The tenant leases for commercial properties in China, Hong Kong and Singapore are rather unique in that they are shorter.

There are no rental escalation. Typically, the tenure is less than 5 years. In Singapore and Hong Kong, the commercial offices and shopping centers have 3 to 5 year leases.

When real estate investment trusts (REITs) that owned foreign commercial properties came over to Singapore, their leases looked pretty unique to the Singapore investors.

The investors welcome the longer leases, which also usually comes with annual rental escalations. If there were no annual rental escalations, there are typically mid term reviews. However, we might have missed some of the drawbacks with these different lease structure as well.

The Differences between USA and Singapore Office Leases

Manulife US REIT announced their 2nd Quarter 2019 results in mid August 2019. In their slide desk, they appended one slide that explain this difference.

The typical differences between the office leases in Singapore and USA

I manage to sit down with them to listen to Jill Smith, the CEO, and the management explain about this, as well as their results (I will talk a little about the results later)

You grow to appreciate that management gives you access to these details. It makes you frame similar REITs in a certain way. It builds your conviction or tear them down.

The lease tenure and incentives are not new to me. But this slide gives some deeper stuff.

1. The lease tenure are longer.

Typically, the average leases are 5 to 10 year versus 3 year for Singapore office leases.

This is an advantage from the landlord perspective because there is less volatility in vacancies. You do not have to renew or re-leased the property so frequently.

Many investors may not be aware of is that the quality of the leases affect the valuation of the property. This affects the landlord’s capacity to borrow as well as a host of covenants. In United States or other countries for example, it is less land scarce. The price appreciation factor, or the anticipation of future price increase is less baked into the valuation of the building.

You can think of the valuation of a property being made up of:

1. 
   The physical building value. The physical building go through wear and tear and will go down in value


2. 
   The land value. Either long leasehold, short leasehold or freehold. This do not go down in value


3. 
   The quality of the leases. If your tenant is listed, well established with long history, and the leases are long, it enhances the value of the property. From the finance perspective, the value of the property is the aggregate of the discounted net cash flow of the property. So if the net cash flow is very sturdy and predictable, the value of the property is higher.

Singapore and Hong Kong are land scarce so there is a bigger premium to the land value, although it is leasehold. However, in other countries, it is less scarce.

So a larger part of the value is in the quality of the leases. So if you have a lot of short leases, the valuation of the property is affected.

Landlords would rather want less vacancies than to always fully maximize rent I feel. One month or 6 months not rented is equal to if not lower than an overall lower rent per square foot.

The flip side is that if the place is red hot, you missed out on the opportunity cost. People in the market can earn $55 psf, you end up being locked in at $48 psf for 10 years.

2. There are Annual Rental Escalations or Mid Term Reviews.

If your leases are longer, your rent may be vastly below the inflation rate. Thus, these long leases typically come with either a 1-3% a year rental escalation or a Consumer price indexed (CPI) based rental escalation.

If not, like the Washington property, there is a mid term rent review.

Investors will need to discern this because there is a tendency for the current rent, before renewal (we call this the passing rent) to be ABOVE the market rent. This happens because the rental escalation is so much higher than the current price appreciation of the rent in the period.

For example, for Michelson in Manulife US REIT, which has a few large tenants that renewed this year. Their passing rent should be very much above the market rent.

Thus, in this quarter’s result, you can see the dip in Michelson’s net rental income. This is bad for unit holders.

But if you ask me, as a landlord who has owned this for 10 years, what will you do? Not take more rent because it ran too much versus the market rent? Don’t make sense right? The unfortunate thing is that because we are new holders, we do not get to “enjoy” these 10 year of greater rent appreciation. We were left holding to this dip.

While the net rental income of Michelson will dip, because they secured an average of 8 years of tenant lease with 3% escalation, it will take probably 2 to 4 years for the rental income to get back to where it is currently.

3. Tenant improvements (TI) is paid by the landlords instead of tenants.

In Singapore, the office tenants tend to have to put in a large amount of capital expenditure (capex) to do up the place. This can be in 10 to 20 million for large tenants.

If they put in so much capex they will typically stay there for at least 2 rent cycles (6 years).

In other places like the States, the TI is paid jointly by the tenant but majority by the landlords. However, this is selective in a certain way. For example, they might propose to the landlord to do the lobby or certain fittings in a certain way.

The difference between the office in Singapore and the States is that in Singapore, the space comes fully empty. In the States, the majority of the fittings are still there.

While the TI is paid by the landlord, Jill explains that we can see this as an AEI to the property. I do agree since they are not going to put a chandelier in just because the tenant wants. It has to be rationalize. Some of these TI is better for the property in the long run.

So the way investors should look at it financially is also how to account for this TI. Which is that this capex is investment capex rather than maintenance capex. And typically if that is the case investment capex is funded with debt, or working capital. As the building value is enhanced, the valuation goes up, which balances this debt increase.

If this is a maintenance capex then it is a one time cost in a long time to the REIT.

4. Free Rent or Incentives.

This is the big one that investors typically missed out. While we get all the good stuff of long WALE and rental escalation, typically, tenants will pay no rent for different amount of periods.

So basically, I will look at this as a discount to the tenant. Tenants pay no rent. So I can also say this is a reduced market rent. Or a reduced WALE. When market conditions is poor, this incentive or discount is larger.

This is applicable to your REITs operating in Australia such as FCOT, FLT, Cache, Soilbuild, MINT as well.

Manulife gave a guidance that this is typically 2 weeks to 4 weeks per year of lease. So if Manulife renewed their Michelson tenant for 11 years this quarter (they did), the rent free for this contract can be 22 weeks to 44 weeks.

This works out to be on average 1 month per year free. So they are renting out for only 11 months.

Typically, this is spread out over the tenure of the lease. Will probably talk about this later.

5. Lease Commissions.

Broker agents help market the leases, and they are given incentive in different way.

The Singapore agents typically are paid only on new leases not renewed. And they are paid 1 month for the entire tenure of leases.

The USA one are typically paid 2 to 3 weeks in fees for the first 5 years and 1 week thereafter. This is for both new and renewals.

6. The Different Rental Lease Agreements.

In one of my previous Manulife US REIT article, I have explained a little on the differences between popular lease agreements in the USA.

This is not explained in the thought leadership but I will like to put it here again. (Note, I cannot cover all today, and I think I will revisit this to add more next time)

1. Triple Net Lease or NNN Lease or Net Lease. This is the favorite. Tenant pays all the three different common costs of real estate taxes, insurance and maintenance. The landlord gets a rent.

The revenue is almost equal to the EBITDA. The margin is like above 90%.

Take a look at First REIT and Parkway Life REIT financial statements, they are under this structure.

The landlord is almost like a financing company. They borrow from banks at a lower interest to buy a property that have a higher net rental yield. They don’t worry about the inflation of costs.

2. Full-Service Gross Lease. This is the opposite to triple net lease. The landlord quote a rent to the tenant and the tenant pays this.

All the costs (taxes, insurance and maintenance) are paid by the landlord. Usually the rent paid by the tenant embeds an assumed value for these costs, and quoted to the tenant.

