Can you afford your dream home after taking the 3-3-5 test?

Earlier this week, a repost of my article “A Simple Affordability Test” by Yahoo News and from my book No B.S. Guide to Property Investment has sparked off some debate online.

Below is the original article in my book for your reference:

A simple affordability test

Daniel is a single in his mid-thirties. He is staying with his parents now but is considering moving out on his own. He has a savings of $120,000 and is drawing a monthly income of $6,000. He is eyeing a studio unit in a newly-launched private residential project downtown as his bachelor’s pad.

Joshua and Esther are newly-weds. They have been looking for their ideal home for some time. They want to buy a three-bedroom flat in a condominium near to where Esther’s parents stay. They have a combined salary of $10,000 and savings of $150,000.

Both parties write in about buying their dream home, and drop the big question at the end:

“Is our money enough to buy the property?”

When buying properties, most people only focus on whether they have sufficient funds to settle the downpayment. But they miss the more important aspect of whether they are able to service the housing mortgage in the future.

The 3-3-5 rule

There are some general guidelines to check whether a property is affordable to you. For the sake of easy memorization, let’s call it the 3-3-5 rule.

Rule 1: 30% of property price

Your initial capital should at least be 30 percent of the property’s asking price, in order to pay for the downpayment, transaction costs and other miscellaneous expenses.

Rule 2: 1/3 of monthly salary

Your monthly mortgage payment should not exceed one-third of your monthly salary.

Rule 3: 5 times of annual income

The purchase price of the property cannot exceed five times of your annual income.

Using the 3-3-5 rule, the property purchasing power of my two groups of readers can be summarized in the table below.

For Daniel, he can only afford to buy a property priced below $360,000. Since he relies only on a single income to support his property, he has higher risk than the couple. His approach should be more conservative.

As for Joshua and Esther, their budget cannot go beyond $500,000 because of the limitation in their initial capital. If they want to increase their budget, they should find ways to save more before plunging into the market.

Why you need to be conservative?

Sounds tough, doesn’t it?

But so far for all my property purchases, I have been able to stick to the 3-3-5 rule.

To buy an investment property, you’d rather be conservative than aggressive. To support your home, you’d better be safe than sorry.

If you have problems even paying for 30 percent of the property, you can’t really afford it.

If the value of your target property far exceeds five times of your annual income, you are either buying an overpriced property or buying a property out of your reach financially.

Many people buy their home without thinking carefully. They are tempted to use the government housing grant or subsidy for first-time buyers.

You may not aware of the fact that this small amount of subsidy, say, $30,000 or $40,000, can easily be offset by the fall in your property’s value when the bear market comes after your purchase. You are left to pay the outstanding loan from an overpriced property.

Interest rates can go up. Property prices can go south. Jobs can be lost.

Do you have the holding power to go through the next property cycle? Would you still be able to service your housing mortgage under all circumstances? Do you have the cash reserve to top up the difference in case your property’s value drops below the market price?

If you can’t give a definite answer, you are not ready yet.

In a sea of comments, let me clarify three points here:

1. Income level and savings out of reach?

The characters in the case study probably fall into the ‘high-income’ group. And the income gap between the rich and the poor is getting wider in Singapore. Read the article “Ultra-rich club gets bigger and wealthier” in today’s Straits Times and My Paper.

Nonetheless, how much you earn may be out of your control, but how much you can save is completely determined by you.

2. The 3-3-5 rule unrealistic?

Some readers think that practising the 3-3-5 rule is infeasible in today’s property market.

I understand that it is unpleasant to find out that you can’t really afford your dream home after taking the 3-3-5 test. If I were a developer or an agent, I would definitely come up with a 1-2-10 rule so that everyone could happily jump into the market and buy something.

We are having the ‘boiling frog’ phenomenon here: When people are in a high-price environment for too long, they will gradually think that it is normal and acceptable to pay high prices. Similarly, when people are in a prolonged boom of the property market, they will forget what is a ‘value-for-money’ home, or why it is necessary to calculate the ROI of an investment property.

