Buying property can be one of the most rewarding
investments you can make. Not only does it serve its purpose as a place to live
in, to work from, it is a great investment that can make you more financially
secure many years down the road. Here are 6 reasons why you should definitely
invest in property.
Provides a Home and Workplace
The first investment property one should acquire should always be your own
home. Unless you are staying with your parents and happen to be the only child, you should always
make preparation for the eventuality you would have to move out and get a place
of your own. Getting an own home is also often a priority for getting married and starting a family.
For those with your own small business or home business, you can consider
investing in a Small Office Home Office (SOHO) unit. SOHOs are built in a way
that your office and home are separated but just a doorstep away. It provides
the convenience of working near home and still allows the separation for you to
not bring work home.
Good SOHO designs also allow for visitors to visit your office section
like an office building, but blocks off the residential section for complete
privacy for the residents.
Acts as a Saving Tool
If you do not own a home, you would have to rent and that would make the
landlord rich by giving your hard earned
money to the landlord every month as rental. You should always
pay yourself first and that’s to pay yourself rent for staying in the house.
You will save a lot of money by paying instalment for a housing loan as opposed to paying rental.
Firstly, you will save money on
the differential between the instalment and the rental; rental is higher than
instalment in most cases. Secondly, you will save money on the principal
portion of the instalment as that money goes towards reducing your loan
instead. The only true cost for owning a home is the interest charges on your bank loan and of course the
opportunity cost of not investing the money is other assets. The capital
appreciation of the property and the reduction of loan will increase your net
asset values faster than you can imagine.
Rental for Passive Income
If you already have a house, should you buy another one? Absolutely! That’s
assuming you have the savings and the income capacity to pay the instalments
for another house. You can then rent out the house and become a landlord! The
tenants will now work for you as they are paying you rental to make you richer.
If you took out a loan for 30 years and you manage to get a tenant to pay your
instalment for you, the house becomes yours for free in 30 years! Furthermore,
if you manage to lock in a rental rate above your instalment, you also get
positive cash flow from your property.
Hedge against Inflation
All things kept constant, barring an economic downturn, property values will
go up in the long term. That’s because properties are known as a good hedge
against inflation. The combination of lower supply of land, increased demand
through population increase, rising construction costs all will push property
prices up. Inflation is generally at an average of 2-3% per year; as such one
would expect property prices to go up in the same proportion. This is only
applicable to long term as in the short term; there are many factors which can
cause the property prices to spike up and down compared to the actual value.
Never Become Zero in Value
Unlike investments in
stocks and businesses, a property cannot become zero in value. Properties are
physical assets which sit on land; as such there will always be a value to it.
Stocks and businesses however, can become bankrupt and the real risk of losing
everything is there. While there may be short term fluctuations in value, the
long term potential of property is always upwards as described above. There are
some exceptions, where once sought after properties become desolate, infested
with criminals and gangsters, the property prices will become very depressed and may never recover.
Leveraged Investment
Property investment is the only investment where the bank is willing to lend
up to 90% of the purchase value. Reason is simple, banks also recognize the
long term value of properties and getting a housing loan may be the only way
for most people to acquire a home when they most need it. The leverage helps to
magnify the returns of both rental and capital appreciation on capital
invested. For example, if you bought a property of $500k with 20% down payment
and the property appreciates by 10%, you have already made a 50% return on your
investment! ($50k increase based on $100k down payment). The flip side is if
you speculate in properties, the leverage will work against you in a downturn
and can cause massive losses.
CALVIN YEO: The rewards of investing in property
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Written by Leong Chan Teik
Saturday, 10 December 2011 10:07
YOU MAY BE familiar wtih Calvin Yeo, whose favourite
investing instrument are REITs and whose articles on REITs have appeared
on several occasions on NextInsight.
Through REITs, he
derives high dividend payouts based on the REITS' income from renting
out their properties. As we got to know Calvin better, he has shared
with us that he has also been investing directly in properties.
He
is an owner of several residential and commercial properties in
Singapore and Malaysia. In the latter country, he spends most of his
time, running a business operation in Kuala Lumpur (while faithfully
keeping up his postings on REITs on his blog www.investinpassiveincome.com).