The landlord takes on the risks of overestimating or underestimating the costs.

Think of this as most of the local REIT’s lease structure.

3. Gross Base Stop Lease. From here on there are a few modifications to #1 and #2. You can view these as in the middle.

In gross base stop leases, the landlord pays all the expenses in the first year.

However, any of the expenses over the first year expenses (when it goes up with inflation) is recovered from the tenants.

For example, the rent is $100 psf and the cost is $15 psf for the first year. If the cost goes up to $17 psf in the second year, the extra $2 is recoverable by the landlord.

In this way, if expenses go up with inflation, the landlord is protected. I do see this as very similar to Triple net. It is just the margin and accounting to be different.

The margins for the triple net can be 90% and the margins for Manulife is around 62%. But you will notice in Manulife’s older statements they will embed the cost recovered in the revenue.

Michelson, Penn for Manulife US REIT is on this structure.

4. Modified Gross Base Stop. You will have some modified version of these rents.

In Manulife’s Plaza and Exchange, Electricity and Utilities are fully recoverable while remaining expenses are base stop.

Does TI, Rent Free Periods and Leasing Commission go into the Implied CAP Rate

One of the question that I have is whether the CAP Rate that was published includes how much of these indirect costs.

These CAP Rates that is communicated to us in terms of:

1. Valuation of the property at purchase


2. Valuation of the property on the ongoing basis


3. Valuation of the market

This is the Implied CAP Rate.

The calculation is based on:

1. 1st year Net Operating Income


2. Do not include Capital Expenditure


3. Do not include TIs


4. Do not include Leasing Commissions


5. Includes Free Rent

Since free rent is the biggest part of the indirect cost, it is good to know the CAP Rate includes that. This is especially if the property is a new purchase.

I don’t like the idea they bought the property for a CAP Rate/net rental yield of 7% only to know that on average, the cash flow yield we will get is like 5%.

A Framework to Think About These Different Cash Flows

Whenever these things get confusing, I thought an example to tie everything together would be great.

We will try to use the example of the latest renewal of Manulife US REIT’s Michelson. But we will extrapolate as if Michelson is wholly rented to this one tenant:

1. 100,000 sqft


2. Purchased at Implied CAP Rate of 5%


3. Rent renewed at $50 psf


4. Rental Escalation or Growth of 3% a year


5. Lease tenure is 11 years


6. A Gross Base Stop lease agreement


7. TI assume to be not included


8. Total 44 weeks of rent free


9. Total 21 weeks worth of leasing commissions

The difficulty is to model the cost.

Manulife US REIT’s Gross Operating Margins is for a long time around 62% there about. So 38% of it is the maintenance, property tax, insurance costs, free rent, leasing commission and TIs.

They have also given me enough guidance (according to an example I gave) that in the example: Assuming the total rental revenue for a full lease tenure is US$500 per sq ft (for the entire period)

1. free rent is ~7% of US$500 (for both new leases and renewals)


2. leasing commission is ~6% of US$500 for new leases and ~3% of US$500 for renewals.

So that is about 10% to 13% of the revenue.

So instead of a margin of 62%, let me take it that after only maintenance, property tax and insurance cost, the margin is 70%. I give back 12% for rent free and leasing commission. This is to compute the implied CAP Rate of how much this property is purchased at.

the base case

In the table above, we can see the progression in net rental income after all cost over the 11 year tenure. Using only rental cost + an average free rent of 4 weeks, and 5% implied CAP rate, we come up with a property price of $22 million.

The net rental yield on the purchase price for the first year is 4.18%. This will slowly be recovered to 5.39% in the third year. Then 11% in the last year.

So you lose in the start than make it back.

This may be how the cash flow will progress but I have to check whether it is right for me to assume the rent free and leasing commission is like this.

Typically, the REITs will straight lined the revenue. This means that they will average out the revenue escalation, taking the mid-point as the revenue in the income statement.

Thus, the income and cash flow will look very different.

With Straight Lining of Revenue

So I attempt to straight line-d the revenue. What I did was to average out the rent (at $58 psf). The rental cost is still based on the first year rent of $50 still. The property purchase price is slightly cheaper, because the free rent cost is a bit higher.

We can see then, that the net rental yield over the property purchase price is around 7.89% over this 11 years.

This looks pretty good. We probably see the appeal of the longer lease in this case.

I also did attempt to compute the internal rate of return (IRR) for both the sequence of cash flow. The IRR is around 7% to 7.5%. That is not too surprising.

If you leverage the property up with 30% debt, the IRR gets juiced to 8.55% to 9.4%. I think this looks disappointing may because the leverage factor is not so high.

Conclusion

REIT investors should at least be aware to some of the terms. This is so that next time you can Google and look up some of these details in lease agreements more.

I have gone through what I think are rather generic information. Different REITs in different regions, will have different flavor of these leases. Thus, don’t treat what I wrote as the absolute truth.

I write a lot on my teachings of REITs below:

DoLike MeonFacebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content viaemail below.

Here are My Topical Resources on:

1. 
   Building Your Wealth Foundation– If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are


2. 
   Active Investing– For the active stock investors. My deeper thoughts from my stock investing experience


3. 
   Learning about REITs– My Free “Course” on REIT Investing for Beginners and Seasoned Investors


4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG


5. Free Stock Portfolio Tracking Google Sheets that many love


6. 
   Retirement Planning, Financial Independence and Spending down money– My deep dive into how much you need to achieve these, and the different ways you can be financially free


7. 
   Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

The post The Differences between Singapore and United States Office Lease Agreements appeared first on Investment Moats.

This is a quick public service announcement.

NTUC are issuing another tranche of these very popular high return for short duration insurance savings plan.

Typically, from what I understand, these plans do not net the commission based advisers much commission. Usually, these are very attractive to those who are not easily swayed.

As they get you on this plan, they have your contact. The real selling happens after the end of the tenure of these insurance savings plans.

But if you are a very well inform and savvy reader of Investment Moats, this might be for you.

The Capital Plus (C2N2) Plan

This is a 3-year non-participating, single premium endowment policy that provides:

• a guaranteed return of 2.30% p.a.


• Up to 105% of death and TPD benefits (before age 70)


• Minimum single premium: $20,000

This plan is suitable for those who wants:

• Short term saving plan of 3 years


• Guaranteed returns


• Capital guaranteed upon maturity


• Higher return than bank deposits and Singapore saving bonds (for 3 years)


• Hassle-free application with no medical check-up required

They plan to sell these plan until it is fully subscribed. So I am not sure if I am too late in telling you this.

Where can you get this?

You can get them from MoneyOwl, which is a non-commission bionic financial advisory firm. They are probably the last folks that will proposition you the lousy things after this 3 year ends.

To buy this, contact them, tell them you want to buy the NTUC Capital Plus. Ask if it is still available.

DoLike MeonFacebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content viaemail below.

