The 3-3-5 Rule and Financial Freedom

By Gerald Tay (guest contributor)

In a recent blog post, fellow contributor Property Soul shared her rules on buying a property you can afford, what she called the “3-3-5” rule. A Propwise.sg reader JC wrote in to comment that Rule #3 (the purchase price of the property should not exceed five times your annual income) was unrealistic and overly conservative. In this article I’d like to share my views on some of his comments (which I’ve extracted in italics below).

The views in this article are entirely of my own. They do not represent the views of either Property Soul or Propwise.sg. Any feedback should be directed to me gerald@crei-academy.com.

Is the 3-3-5 rule unrealistic?

JC: In a nutshell, the 3-3-5 rule is skewed towards an unrealistic scenario which is unlikely to happen in Singapore (for Rule #3). We need to be realistic about the current pricing, current market, and hopefully, capitalize or gain from it through long term investment or enjoyment of the property.

The context of 3-3-5 rule (except Rule #1) is meant for personal consumption, not as an investment metric. I believe Property Soul is primarily referring Rule #3 as a guide to buying a property purely as a home, and therefore prudence and affordability are important ratios to look at, hence the prudent 5x annual income ratio.

If it’s purely for investment purposes (i.e. a rental property), one would use more important metrics (i.e. ROI after debt service) and not a 5x annual income ratio (or Rule #2) to measure its investment worth or value.

Thus, I think it’s very realistic to use Rule #3 if one is buying an HDB flat for example. If a couple’s combined income is $30,000 a year, 5x income ratio means a $150,000 HDB flat. The couple will still have affordable choices coming from the many HDB BTO sales recently. BTO flats are very affordable to many young Singaporeans (please don’t get political with me on this) if these young couples are prudent from the very start.

I’ve seen young couples whose combined incomes are less than $36,000 a year, yet purchase a new large 5-bedroom HDB flat costing $500,000. That’s almost 14x the annual income!

Some of these young income earners can choose to buy a cheaper 3-bedroom or 4-bedroom BTO HDB flat in a non-matured estate, but they rather choose a more expensive home for ‘face-saving’. And yet, they complain that HDB flats are expensive and unaffordable!

Why spend on an expensive private home?

JC: Example: a couple earns $15,000 per month, which annually would be $180,000. At five times, they can only afford a property that is $900,000, which can only buy a 2-bedder condo at an RCR or OCR location in Singapore.

Exactly. If a couple can only afford a maximum $900,000 home on a prudent 5x annual income ratio, then why the need to spend conspicuously on an expensive private home?

Surely a couple with that kind of earning power can easily afford – without the need to slog at their jobs – a cheaper re-sale HDB instead?

Or is the purchase for reasons of ‘peer pressure’ and society’s expectations which dictate a $15,000 monthly income earner cannot live in an HDB flat (re-sale) because it’s considered below their ‘standards’?

Surely, this couple can easily find and afford a large 5-room re-sale flat which will meet their future needs, in a matured estate with excellent location with a price budget of $900,000 or even lesser?

The more we earn, the richer we are?

JC: Rather, many couples CAN afford properties at $1.2 to $1.5 million and above when their income is approximately $10,000 per month, which is a 10x rather than 5x ratio. With savings of $400,000 to $500,000 (approximately 30% of $1.5mil), they can easily afford the mortgage at $3,000 per month (2% interest rate over 28 years).

Many people have terrible misconceptions on Wealth. Many think Wealth is “the more we earn, the richer we are.” How wrong this is.

Financial wealth is not defined by how much we earn. It is defined by what expenses we have. Wealth is thus defined by how long we can survive if we choose not to work, and still afford paying our expenses at the same time.

A couple earning $15,000 a month combined employment income is middle-class.

Another earning $30,000 a month in employment income could still be middle-class.

An individual earning $2,000 in passive income from investments to cover $2,000 of monthly expenses with no bad debt could be richer than the two examples above.