Calvin
has been running the business for the past two years since returning
from New York where he worked as an investment banker. He quit in the
midst of the global financial crisis when M&A deals dried up and
bonuses were about to collapse for any banker who could hold on to his
job.
We asked Calvin, who is 29, if he would do an email
interview to share his experience and insights into how he invests in
property. He kindly obliged.
Why invest in property?
Calvin: Property is one of the best assets for both
income and capital appreciation. A property provides a home / workplace,
so it serves a very basic purpose which everybody needs. If you do not
own a property, chances are you would have to rent and that's making the
landlord rich.
Property investment acts as a saving tool as you
should pay yourself first; that's by owning your house and paying
instalments on your housing loan. As the property serves a basic need,
you can also rent out your property for rental income, so your tenant
will have to work hard to make you the landlord richer.
Properties
are also known as a hedge against inflation as property prices and
rental value tend to go up over time due to increasing land costs,
construction costs etc. Finally, property investments are also leveraged
investments where you borrow money from the bank to magnify your
returns.
Property investment is the only investment where a bank
can readily lend you up to 80-90% of your asset value, hence increasing
your returns by more than 5 times.
Calvin Yeo in his landed property which he lives in in KL, where he is currently based.
When did you start investing in property?
Calvin:
I started when I was in Malaysia and looking for my first house two
years ago. The fact that I was paying rental for a house made no sense
to me as I could easily afford the downpayment required and the
instalment amount would be lower than the rental I was currently paying.
After acquiring my first house, I invested in another house within the same development as I saw extremely good value.
What
are 2 examples of solid property investments that you have made in
terms of yield, capital appreciation, choice of location, etc?
Calvin: The first would be my own house, which I
bought for slightly under a million ringgit in the upscale Mont Kiara
location which is very popular with expats. The property has more than
doubled in value in less than 2 years with some buyers asking for as
high as 2 million ringgit plus. I knew this would happen eventually as
the property was extremely undervalued for a landed property in this
area, I just did not expect it would be this fast.
Calvin Yeo's condo at Tropics comes with upmarket furnishing to attract premium-paying tenants.
The second example would be a condo, Tropics, which I bought in PJ.
It's conveniently located on top of a major shopping center and
therefore I saw the potential of the condo. I bought it for about RM
350k a year ago, today it is worth at least RM 450k, an appreciation of
close to 30% in a year.
The property is currently rented out at
over RM 2k a month, achieving a rental yield of close to 8%, or about
double of the mortgage interest rates.
I came to know of this
shopping complex through a friend who asked me out to watch a movie. I
was really impressed by the shopping mall.One thing led to another -- my
girlfriend and I began hunting for units at the condo on top of the
shopping mall, called Tropics.
We found out that older condos
in the area were rented out for around RM 2k per month for studios, so
that was our benchmark in calculating rental yield.
By buying a subsale unit, our risk was already decreased significantly as we know what type of tenants the shopping center would have, the quality of workmanship and also the view from the unit. Some of the units have a clear view of a cemetery!
Are you inclined to buy completed properties rather than yet-to-be completed properties?
Calvin: Yes. There are several reasons:
a.
What You See Is What You Get: You will be able to see the actual unit
before you commit to purchasing it. This is quite important actually;
you will see the exact layout, the quality of furnishing, the view, who
the neighbours are, occupants of the development, surrounding
amenities and more. All these factors are critical factors to
rentability of your unit, so it’s great to be able to see them,
reducing your risk considerably.
b. Cheaper Prices than New Properties: Subsales properties are not
always old and dilapidated, in fact, some are newly completed! In my
opinion, those new completed properties usually represent a good buy
especially if the price is still below the launching prices of new
projects.
c. Instant Rental: Once the transaction is completed, you will be
able to rent out the unit for income instantly. Better yet,if the
purchase comes with a rental agreement,
saving you the agent costs and searching costs. This is another very
important factor, getting Instant Returns once you actually own the unit
instead of having to wait.
d. Ability to Calculate Rental
Yield: Even if the actual unit is not rented out, it is quite easy to
derive approximate rental based on other units rented in the same
project. Ability to calculate rental yield is an important determinant
of whether the price you are paying for the property is reasonable. The
higher the rental yield, the better the price is.
