The Property Wealth Trap aka Capital Gains

SINGAPORE PROPERTY WEEKLY Issue 112

By Gerald Tay  (guest contributor)

We can see many property investors on the streets who dream to become millionaires. They behave like the hilarious first round participants of “The Next Singapore Idol‟ contest who are thick-skinned enough to believe they have it. My late multimillionaire grandfather said, “The Rich makes money with control, while dreamers always make money on hope and hope is their only saviour.”

Dreamers invest on capital gains and hope. You don’t need intelligence to make money in a booming market, because anyone can make money when the market is booming.

But when the crunch time comes, many of these dreamers lose control, and panic like lab rats. They don’t have the necessary skills to prevent a financial disaster. All they have is hope. They have what I called “herd intelligence‟. They see the immediate situation just like everyone else. They copy and paste. They think narrowly and call it being focused. They don't see the context. They don't see the consequences.

That’s how dreamers often get ripped into pieces by the unforgiving market.

A taste of success breeds complacency

 After the recent MAS cooling measures, I talked to an acquaintance whom I met. He had made money selling off his first investment property for a six-figure-profit which he bought in 2009 and sold in 2011. As an ordinary employee of a local MNC, he felt incredible with such profits in his pockets! Now, believing that he can fly from the success of his first investment, he proceeded to buy two newly launched property units of large developments in 2012. His objective: to sell and make capital gains upon T.O.P in the next few years. When I asked him if he really believed that he could sell higher then, he haughtily said, “If I cannot sell, I rent. If I cannot rent, I stay.” He proudly continued, “I’ve recently received many calls from potential buyers for $1.8million for one of my properties. Initially, that’s my asking price but I flatly rejected those offers.

”Why?”  I asked.

“You should have simply accepted the deal and walked away with the money now.”

  “Because I wanted $2.2 million as I believe my property will fetch this price due to its location since other recent new launches in other less strategic locations are already asking around this price. I even asked mywife not to entertain those calls unless the buyers are willingly to negotiate at my price, then we talk.

“What if the market corrects in the next few years?” I asked.

“I can still sell the property at $1.4 million from the $1.6 million I bought. I can afford to lose$200,000 in such situation.”

Making assumptions that are out of your control

This dreamer guy makes far too many assumptions which he cannot control:1. Believes prices will always go up2. Believes his properties have real buyers, when in reality, the potential “buyers‟ are no more than property agent’s marketing gimmicks to entice buyers to sell.3. Believes he can keep his job to service his mortgage payments when a downturncomes4. Believes the market, if it corrects, will only fall 12% and he will lose only $200,000. Believes interest rates will stay low in thefuture6. Believes he can rent out his unit easily when it T.O.Ps (huge development)7. Believes he can find buyers easily when it T.O.Ps (huge development)8. Believes property is a sure one-way-bet to riches9. Believes he can constantly make money on capital gains easily10. Believes he is a savvy investor and he can now fly

He’s an amateur who invested with no investment control. His only control was that he felt he could afford to lose $200,000. If you’re investing on assumptions and beliefs, good luck to your investments.

Capital Gains are like inherited wealth: attained without discipline

Most kinds of power require a substantial sacrifice by whoever wants the power. There is an apprenticeship, a discipline lasting many years. Whatever kind of power you want: CEO of the company; Black belt in karate; Spiritual guru; Property millionaire. Whatever it is you seek, you have to put in the time, the practice, the effort. You must give up a lot to get it. It has to be very important to you. And once you attain it, it is your power. It can't be given away. It resides in you. It is literally the result of your discipline. Now, what is interesting about this process is that, by the time someone has acquired the ability to kill with his bare hands, he has most likely also matured to the point where he won't abuse it. So that kind of power has a built in control. The discipline of getting the power changes you so that you won't abuse it. Capital Gains are like inherited wealth: attained without discipline. You copy what others have done, and you take the next step. You can do it very young. You can make progress very fast. There is no discipline lasting many decades. There is no mastery; risks are ignored. There is no humility before nature. There is only a get-rich-quick, make a name for yourself fast philosophy. No one has any standards. They are all trying to do the same thing: to do something big, and do It fast.

Without discipline, something will go wrong eventually

 A karate master does not kill people with his bare hands. He does not lose his temper and kill his wife. The person who kills is the person who has no discipline, no restraint. And that's the power that capital gains fosters and permits. And that's why you think that to build wealth like this is simple. But it is not, and something will go wrong eventually. I question the conventional wisdom of constantly buying and selling properties (or any other assets for the matter) for capital gains. If the taxman does not get you, the market will eventually. You buy low, then sell high. Then what do you do with your profits at that point of time? Buy higher, sell lower?

It’s always a zero-sum game. The rich never buy and sell profitable assets. They buy and keep forever for both income and capital value. The dreamers always hope to buy and sell to make that quick buck. Go to the casino instead. In a casino, an amateur gambler makes money on the first couple of visits, only to lose even more eventually when his luck runs out. Just like a casino, we can never beat the market. This is what happens to most amateur investors who happen by chance to make money in a boom time, only to lose it all in a downturn. Real investors make the most money during the downturn of the market, and treat gains from a booming market as a bonus.