Here are My Topical Resources on:

1. 
   Building Your Wealth Foundation– If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are


2. 
   Active Investing– For the active stock investors. My deeper thoughts from my stock investing experience


3. 
   Learning about REITs– My Free “Course” on REIT Investing for Beginners and Seasoned Investors


4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG


5. Free Stock Portfolio Tracking Google Sheets that many love


6. 
   Retirement Planning, Financial Independence and Spending down money– My deep dive into how much you need to achieve these, and the different ways you can be financially free


7. 
   Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

The post NTUC Capital Plus (CSN2) 3 Year 2.3% Return Endowment Policy appeared first on Investment Moats.

A sub-conscious fear and confusion about some things related to money.

That is the thing I can clearly defined as I hear people talk about their concerns. Or when my colleagues shared with me what their clients tell them or what they managed to detect.

I have less of this problem currently. I think fear used to plague me more. I didn’t think it was a lot but it was sub-conscious. That is why financial prudent folks decide to rank wealth building rather high in their list of priorities. We either try hard to alleviate our fear or something that makes us feel good.

Early Retirement SG (ERS) has a good post last week. In taking care of mental health, He wants to tell his readers that the solutions to a lot of our problems is not by what we do outside but whether we are able to find the answer on the inside.

The main example he use is financial security. It is a good example because I think it plague almost all of us. Whether you admit it or not.

So this post explored a little more on financial insecurities and how we may be able to better solve it in little ways.

These Insecurities Plagues the Wealthier Folks Too

ERS says that he knows there are people with $1 million that does not feel financially secure. He explains that not feeling secure is an internal thing. You cannot be secure financially unless you look inside.

MoneyOwl’s CEO Chuin Ting informed us of this Bloomberg article that underlines this financial security issue. Advisers share their tale of how difficult it is, to get their rich clients to spend money.

If well-off retirees are more frugal than necessary, they end up denying themselves the fruits of a lifetime of hard work. Their heirs eventually benefit, but the vitality of the American economy suffers. “Wealth is getting more and more concentrated among households that are averse to spending it,” says Matt Fellowes, a former Brookings Institution fellow who’s founder and chief executive officer of United Income, a retirement planning startup. “It’s trillions and trillions of wealth that is not benefiting anyone except asset managers.”

Nervous Retirees Are Too Scared to Spend

I am surprised they managed to make this into a reason for greater wealth divide.

“The reason they don’t spend in retirement is because they worry about running out of money,” says David Lau, founder and CEO of DPL Financial Partners. “You don’t know when someone is going to die, you don’t know when someone is going to get sick.”

Nervous Retirees Are Too Scared to Spend

This is very real. It would plague the poor on a daily basis. For the rich, it is fleeting. Some days you will never think about it. Then on certain days, you will wonder about it.

When someone mentions to you that you have a lot of money, you will tell them that it is not really true. There are so much uncertainty in this world.

1. Your parents healthcare can be on you


2. You may become disabled


3. The stock markets are so volatile


4. Your kids can turned out to be more of a liability than an assets


5. Inflation is so high nowadays especially for healthcare costs

These are the uncertainty in not just the rich people but also the middle class. You can add a few more and minus some of these, since our priorities are different.

Never Spending the Principal is a Sign of Insecurity?

The Bloomberg article tells us that one of this fear is the notion not to spend your capital:

Many clients think they’re doing something wrong if they spend money in a way that causes portfolio balances to drop. “Never touch the principal” is classic advice that’s a relic of an era of double-digit interest rates, when even conservative investments could produce substantial income. Despite ultra low interest rates, advisers say it can be difficult to persuade retirees to tap savings rather than just live on their tiny bond coupons and dividend checks. “Wealth is really a source of identity for people,” Fellowes says. “By spending their wealth, they’re losing some of their identity. There’s an aversion to seeing their balances go down, even if it’s excess wealth” that they’ll never need.

Nervous Retirees Are Too Scared to Spend

This is pretty common. In how much do you need to be financial independent article, I explain how much is enough based on this framework.

1. Build up a portfolio of dividend paying stocks


2. Make sure your dividend income can pay for your annual expenses


3. Your portfolio of stocks will grow to keep up with inflation


4. For example, if your expenses is $25,000 and your portfolio of dividend stocks can give a conservative and sustainable income of 4%, then you will need a portfolio of $625,000.


5. Your principal is protected. It will not run out.

I went through this phase of finding that perfect framework of spending my wealth in a sustainable manner. Come to think about it, the main reason I would do that is due to insecurity.

There is a big part of us worry that the money will run out. For some, there is a bigger fear that their next generation will not have this wealth and because of that, they end up worse off, versus their friends.

My research shows that the dividend income model may be a little flawed. The primary reason is that we estimate too perfect of a future. That usually do not happen. However, this is a story for another day.

To be honest, I wonder how many people could say “This money is not mine. Eventually we are all dead. We only have one life. So why not take the money and use it in a way I think is meaningful to me. Money will work itself out.”

One of my university mates and good pal used to tell me that when we started working. He is right. But right now, 15 years later, insecurity is breeding within him and his wife.

That is life for a lot of people. We go through this cycle of YOLO and Insecurity, YOLO and Insecurity.

Lifestyle Security is What We Seek

Sometimes I think we all benefit by ERS being early retired, not working and writing out his thoughts.

Because some of these things, we seldom hear it anywhere else.

ERS makes the statement :

When people talk about financial security, they usually mean lifestyle security. They want to maintain some form of lifestyle. So… typically, it’s not really ALL about the money. IF you can maintain the same lifestyle WITHOUT money, that’s also ok right?

BUT we lived in a world where the Government says, “Ok, we’ll take care of your food, lodging, medical expenses, if you earn more that’s your bonus.”
There will still be people who feel insecure, although, by right, that shouldn’t make sense.

ERS

In a lot of ways he is right.

In the financial planning space this is what we try to balance for our clients often. They will come in with that expectation to secure their current lifestyle. Say they need $200,000 a year.

And they wants this plan to be REAL secure.

So the figure usually comes up to around $6.5 – 7 million. Some of us can be real productive at work. But when you see such a figure, it puts you down. And your plan is to have this within the next 10 years.

This is similar to the project management problem: You can only have 2 of fast delivery, quality and cost.

The need to protect their lifestyle and be real secure is real for a lot of people.

The Solution… I Think… for Now….

At 39 years old, I am not going to say I figured everything out to say this is the solution.

I worked this problem out enough that I think I have a framework or list for you to explore.

Here it is.

1. Reflect and List Down a List of the Financial Fears that Plague You

ERS is right. The thing you are searching for is inward.

But to help yourself, you need to find these “monsters” first. You need to prioritize time to reflect. Sometimes, it is not that. Maybe always have a list in your phone. Whenever you come across these concerns, list them out.

I would give you a trigger list for a start:

1. Your wealth is not enough for _____________
   1. lasting for 1 month, 3 months, 1 year, 5 years, 30 years, perpetuity
   
   


2. I have wealth but I am worried about___________
   
   
   1. Me dying and what will happen to my family
   
   
   2. Can I sustain my parent’s future health cost
   
   
   3. Not reducing the quality of life
   
   
   
   

If you still say you do not know, then you better sit down with someone you trust, that is a good critical thinker, asks good questions to try and get this out.