Don’t misunderstand my words on middle-class earners. I highly respect people who lead hardworking but humble lives, people who may lead middle-class lives but contribute tremendously back to help society as a whole.

Whom I detest most – lazy people who complain more than contribute and yet demand more from society, e.g. asking for more pay without justifying one’s skills and contributions.

Why do the 99% always complain that they’ve no money or no money to invest?

One of the habits that is common among all wealthy people is that they live below their means. This means that they buy a small car when then can afford a medium sized car, then buy a medium sized car when they can afford a big car, they buy a big car when they can afford a small helicopter and they buy the helicopter when they can afford the private jet. They’re not eager to own expensive toys to boast to the world that they’ve arrived.

When the 1% makes money, they plough the profits back to buy more investments that will put more ‘passive’ money into their pockets. The 99% after making their profits will first think what bigger car to drive and which bigger house to live in.

When you’re rich, you can have a lot of stuff and still be rich enough to afford more stuff. When you’re middle class or working class, you cannot. If you live within your means, you’d be surprised how much you can ultimately have to invest when opportunity comes and be financially free.

Amassing your savings to invest

JC: A savings of $400,000 is not difficult to achieve for a couple (both university grads) who have worked for 10 years possibly with a little help from their parents, say $50,000 to $80,000.

It’s definitely not difficult for high earners like university graduates to amass huge savings if they spend prudently. And this ‘power’ gives them an added advantage to gain financial wealth or freedom much earlier than lower income earners. They should not squander away such an invaluable opportunity on conspicuous purchases like an expensive private property or a new car.

If ever my children come to me for a $50,000 to $80,000 loan, saying they lack sufficient funds for the down payment on a nice condo they’ve been eyeing as a home, I’ll slap myself hard on my own face – TWICE! The first slap is for failing my obligations as a parent to impart proper monetary values. The second slap is a punishment for raising my kids into spoilt brats!

JC: If we stick to this rule, we will NEVER buy a property (condo, that is) in Singapore, unless we earn $25,000 per month income combined for a couple. (i.e. $12,500 each!)

Then don’t. Why is it a necessity for everyone to own a private property for own stay? Is it a Singaporean dream created by marketing propaganda over the years?

Don’t get me wrong. I’m not saying one cannot spend to live in a nice and beautiful ‘cage’ in the sky. What I’m saying is if you really have the means, go ahead and buy one for your own stay. The government will be more than happy that you contributed more to GDP growth and taxes from your purchase.

But if you’re living a ‘slave life’ in your own castle – and your only means of paying off that huge 30 year mortgage loan comes from a 15-hour day job, you might want to reconsider.

I do own a private property myself as a home currently – but I’m financially wealthy. My home mortgage loan is paid down by my tenants (rental income) from my other properties. I have a choice between working and not working every single day.

So why am I telling you this?

Well, I suppose I want to let you know it is possible for you to focus your limited monetary resources to build and increase your financial wealth through sensible investments, rather than spend unnecessarily on material riches (middle-class wants) that decrease your wealth.

I’m a regular family guy who wants pretty much the same things as anyone else. I want to be in control of my life and I want to have a good life. I want to be rich with my time and build positive relationships with the people around me.

But I want you to know this: I do not possess any special characteristics compared to anyone else and neither do I consider myself lucky. All I did was apply myself to do something that I wanted to do. This was to become financially free from an employer.

I believe anyone can do this with the right attitude and choice.

By guest contributor Gerald Tay, CEO of CREI Academy Group, and a professional real estate investor whose real estate portfolio is now worth over $8 million and generates a 6-figure sum in rental income annually. He exposes widely-held property investment myths that are highly ineffective in creating wealth and prevent a comfortable retirement for the ordinary investor. Posted courtesy of www.Propwise.sg, a Singapore property blog dedicated to helping you understand the real estate market and make better decisions. Click here to get your free Property Beginner’s and Buyer’s Guide.

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