of losing money?), then they'll try and hit you up.

That's one reason I prefer shares. I was thinking lately shares are also more liquid in the event of divorce. As soon as you smell trouble liquidate the portfolio and off into your swiss bank account it goes