2. Find the Framework or Models to Solve These Financial Insecurities

For each of these financial worry, there are usually a money value that you can assign to it.

For example, you do not know how much you need to be financially secure.

I would say KNN, you have been reading this blog long enough, you should notice a few variation of looking at it. Collate your expenses. Build wealth so that it is large enough to cash flow to pay for the expenses.

How much is more secure?

1. There is the conservative dividend paying model.


2. There is the withdrawal rate model.


3. There are the variable withdrawal rate model.


4. There is the endowment model.


5. You can also figure out roughly how to generate cash flow perpetually.

The idea is that these topics are rather popular and prevalent. If this is a worry that is big enough, then you should prioritize to go down this rabbit hole and seek out how much you need.

That is one of the main way I solved a large part of my insecurity. At least now I know “damn this is a big figure” or “OK I am not so far off”

We want to know where we are on this ruler.

You will tell me but some of these things are so uncertain. Like healthcare cost. Like whether your parent will have dementia and how long they are going to live.

For most things, you can put a value to it.

Don’t know the inflation rate of medical cost? You can work out the present value of a stream of expenses on 3%, 5%, 7%, 10% inflation rate. For different duration.

If you are so insecure, then take the largest one. 10% inflation and for 40 years. This is a future financial liability. Save enough of this Sinking Fund.

For all financial insecurities, there is usually a value attached.

3. Reflect upon these Financial Insecurities

Assigning the real values removes uncertainty and confusion. But it does not solve the insecurity.

ERS is right. You have to look inward.

You might be looking for lifestyle security. But how much of this lifestyle to you really wish to secure? All of it?

You have just listed out 10 things you are worried about and here are the costs. Realistically can you save and fund all these 10 financial liabilities?

How do people with less money tackle all these things? How did people with NO money tackle these worries?

Some of these questions, take you down some mental rabbit hole and hopefully, you come out of these to a better place.

Your Network is More Important than Your Net Wealth

I reflected upon my experience building wealth and learning about spending wealth and recently, I lean towards this idea.

There is the net wealth you need to build up. But your network may be far better.

I dunno how to describe it. Maybe this will be another post. But it seems that how you carry yourself, and how open you are to create deeper relationships will allow you to have a safety net.

1. People you help to take care of little chores. They help you take care of little chores


2. People that refer you for work. You do the same if they need it


3. People show you where to get food and supplies


4. People giving you medical help

If you rely on money solely, it is going to be expensive. Perhaps not enough. But you also can’t depend on network alone. You also need money.

Figure out Enough then Let it Go, Let it Flow

My solution is to figure out the framework and model to look at these money insecurities. Then look inward.

After that, let it go after you know you have explored enough. ERS is also right. The more you look at this, and trying to seek the holy grail, the more fxxked up it feels.

But I do caution: Most people never found these models that help them quantify these financial worries.

But they choose to let it go.

This is not Zen. This is postponing the inevitable. You may have a financial fall out big enough that you could have easily prepared for.

Going down this financial independence rabbit hole for many is a journey to tackle our insecurities. For most, we emerge in a better place. But many still have a lot of worries.

In that case, maybe the answer is not financial anymore. You might need more spiritual help.

DoLike MeonFacebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content viaemail below.

Here are My Topical Resources on:

1. 
   Building Your Wealth Foundation– If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are


2. 
   Active Investing– For the active stock investors. My deeper thoughts from my stock investing experience


3. 
   Learning about REITs– My Free “Course” on REIT Investing for Beginners and Seasoned Investors


4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG


5. Free Stock Portfolio Tracking Google Sheets that many love


6. 
   Retirement Planning, Financial Independence and Spending down money– My deep dive into how much you need to achieve these, and the different ways you can be financially free


7. 
   Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

The post How we can Tackle Financial Insecurities appeared first on Investment Moats.

A sub-conscious fear and confusion about some things related to money.

That is the thing I can clearly defined as I hear people talk about their concerns. Or when my colleagues shared with me what their clients tell them or what they managed to detect.

I have less of this problem currently. I think fear used to plague me more. I didn’t think it was a lot but it was sub-conscious. That is why financial prudent folks decide to rank wealth building rather high in their list of priorities. We either try hard to alleviate our fear or something that makes us feel good.

Early Retirement SG (ERS) has a good post last week. In taking care of mental health, He wants to tell his readers that the solutions to a lot of our problems is not by what we do outside but whether we are able to find the answer on the inside.

The main example he use is financial security. It is a good example because I think it plague almost all of us. Whether you admit it or not.

So this post explored a little more on financial insecurities and how we may be able to better solve it in little ways.

These Insecurities Plagues the Wealthier Folks Too

ERS says that he knows there are people with $1 million that does not feel financially secure. He explains that not feeling secure is an internal thing. You cannot be secure financially unless you look inside.

MoneyOwl’s CEO Chuin Ting informed us of this Bloomberg article that underlines this financial security issue. Advisers share their tale of how difficult it is, to get their rich clients to spend money.

If well-off retirees are more frugal than necessary, they end up denying themselves the fruits of a lifetime of hard work. Their heirs eventually benefit, but the vitality of the American economy suffers. “Wealth is getting more and more concentrated among households that are averse to spending it,” says Matt Fellowes, a former Brookings Institution fellow who’s founder and chief executive officer of United Income, a retirement planning startup. “It’s trillions and trillions of wealth that is not benefiting anyone except asset managers.”

Nervous Retirees Are Too Scared to Spend

I am surprised they managed to make this into a reason for greater wealth divide.

“The reason they don’t spend in retirement is because they worry about running out of money,” says David Lau, founder and CEO of DPL Financial Partners. “You don’t know when someone is going to die, you don’t know when someone is going to get sick.”

Nervous Retirees Are Too Scared to Spend

This is very real. It would plague the poor on a daily basis. For the rich, it is fleeting. Some days you will never think about it. Then on certain days, you will wonder about it.

When someone mentions to you that you have a lot of money, you will tell them that it is not really true. There are so much uncertainty in this world.

1. Your parents healthcare can be on you


2. You may become disabled


3. The stock markets are so volatile


4. Your kids can turned out to be more of a liability than an assets


5. Inflation is so high nowadays especially for healthcare costs

These are the uncertainty in not just the rich people but also the middle class. You can add a few more and minus some of these, since our priorities are different.

Never Spending the Principal is a Sign of Insecurity?

The Bloomberg article tells us that one of this fear is the notion not to spend your capital:

Many clients think they’re doing something wrong if they spend money in a way that causes portfolio balances to drop. “Never touch the principal” is classic advice that’s a relic of an era of double-digit interest rates, when even conservative investments could produce substantial income. Despite ultra low interest rates, advisers say it can be difficult to persuade retirees to tap savings rather than just live on their tiny bond coupons and dividend checks. “Wealth is really a source of identity for people,” Fellowes says. “By spending their wealth, they’re losing some of their identity. There’s an aversion to seeing their balances go down, even if it’s excess wealth” that they’ll never need.

Nervous Retirees Are Too Scared to Spend

This is pretty common. In how much do you need to be financial independent article, I explain how much is enough based on this framework.