When market prices are climbing rapidly, salespeople will tell customers that it is impossible to go back to the low prices in the past. However, history has proved time and again that they are wrong. Cycles do repeat themselves over the past few decades.

And it is when market prices have been corrected sharply that people begin to realize that many buyers have overpaid for their properties bought during the last peak of the property cycle. These buyers are going to pay the price of holding their overpriced properties ‘for the long-term’ to wait for break-even, while missing the opportunities to buy when prices become reasonable again.

3. Use your own judgment

Developers can sell at future prices and sellers can market at unreasonably high prices. But as buyers, it doesn’t mean that we have to take whatever we are offered. Before we commit to any big purchase, we have the right to exercise our individual judgment to determine whether the product prices are reasonable.

As a conservative value investor, I can say that I bought all my private properties strictly in compliance with the 3-3-5 rule. And I certainly know many people who can do the same too.

It is not it can’t be done. It is people who don’t know that it can be done, or they choose to believe that it can’t be done.

35 Responses to Can you afford your dream home after taking the 3-3-5 test?

  1. Ken says:

    Thank you for your sharing. As an investor how do we factor in (suitable ratio) the affordability test taking into the following:
    1. Rental received
    2. Mortgage payment
    3. Expenses (assessment, maintenance, repairs)

    • Thanks for your question. Below are some simple calculations for your reference:

      Cash-on-cash return = 1st year cash flow – Total cash investment

      1st year cash flow = (monthly rent – mortgage repayment – maintenance fee – property tax – insurance) x 12

      Total cash investment = downpayment + stamp duties + legal fee + renovation/repair + miscellaneous expenses

      • Ken says:

        Hi, not too understand. Where is this cash-on-cash return factored in your 3-3-5 ratio? Thank!

      • Ken, the 3-3-5 rule is only talking about whether one can afford to buy the property, whether for own stay or for investment.

        If you are buying for investment, there are more buying criteria which I have discussed in details in my new book. One important consideration is the calculation of the ROI (Return on Investment). And that is when calculations such as cash-on-cash return come into play.

      • Ken says:

        Thanks! Where can I get your book in Malaysia? Any softcopy? Prefer to play it safe and conservative for holding power when the going gets tough.

      • Can’t agree with you more.

        P.S. The ebook can be ordered online from the publisher at

  2. Woo P says:

    Hi property soul,

    At las …I bought a copy of yr book. Here’s the receipt. Will enjoy reading it.


  3. Ash says:

    Hello – thanks for sharing your wisdom and congrats on being featured in the Straits Times today! As someone who has just returned from a stint overseas, I’m amazed by how the market seems to have accepted 1000+ PSF as the norm for even suburban properties. What concerns me is how this is going to reset ( when it eventually does) – the higher it goes, the more painful the downward trajectory becomes, I guess. In this context, what do you see as the biggest near term drivers for the market to turn southward significantly? Government policy (TDSR is proving to be effective) ? Fallout from a sharp decline in the market in China, if it happens? Anything else? The low interest rate may prevail for some more years so that may not be the big driver?

    • It is easier for a bubble to form than for it to burst; otherwise, our world will be in chaos too often. The market will be lingering for a gradual decline but won’t crash all of a sudden unless there is a major crisis happening.

      • Ash says:

        Thanks. I’ve been on the sidelines for the last few years waiting to buy an apartment for own stay (renting currently). I can see that the property values are overpriced but it has been a long wait and promises to be a wait as you say (if gradual decline). But concerned about the huge mortgage and potential decline in value if I buy now. How should one look at property for own stay? There is a generally held view that any time is really a good time to get in, if you are buying within your means and for your own stay – how does this work when we know prices are high now and there could be a future decline? Thanks

      • If I were a developer, a property agent or anyone with vested interest in this industry, I would definitely tell you “anytime is a good time to buy” because good or bad times I still have to close deals : )

        But whether, when and how much you want to buy, it is entirely up to individuals.

