I was reading an article about renting vs buying a home on The Sunday Times (21 May) and remembered what Robert Kiyosaki famously mentioned that your house is not an asset.
I would leave it to you to read more about the article.
What I want to do here is to relate property investment to stock market value investing.
For stock investment, I proposed that there should be a systematic 5-step stock investment framework. For property investment, I believe a similar thought process can be formulated. There are many good books written by the property experts like Ku Swee Yong, so do look out for his books and others.
I want to share a few things I have learned about buying a property for investment though, from my own personal experience.
New Vs Resale Property
I bought a property in Singapore 5 or 6 years ago and happily collected the keys upon completion, did up the place nicely and rented it out. Rental was S$3,000 first year, dropped to S$2,850 second year and dropped further to S$2,400 third year (there is absolutely an over-supply right now). A few months ago, I took back possession of the unit as the tenant lost his job and wasn’t paying the rental.
Truth is I didn’t bother to check on the conditions during these 3 years as it was rented out to the same tenant. The one thing I learned is that property is subject to wear and tear and if you are buying a property for rental investment, there is really no need to buy a newly launched property which almost always commands a premium.
If your primary purpose of buying a property is for rental income, then rental yield calculation constitutes an important part of your overall decision making process. This is like computing the dividend yield requirement for dividend stocks.
The one good great thing about property investment is the leverage you get. This is best illustrated using an example. Say for a property of $1Mil, if you can borrow $700K, you have a leverage amount of $700 to make incremental returns, assuming your rental more than covers the interest expenses.
Since rental income is important, you want to make sure the property is easily let out, that there is enough demand from potential tenants. A homework regarding property locations which attract the tenants pool is warranted, together with the rental market rates and also competition from other owners.
When it comes to property investment, do note it is a huge decision and a check-list should be used as a guide. There are a number of property speculation curbs introduced in Singapore which push people to look outside of Singapore. However, there are many considerations if you decide to buy a property outside of Singapore.
In addition to the usual considerations like location attractiveness, whether the property is undervalued and if there is potential for asset appreciation etc other considerations will be exchange rate fluctuation, tax implications, flow of money across border and ease of tenant management.
Like stock investment, property investment requires you to research and know exactly what you are getting into. I would advise you to seek out people who are successful property investors and learn from them.
Alternatively, if you want more bite-sized investments instead of a lump-sum investment into buying a property, buying into property counters or Real Estate Investment Trust (REITs) allows you to do exactly that. The advantages are smaller investment amounts, broader diversification into many properties and it also accords higher liquidity in case you need to convert your asset into cash quickly.
If you are new to REITs, a quick introduction video below.
So do not walk into those show-flats before you do your basic homework. Show-flats have a particular effect on your mind, and block the rational side of your brain when you make a property investment decision.