1. Build up a portfolio of dividend paying stocks


2. Make sure your dividend income can pay for your annual expenses


3. Your portfolio of stocks will grow to keep up with inflation


4. For example, if your expenses is $25,000 and your portfolio of dividend stocks can give a conservative and sustainable income of 4%, then you will need a portfolio of $625,000.


5. Your principal is protected. It will not run out.

I went through this phase of finding that perfect framework of spending my wealth in a sustainable manner. Come to think about it, the main reason I would do that is due to insecurity.

There is a big part of us worry that the money will run out. For some, there is a bigger fear that their next generation will not have this wealth and because of that, they end up worse off, versus their friends.

My research shows that the dividend income model may be a little flawed. The primary reason is that we estimate too perfect of a future. That usually do not happen. However, this is a story for another day.

To be honest, I wonder how many people could say “This money is not mine. Eventually we are all dead. We only have one life. So why not take the money and use it in a way I think is meaningful to me. Money will work itself out.”

One of my university mates and good pal used to tell me that when we started working. He is right. But right now, 15 years later, insecurity is breeding within him and his wife.

That is life for a lot of people. We go through this cycle of YOLO and Insecurity, YOLO and Insecurity.

Lifestyle Security is What We Seek

Sometimes I think we all benefit by ERS being early retired, not working and writing out his thoughts.

Because some of these things, we seldom hear it anywhere else.

ERS makes the statement :

When people talk about financial security, they usually mean lifestyle security. They want to maintain some form of lifestyle. So… typically, it’s not really ALL about the money. IF you can maintain the same lifestyle WITHOUT money, that’s also ok right?

BUT we lived in a world where the Government says, “Ok, we’ll take care of your food, lodging, medical expenses, if you earn more that’s your bonus.”
There will still be people who feel insecure, although, by right, that shouldn’t make sense.

ERS

In a lot of ways he is right.

In the financial planning space this is what we try to balance for our clients often. They will come in with that expectation to secure their current lifestyle. Say they need $200,000 a year.

And they wants this plan to be REAL secure.

So the figure usually comes up to around $6.5 – 7 million. Some of us can be real productive at work. But when you see such a figure, it puts you down. And your plan is to have this within the next 10 years.

This is similar to the project management problem: You can only have 2 of fast delivery, quality and cost.

The need to protect their lifestyle and be real secure is real for a lot of people.

The Solution… I Think… for Now….

At 39 years old, I am not going to say I figured everything out to say this is the solution.

I worked this problem out enough that I think I have a framework or list for you to explore.

Here it is.

1. Reflect and List Down a List of the Financial Fears that Plague You

ERS is right. The thing you are searching for is inward.

But to help yourself, you need to find these “monsters” first. You need to prioritize time to reflect. Sometimes, it is not that. Maybe always have a list in your phone. Whenever you come across these concerns, list them out.

I would give you a trigger list for a start:

1. Your wealth is not enough for _____________
   1. lasting for 1 month, 3 months, 1 year, 5 years, 30 years, perpetuity
   
   


2. I have wealth but I am worried about___________
   
   
   1. Me dying and what will happen to my family
   
   
   2. Can I sustain my parent’s future health cost
   
   
   3. Not reducing the quality of life
   
   
   
   

If you still say you do not know, then you better sit down with someone you trust, that is a good critical thinker, asks good questions to try and get this out.

2. Find the Framework or Models to Solve These Financial Insecurities

For each of these financial worry, there are usually a money value that you can assign to it.

For example, you do not know how much you need to be financially secure.

I would say KNN, you have been reading this blog long enough, you should notice a few variation of looking at it. Collate your expenses. Build wealth so that it is large enough to cash flow to pay for the expenses.

How much is more secure?

1. There is the conservative dividend paying model.


2. There is the withdrawal rate model.


3. There are the variable withdrawal rate model.


4. There is the endowment model.


5. You can also figure out roughly how to generate cash flow perpetually.

The idea is that these topics are rather popular and prevalent. If this is a worry that is big enough, then you should prioritize to go down this rabbit hole and seek out how much you need.

That is one of the main way I solved a large part of my insecurity. At least now I know “damn this is a big figure” or “OK I am not so far off”

We want to know where we are on this ruler.

You will tell me but some of these things are so uncertain. Like healthcare cost. Like whether your parent will have dementia and how long they are going to live.

For most things, you can put a value to it.

Don’t know the inflation rate of medical cost? You can work out the present value of a stream of expenses on 3%, 5%, 7%, 10% inflation rate. For different duration.

If you are so insecure, then take the largest one. 10% inflation and for 40 years. This is a future financial liability. Save enough of this Sinking Fund.

For all financial insecurities, there is usually a value attached.

3. Reflect upon these Financial Insecurities

Assigning the real values removes uncertainty and confusion. But it does not solve the insecurity.

ERS is right. You have to look inward.

You might be looking for lifestyle security. But how much of this lifestyle to you really wish to secure? All of it?

You have just listed out 10 things you are worried about and here are the costs. Realistically can you save and fund all these 10 financial liabilities?

How do people with less money tackle all these things? How did people with NO money tackle these worries?

Some of these questions, take you down some mental rabbit hole and hopefully, you come out of these to a better place.

Your Network is More Important than Your Net Wealth

I reflected upon my experience building wealth and learning about spending wealth and recently, I lean towards this idea.

There is the net wealth you need to build up. But your network may be far better.

I dunno how to describe it. Maybe this will be another post. But it seems that how you carry yourself, and how open you are to create deeper relationships will allow you to have a safety net.

1. People you help to take care of little chores. They help you take care of little chores


2. People that refer you for work. You do the same if they need it


3. People show you where to get food and supplies


4. People giving you medical help

If you rely on money solely, it is going to be expensive. Perhaps not enough. But you also can’t depend on network alone. You also need money.

Figure out Enough then Let it Go, Let it Flow

My solution is to figure out the framework and model to look at these money insecurities. Then look inward.

After that, let it go after you know you have explored enough. ERS is also right. The more you look at this, and trying to seek the holy grail, the more fxxked up it feels.

But I do caution: Most people never found these models that help them quantify these financial worries.

But they choose to let it go.

This is not Zen. This is postponing the inevitable. You may have a financial fall out big enough that you could have easily prepared for.

Going down this financial independence rabbit hole for many is a journey to tackle our insecurities. For most, we emerge in a better place. But many still have a lot of worries.

In that case, maybe the answer is not financial anymore. You might need more spiritual help.

DoLike MeonFacebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content viaemail below.

Here are My Topical Resources on:

1. 
   Building Your Wealth Foundation– If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are


2. 
   Active Investing– For the active stock investors. My deeper thoughts from my stock investing experience


3. 
   Learning about REITs– My Free “Course” on REIT Investing for Beginners and Seasoned Investors


4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG


5. Free Stock Portfolio Tracking Google Sheets that many love


6. 
   Retirement Planning, Financial Independence and Spending down money– My deep dive into how much you need to achieve these, and the different ways you can be financially free


7. 
   Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

A sub-conscious fear and confusion about some things related to money.