        Study the Singapore property price index in the last few decades to observe all the previous property cycles. You will be able to tell whether prices are high now.

  4. Lim says:

    3-3-5 rule is relevant when the market is stable. In our current situation, liquidity/high cash/high valuation market, 3-3-5 may need some tweaking. In the example above, if buying for own stay then i agree 3-3-5. But if buying for investment, investment return + can afford to pay mortgage and other expenses for 1 year (without rental income) should be a good gauge.

    • It depends on individuals. I am a value investor. When I buy for investment, I set even tougher rules and more criteria than the basic 3-3-5 rule to lower my risk.

  5. Lim says:

    What do you think of the Singapore mkt in 3-5 years? I think the Singapore mkt will not burst and interest rate will stay like this in the next 3-5 years. Why Singapore mkt not burst? In my layman explanation, Government know how to pump/print money should there be a crisis. Stabilizing effect. If China bursts, whole world will get affected. Imagine China property mkt burst, commodities will crash, oil price crash, all related will crash. No government will let China or Western mkt to crash again. The result will be print more money and lent to yourself like the Americans did. China print money will be bigger scale than Americans where the mkt is regulated and China is not. Interest will remain low. Inflation will be up again. Biggest beneficiary will again be Singapore if Singapore mkt don’t burst. Singapore currency will appreciate. Gold will appreciate. Your Singapore property will appreciate. Americans are deep in debt. Europeans are deep in debt. Did the Americans tell you when they will finishing paying their debts?They just borrow forever and more and more. If Americans can do it, can the Chinese do it? China Yuan is pegged to American dollars. China is the biggest bond holders for American debts. If Americans are borrowing in their own dollars which is controlling the mkt, China Yuan is based on the pegging and bonds to balance off right? So in that case, will our property crash? But the upside is also limited. There will be an upside only when China or Americans start pumping money again into the mkt like in a crash. So if not crash and no money pumped in, the mkt will remain like this in 3-5 yrs. So what to do if no upside? Collect rental.

    • I don’t think anyone can tell what will happen in 3 to 5 years. In fact, no one can tell what is going to happen next year.

      I believe in laissez-faire policy. Compared with government regulations, financial crises and market sentiments often have a bigger impact on the property market.

  6. Savvy Hunter says:

    Thank you Property Soul for your past contributions and valuable insights. Allow me to share my personal experience and observations that I have encountered investing in properties for the last 30 years.

    In 1963, when my father first purchased a 3 room HDB in Commonwealth close for apx SGD 6,000 which was sold in 1980 for over SGD 100k. Imagine if we had held on then, we could easily fetch more than 200k now for a 50 years old HDB flat, that is to say, excluding the rental yield collected across 50 years.

    In 1970, we bought our first terrace house in Sembawang Hill for 72k with a land area of apps 2,700 sqft. Back then, 72k was an expensive price for a terrace. In 1990, we sold that similar property for 370k, a capital appreciation of 500% and subsequently upgraded to a semi-detached close to Bishan MRT. The 3,400sqft property was purchased at 600k. Today, this similar property easily commands a minimum asking price of 4million with a capital appreciation of 600%.

    Personally experiencing these phenomenons, I began my personal property investments when I entered the workforce. I applied the principles you advocate which a good piece of property comes with a healthy rental yield and I currently own about 10 properties, never looking back since I went down this path.

    Needless to say, these 10 properties prices have grossly inflated across the years but I am still holding on to them, based on my past experiences and my perception that property will be a great hedge against any form of inflation, taking into the fact that the global economy is resorting to printing currencies to stimulate economy growth.

    As of 2012, Singapore has overtake Paris as the most expensive city in the world to live in and the total assets of the millionaires based in Singapore amounts to 522b USD.

    Furthermore, with the advent of the Population White Paper and the investments our government have in our infrastructure, the demand for property will always be there.

    I firmly believe that property should only be bought and not sold, given the fact that inflation is intangible and will always set in. However, invest within your own capacity and means. No one can time the market. If one can time the market, my father would not have sold all his past properties and we would all have been millions of dollars richer.

    The market is ready only when you are ready to invest.

    • Singapore has emerged from a developing to a developed country in the past 50 years. It is not surprising that property prices would have increased many times together with a changed economy. A study on the property market of Japan, US, UK, etc. in the past two decades may be able to provide some insights on what will happen next.

      The “buy and hold” strategy depends very much on individuals – their age, holding power, and when, what or how much those properties are bought.

  7. Finance Thesis says:

    Thanks! Where can I get your book softcopy on internet?

  8. Teo says:

    Hi, thanks for this discussion. 3-3-5 is an eye openning formula to think about. I am just wondering about the use of terms like “monthly salary” and “annual income” seem to be used interchangably….. Thanks

    • Rule 2 says that your monthly mortgage payment should not exceed one-third of your monthly salary. It is “monthly salary” because your bank loan is paid on a monthly basis.

      Rule 3 states that the purchase price of your property cannot exceed five times of your annual income. It is “annual income” because it is talking about how soon you can use the savings from your annual income to pay off your total mortgage.

  9. Teo says:

    Noted woth thanks. Annual income should then take into account bonuses, although I won’t include it as it is a “bonus”. Nonetheless, most people gets 13th month.


  10. Yong says:

    Hi, I am reading your book and a question about the 3-3-5 rule came to mind. How would you apply this rule for cash rich individuals? Say for example, someone earning 60k/annum struck lottery and won a million dollars. In this scenario, the maximum price for their home is 60X5=300k since that is lower than 3m. Isn’t that rather conservative given they have a million in cash?

    Just thinking about it, maybe it should be tweaked such that the maximum loan you take should not be more than 5 times annual income. So in the above scenario, they should cap their budget at 1.3m. Any thoughts?

    • The answer is no. Five times of annual salary is the limit of purchase price, not housing loan. The latter can use TDSR for calculation.

      Of course, for mid to high-tier high net worth individuals (investible cash of US$5M to >US$30M), they play a different game.

      By the way, statistics show that people who struck lottery of $500K will spend all in 6 months’ time while those who get a windfall of $1M will have nothing left after 1 year. It’s because they don’t have the experience to manage that money.

  11. Jill says:

    Based on your 3-3-5 test, for a person earning about $9,000 per month, $130,000 annually, the person can only invest in private property of approx $500,000.

    Could it be possible to even find a good property in a good location where there are tenants? Seems like quite difficult.

    Would your impending course touch on how to look for these? Even SRX property screener does not / hardly screen such bargains.

    • The last rule states that the maximum property price one buys should not exceed 5 times one’s annual income. If you can’t find the suitable property, it is either you are not looking for properties within your affordability, or the current properties available in the market are overpriced.

  12. Jill says:

    You have indicated that “But so far for all my property purchases, I have been able to stick to the 3-3-5 rule””

    Do you stick to the rule, property by property or you evaluate on an overall basis? Sorry, i have to get your book soon.

  13. Nur Fadhli says:

    Thanks for sharing. The 3-3-5 test is very simple and straightforward to tell you your affordability level. Since the monthly salary and house price in Malaysia are relatively cheaper, rule 3 could be changed to 3 times annual salary to make it 3-3-3

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  16. Sureka says:

    Savings = ( cash on hand + CPF home buying eligibility holdings) ???

    • Only if you don’t have enough cash.

      Using cash is much better because

      1) You have to check how much you can use for property investment in your CPF ordinary account;

      2) You have to return the full amount + interest to CPF when you sell your property; and

      3) CPF ordinary account pays interest of 2.5 percent (can your property give you a higher return than that?).

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