That is the thing I can clearly defined as I hear people talk about their concerns. Or when my colleagues shared with me what their clients tell them or what they managed to detect.

I have less of this problem currently. I think fear used to plague me more. I didn’t think it was a lot but it was sub-conscious. That is why financial prudent folks decide to rank wealth building rather high in their list of priorities. We either try hard to alleviate our fear or something that makes us feel good.

Early Retirement SG (ERS) has a good post last week. In taking care of mental health, He wants to tell his readers that the solutions to a lot of our problems is not by what we do outside but whether we are able to find the answer on the inside.

The main example he use is financial security. It is a good example because I think it plague almost all of us. Whether you admit it or not.

So this post explored a little more on financial insecurities and how we may be able to better solve it in little ways.

These Insecurities Plagues the Wealthier Folks Too

ERS says that he knows there are people with $1 million that does not feel financially secure. He explains that not feeling secure is an internal thing. You cannot be secure financially unless you look inside.

MoneyOwl’s CEO Chuin Ting informed us of this Bloomberg article that underlines this financial security issue. Advisers share their tale of how difficult it is, to get their rich clients to spend money.

If well-off retirees are more frugal than necessary, they end up denying themselves the fruits of a lifetime of hard work. Their heirs eventually benefit, but the vitality of the American economy suffers. “Wealth is getting more and more concentrated among households that are averse to spending it,” says Matt Fellowes, a former Brookings Institution fellow who’s founder and chief executive officer of United Income, a retirement planning startup. “It’s trillions and trillions of wealth that is not benefiting anyone except asset managers.”

Nervous Retirees Are Too Scared to Spend

I am surprised they managed to make this into a reason for greater wealth divide.

“The reason they don’t spend in retirement is because they worry about running out of money,” says David Lau, founder and CEO of DPL Financial Partners. “You don’t know when someone is going to die, you don’t know when someone is going to get sick.”

Nervous Retirees Are Too Scared to Spend

This is very real. It would plague the poor on a daily basis. For the rich, it is fleeting. Some days you will never think about it. Then on certain days, you will wonder about it.

When someone mentions to you that you have a lot of money, you will tell them that it is not really true. There are so much uncertainty in this world.

1. Your parents healthcare can be on you


2. You may become disabled


3. The stock markets are so volatile


4. Your kids can turned out to be more of a liability than an assets


5. Inflation is so high nowadays especially for healthcare costs

These are the uncertainty in not just the rich people but also the middle class. You can add a few more and minus some of these, since our priorities are different.

Never Spending the Principal is a Sign of Insecurity?

The Bloomberg article tells us that one of this fear is the notion not to spend your capital:

Many clients think they’re doing something wrong if they spend money in a way that causes portfolio balances to drop. “Never touch the principal” is classic advice that’s a relic of an era of double-digit interest rates, when even conservative investments could produce substantial income. Despite ultra low interest rates, advisers say it can be difficult to persuade retirees to tap savings rather than just live on their tiny bond coupons and dividend checks. “Wealth is really a source of identity for people,” Fellowes says. “By spending their wealth, they’re losing some of their identity. There’s an aversion to seeing their balances go down, even if it’s excess wealth” that they’ll never need.

Nervous Retirees Are Too Scared to Spend

This is pretty common. In how much do you need to be financial independent article, I explain how much is enough based on this framework.

1. Build up a portfolio of dividend paying stocks


2. Make sure your dividend income can pay for your annual expenses


3. Your portfolio of stocks will grow to keep up with inflation


4. For example, if your expenses is $25,000 and your portfolio of dividend stocks can give a conservative and sustainable income of 4%, then you will need a portfolio of $625,000.


5. Your principal is protected. It will not run out.

I went through this phase of finding that perfect framework of spending my wealth in a sustainable manner. Come to think about it, the main reason I would do that is due to insecurity.

To be honest, I wonder how many people could say “This money is not mine. Eventually we are all dead. We only have one life. So why not take the money and use it in a way I think is meaningful to me. Money will work itself out.”

One of my university mates and good pal used to tell me that when we started working. He is right. But right now, 15 years later, insecurity is breeding within him and his wife.

That is life for a lot of people. We go through this cycle of YOLO and Insecurity, YOLO and Insecurity.

Lifestyle Security is What We Seek

Sometimes I think we all benefit by ERS being early retired, not working and writing out his thoughts.

Because some of these things, we seldom hear it anywhere else.

ERS makes the statement :

When people talk about financial security, they usually mean lifestyle security. They want to maintain some form of lifestyle. So… typically, it’s not really ALL about the money. IF you can maintain the same lifestyle WITHOUT money, that’s also ok right?

BUT we lived in a world where the Government says, “Ok, we’ll take care of your food, lodging, medical expenses, if you earn more that’s your bonus.”
There will still be people who feel insecure, although, by right, that shouldn’t make sense.

ERS

In a lot of ways he is right.

In the financial planning space this is what we try to balance for our clients often. They will come in with that expectation to secure their current lifestyle. Say they need $200,000 a year.

And they wants this plan to be REAL secure.

So the figure usually comes up to around $6.5 – 7 million. Some of us can be real productive at work. But when you see such a figure, it puts you down. And your plan is to have this within the next 10 years.

This is similar to the project management problem: You can only have 2 of fast delivery, quality and cost.

The need to protect their lifestyle and be real secure is real for a lot of people.

The Solution… I Think… for Now….

At 39 years old, I am not going to say I figured everything out to say this is the solution.

I worked this problem out enough that I think I have a framework or list for you to explore.

Here it is.

Reflect and List Down a List of the Financial Fears that Plague You

ERS is right. The thing you are searching for is inward.

But to help yourself, you need to find these “monsters” first. You need to prioritize time to reflect. Sometimes, it is not that. Maybe always have a list in your phone. Whenever you come across these concerns, list them out.

I would give you a trigger list for a start:

1. Your wealth is not enough for _____________
   1. lasting for 1 month, 3 months, 1 year, 5 years, 30 years, perpetuity
   
   


2. I have wealth but I am worried about___________
   
   
   1. Me dying and what will happen to my family
   
   
   2. Can I sustain my parent’s future health cost
   
   
   3. Not reducing the quality of life
   
   
   
   

If you still say you do not know, then you better sit down with someone you trust, that is a good critical thinker, asks good questions to try and get this out.

Find the Framework or Models to Solve These Financial Insecurities

For each of these financial worry, there are usually a money value that you can assign to it.

For example, you do not know how much you need to be financially secure.

I would say KNN, you have been reading this blog long enough, you should notice a few variation of looking at it. Collate your expenses. Build wealth so that it is large enough to cash flow to pay for the expenses.

How much is more secure?

1. There is the conservative dividend paying model.


2. There is the withdrawal rate model.


3. There are the variable withdrawal rate model.


4. There is the endowment model.


5. You can also figure out roughly how to generate cash flow perpetually.

The idea is that these topics are rather popular and prevalent. If this is a worry that is big enough, then you should prioritize to go down this rabbit hole and seek out how much you need.

That is one of the main way I solved a large part of my insecurity. At least now I know “damn this is a big figure” or “OK I am not so far off”

We want to know where we are on this ruler.

You will tell me but some of these things are so uncertain. Like healthcare cost. Like whether your parent will have dementia and how long they are going to live.

For most things, you can put a value to it.

Don’t know the inflation rate of medical cost? You can work out the present value of a stream of expenses on 3%, 5%, 7%, 10% inflation rate. For different duration.

If you are so insecure, then take the largest one. 10% inflation and for 40 years. This is a future financial liability. Save enough of this Sinking Fund.

For all financial insecurities, there is usually a value attached.

Reflect upon these Financial Insecurities

Assigning the real values removes uncertainty and confusion. But it does not solve the insecurity.

ERS is right. You have to look inward.

You might be looking for lifestyle security. But how much of this lifestyle to you really wish to secure? All of it?

You have just listed out 10 things you are worried about and here are the costs. Realistically can you save and fund all these 10 financial liabilities?

How do people with less money tackle all these things? How did people with NO money tackle these worries?

Some of these questions, take you down some mental rabbit hole and hopefully, you come out of these to a better place.

Your Network is More Important than Your Net Wealth

I reflected upon my experience building wealth and learning about spending wealth and recently, I lean towards this idea.

There is the net wealth you need to build up. But your network may be far better.

I dunno how to describe it. Maybe this will be another post. But it seems that how you carry yourself, and how open you are to create deeper relationships will allow you to have a safety net.

1. People you help to take care of little chores. They help you take care of little chores


2. People that refer you for work. You do the same if they need it


3. People show you where to get food and supplies


4. People giving you medical help

If you rely on money solely, it is going to be expensive. Perhaps not enough. But you also can’t depend on network alone. You also need money.

Figure out Enough then Let it Go, Let it Flow

My solution is to figure out the framework and model to look at these money insecurities. Then look inward.

After that, let it go after you know you have explored enough. ERS is also right. The more you look at this, and trying to seek the holy grail, the more fxxked up it feels.

But I do caution: Most people never found these models that help them quantify these financial worries.

But they choose to let it go.

This is not Zen. This is postponing the inevitable. You may have a financial fall out big enough that you could have easily prepared for.

Going down this financial independence rabbit hole for many is a journey to tackle our insecurities. For most, we emerge in a better place. But many still have a lot of worries.

In that case, maybe the answer is not financial anymore. You might need more spiritual help.

DoLike MeonFacebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content viaemail below.

Here are My Topical Resources on:

1. 
   Building Your Wealth Foundation– If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are


2. 
   Active Investing– For the active stock investors. My deeper thoughts from my stock investing experience


3. 
   Learning about REITs– My Free “Course” on REIT Investing for Beginners and Seasoned Investors


4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG


5. Free Stock Portfolio Tracking Google Sheets that many love


6. 
   Retirement Planning, Financial Independence and Spending down money– My deep dive into how much you need to achieve these, and the different ways you can be financially free


7. 
   Providend– Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for first meeting to understand how it works

The post How we can Tackle Financial Insecurities appeared first on Investment Moats.

Resale endowment policy is not something new.

However, in the realm of wealth building, it may be less talked about. And therefore, a lot of investors may not be aware about it.

The concept from what I remember originate from UK. UK Tradeable Endowment was a pretty hot concept in the unit trust and investment forums that I frequent when I started investing in 2004 to 2006.

Since then, the talk about UK Tradeable Endowments have died down. In their place, there are some brokers who started dealing with Endowments that can be traded in Singapore.

One of them is REPS Holdings.

In this article, I will do a deep dive on the resale insurance endowment business. The value proposition to you as a potential investor. The risks involved as well.

How are Insurance Endowments “Traded” or “Resold”?

Absolute assignment is a process where a current owner of a policy (we call this the assignor) can legally transfer the rights and benefits of a policy to a new policy owner (we call this the assignee).

For each insurance company, they have their own assignment form that the assignor can fill up with the assignee to transfer the policy.

You can review the assignment forms for the various insurance company here.

The first part of the process is when the original seller assigns the policy to REPs Holdings. REPs Holdings is the assignee in this case:

The original owner sells the policy to REPs Holdings

Once the form is filled, signed and accepted, the policy is assigned to REPS Holdings.

REPs Holdings sell to a prospective policy owner

An interested investor would then browse the policies that REPs Holdings have taken over. When the investor found a policy that matches what he or she is interested in, the policy is then assigned to the investor. The investor became the new policy owner.

In these assignment forms, we can pick up more things regarding what the assignor is signing over, and what the assignee is taking over.

NTUC assignment form

We learn here that any policy under trust nomination or HPS cannot be re-assigned. So this weeds out some of these policies that are more complex in nature.

Prudential’s Notice of Assignment form

We learn all future correspondence and dealings on the policy will only require the new policy owner’s consent.

HSBC Assignment form

In HSBC’s assignment form, it provides the clearest take on specifically sell, assigning and transfer of the cash surrender and loan value, the bonus declared.

AIA Assignment form

In AIA’s assignment form, it explains that any nomination of beneficiaries that the assignor made, once the policy is assigned to the assignee, will be revoked.

This means that once the policy is assigned to the new owner, the beneficiary will be the new owner.

How does a policy sold through REPs Holdings look like? A Case Study of a $24,900 Investment

It would be something like an 8-year endowment policy listed by REPS Holdings shown below:

An 8-Year REPS Holdings Resale Endowment

This was originally a 10-year endowment plan (29-Nov-17 to 29-Nov-27). The original owner of this policy sold to REPs Holdings after less than 2 years of owning it.

The surrender value the original owner got when he or she surrendered should be at a loss. The owner surrendered to REPs Holdings instead. In return REPs Holdings is able to give the original owner a better surrender value.

REPs Holdings would typically incubate the policy from 3 year upwards. Some policies have tenure as long as 20 years.

If you are interested in this policy, you can buy from REPs Holdings. The green numbers show the cash flow that you will need to put in.

In this case, the new owner will need to fund $24,891, and 3 x $15,000.

(Do note that this is not a one-time investment. If the policy requires on-going premium payment, you need to be ready to commit. In this case, you can see there are three $15,000 a year payment)

8 years later when the policy mature, the policy will pay out $92,416.

If you would like to know your projected return, you can look at the Price Discount Rate. The 3.8% here, is the XIRR or internal rate of return.

This is typically the way we view and how the insurance company view the “interest rate” of this stream of cash flow. It allows you to compare to other financial assets such as equity, bonds, commercial offices.

A 6-Year REPS Holdings Resale Endowment

Here is another case study.

This policy is a shorter 6-year maturity that will yield a projected 3.6% XIRR/discount rate.

The main difference is that the cash flow is different. It is a smaller amount.

For some of you, your capital might not be as large as the previous case study.

Since these policies comes in different capital commitments, you will have to choose one that you are comfortable with. (Now you know why I say this is like buying second hand laptops)

How different is this resale endowment versus the traditional endowment

A resale endowment does not have a lot of difference from the traditional endowment:

1. There is an assured person (life insured)


2. The participating fund, which helps the policy owner invest their money is also the same


3. The rate of return is thus the same had the policy not been sold


4. In a traditional endowment plan, your actual return may vary from the projected return. This does not change as well


5. The recurring premium contributions are also the same

What is different will be your return and margin of safety versus the first owner.

Why are the returns higher?

The returns if you choose to buy this resale endowment is higher because the initial amount you put in is lower.

Going back to this example, the original owner of the policy, for the first 2 years would have paid in total $30,000 in premiums during the first 2 years.

When the original owner surrenders the policy to REPS Holdings or the insurance company normally, the original owner would only get back say $22,000 in surrender value if the original owner chooses to surrender to REPS Holdings.

REPS Holdings resell this policy to you at $24,891. So the premiums you paid, versus the original owner ($30,000) is lower.

When your capital is lower, your discount rate/XIRR is higher than the original owner.

What if the original assured passes away? Who gets the sum assured?

When the policy is sold to REPS Holdings, the original owner will sign a change in assignment form to transfer the ownership to REPs Holdings.

After the sale, REPs Holdings (the new owner) is the only one who is able to claim any death proceed should something happen to REPs Holdings.

Usually the original owner is also the insured person. The original owner can name a few beneficiaries. These are the people who can receive the money should the insured (usually himself or herself) passes away.

Once the policy is assigned to a new owner, all past beneficiaries will be revoked. The new owner is the only one able to claim any death proceeds should something happen to the insured.

In some situations, a mother would buy a policy for her son. The mother is the first policy owner and the son is the insured.

For policies like this, the policy cannot nominate a beneficiary. This is because if anything were to happen to the son, the owner, which is his mother, will automatically be the beneficiary. Thus, nomination is not allowed.

When this policy is resold to you, as the new owner, you are not allowed to name any beneficiaries to the policy as well.

Who Gains, Who Loses?

My readers tend to be more sceptical than most. You are thinking about how this adds up. There should be some party who loses. It cannot be that all parties gain.

So here is the summary:

1. The biggest person who loses is the one who surrender the policy. The original owner surrenders the policy at a big negative difference to the premiums he or she paid (the lesson learn is know what you are putting your money into, know how it works, how it fits into your financial net wealth!)

You can liken a resale endowment like a distress debt. REPS Holdings takes over from the original owner at a big discount to the original par value.

There is margin of safety there for them.

Here are the folks that benefit

1. The person who purchased the endowment gets a product that he or she understands, matches his or her risk profile, matches his or her time horizon and a decent return


2. The insurance agent (that sold to the original owner) and the insurance company still get their commissions as the policy is still in-force


3. 
   REPS Holdings earns a profit margin for taking over and reselling the policy


4. The original owner who surrendered the policy get a higher surrender value compared to if the owner surrendered with the insurance company

Are the Returns on the RESALE Endowment Guaranteed?

The mechanics of the resale endowment is the same as how the original owner of the policy experiences it.

1. The original owner’s returns are partly guaranteed and non-guaranteed


2. The returns are dictated by the performance of the insurance company (not REPS Holdings) participating fund


3. The original owner will get the reversionary bonus and may get the terminal bonus


4. The policy may fall short of expectations when the insurance company cut the bonus. The owner’s returns will be cut lower

When you take over the policy, you will have experienced the same uncertainty as the first owner.

What are the Returns Expectations?

When REPS Holdings take over the policy, they will get the most up to date returns projection from the insurance company to work out the XIRR/Discount Rate that you would get, if you choose to purchase this policy. Remember that if the insurance company cuts the bonus, the returns projection changes.

So REPS Holdings do their best to give the closest projection and not based it on the original projection that the original owner gets when the original owner first bought the policy.

I have written a crowd sourced article in the past, where I tabulated the matured value of readers, friends and family’s insurance endowment plans. You can read it here.

from Investment Moats

Longer term policies should have a higher return, compared to shorter term policies. However, your experience will very much be determined by the performance of the insurance company’s participating fund.

In the summary table above, taken from my previous article, you can see the returns can vary.

Going forward, the returns of the policy is fundamentally based on the underlying returns of the financial assets in the participating funds. In the table above from Business Times, you can observe the asset mix for different insurer.

If you purchase these resale endowments, your cost is lower than the original owner, so your returns are also higher.

Are REPs Holdings Licensed by MAS?

There are currently no MAS administered regulations which govern the sale, purchase and distribution of Resale Endowment Policies.

This means that if a person purchased a resale endowment policy, the person cannot rely on laws administered by MAS to take action against either REPS Holdings should they encounter any problems with the investment process.

You can however seek recourse under the Consumer Protection (Fair Trading) Act (CPFTA). The CPFTA allows consumers aggrieved by unfair practices to pursue civil remedies before the courts.

Who buys these Resale Endowments?

This is an interesting question.

I asked my representative about this and the folks that likes these policy (and they tend to keep coming back to purchase) are those very conservative wealth builders.

Firstly, they understand how these things work.

Why is this better than the traditional endowment?

1. The maturity period tends to be shorter


2. They have less risk of surrendering the policy with a bigger loss, versus the premiums that they paid, if they need to surrender the policy. This is because the capital they put in is smaller (than the original owner)


3. They get higher return

So it is a no brainer to them.

Unlike the original policy owner, these folks tend to be more composed and assured about using endowments in their wealth building.

How should we view Resale Endowments in our Financial Net Wealth Allocation?

A wealth builder needs to know how the financial assets that goes into their portfolio work. You would have to know the characteristics such as returns, risk, liquidity and the amount of work involved.

And the wealth builder has to view these instruments as part of their overall financial net wealth.

Resale Endowments have the following profile:

1. They are illiquid, unless you resell them back to Reps Holdings


2. Since majority of the assets are bonds and property, the returns tend to stick close to bond returns, if you hold them to maturity


3. They should yield positive expected returns if held to maturity, due to the way they are constructed


4. Since their value is not priced so often, on a portfolio basis, they look less volatile

A portfolio allocation that younger folks would appreciate.

For those who wish to build wealth, and are younger, equities tend to have more market risk, more volatility, and expected to provide a higher return. Resale Endowment can take the role of the bond to reduce the volatility of the net wealth.

Since property is also not revalued so often (at least on a daily basis), the overall net wealth would look less volatile.

A more risk adverse asset allocation

For some of you who are more risk adverse, your financial net wealth can be like this. The volatility to your financial net wealth is going to be very low.

However, you have to take note of the illiquidity of your financial net wealth.

1. Your property is less liquid


2. Your endowment is also less liquid

If you need to liquidate them, it might not be as easy as liquidating equity, unit trust, bond funds. When you liquidate your property and endowment in an illiquid market, the value that they may fetch might be far less.

Conclusion

REPS Holdings have provided an interesting prospect for those who wish to surrender their policy with a higher value.

As a broker, they have also provided a way for investors with certain risk appetite to purchase policies that meets their rate of return through REPSINVEST.

If you are interested to know more, do contact REPSINVEST here.

This post is Sponsored by REPS Holdings. The views are Kyith’s.

The post REPS Holding’s Resale Endowments: What You Need to Know appeared first on Investment Moats.