There is a spread of
views on the outlook for the Singapore property market but they are
largely negative or at least cautious. What is your own take on the
property market over the next 2 years?
Calvin:
I would also be cautious, if not negative for both Singapore and
Malaysia properties. For Singapore properties, the persistently low
interest rates are creating artificially high prices for the properties.
If you look back at the Asian Financial Crisis in 1997, it was the same
case where very low interest rates have driven the property prices to
unsustainable points just before it all blew up in the Financial Crisis.
While some people make a case where there has been a consistent
undersupply in properties in the last few years, the government has
responded by releasing lots of land
banks. The numbers of new
properties coming on stream in 2012/2013 are tremendous and it may take
the market a while to absorb them.
For Malaysian properties, the
interest rates have been rising at a healthy level hence interest rates
are not the key issue. The problem lies with the demand and supply;
overbuilding is a real danger as the population may not be large enough
or even rich enough to absorb all the new highly priced properties being
sold in the market. The fact that valuers and banks also work hand in
hand with developers to sell properties at overvalued prices with low
downpayments like 90-95% leverage means there is substantial speculative
risks in properties.
What is your current position – hold or sell - with regards to your investment properties? Why?
Calvin:
I am holding all my properties as I have bought them at significantly
lower prices than what they are worth. All the properties have also
exciting new developments around them which have the potential to push
the prices up even higher. The current secondary market is very slow, so
it will be difficult to get a good price at this point of time. I am
also getting decent rental from the properties, hence I have no rush to
sell them.
The key is to be comfortable with your debt service
ratio and leverage level. Ideally, all the investments should be at
least cash flow positive or neutral, so you would not have to come out
of your pocket to pay for the differences between the rental and
instalments. That way, you can take your time and sell only when you
believe the value is good.
Recent stories by Calvin Yeo:
CAPITARETAIL CHINA TRUST – Overlooked High Performance Retail REIT
K-REIT: "Why I will sit out this one"
I am sure many of you have heard of how people like Donald Trump
and Li Ka Shing became billionaires through Real Estate. Can Real
Estate do the same for you? How can you make lots of money through Real Estate? However, Donald Trump and Li Ka Shing did not make become ultra-rich through Real Estate Investment, they made huge bucks doing Real Estate Development.
Why makes Real Estate Development so lucrative? In Singapore, developers buy land at Price per Square Foot per Plot Ratio, throw in the costs to calculate
breakeven price and then markup a good 15-25% to determine selling
price. It is quite transparent as most land sales are publicly announced
and analysts always state expected selling prices. So it’s reasonable
to assume 15-25% margin, which is still a huge amount for development
sites, e.g. condos can have Gross Development Value of hundreds of
millions, 25% of $100 million = $25 million. In Malaysia, property
developers make obscene amounts of money as they normally buy land
really cheap, calculated from simply Price per Square Foot basis.
Furthermore, developers leverage on the bank’s money and pre-sell the
developments before even starting to build! Now you know why developers
are so rich.
Real Estate Developments are normally carried out by famous huge
developers like Cheung Kong Holdings, Capitaland and Trump Organization
etc. The normal people like you and me probably wouldn’t have the
resources or know how to develop properties. You can choose to be a
boutique developer, but since banks normally do not like to finance land
purchases, deep pockets are necessary to procure the land. Pre-selling
the site can also be difficult for a small developer without a long
track record, so construction and development costs may have to be borne upfront.
Developing is also a high risk game, one which unless you are highly
loaded or part of a Public Company, you have no choice but to succeed.
The wrong market timing or wrong development strategy can make a small
developer bankrupt overnight. I know this as I have been part of a
development gone really badly. Just one wrong move can destroy all the
years of hard work and profits. So I have the utmost respect for the niche Real Estate developers, but Real Estate development is really not my cup of tea, at least not right now.
So now we come to Real Estate Investment, the strategy is to buy
property at a good value, make Passive Income from rental and also gain
from Capital Appreciation. Since Real Estate Investors
learn to invest at the right time and not overleverage, a market
downturn is of little concern to a seasoned Investor. Unlike the Real
Estate Developer who needs to sell as soon as possible to reduce debt
burden, a Real Estate Investor can patiently wait for the right timing while collecting rent at the same time.
My Real Estate Investment strategies centre on Rental, which is
really the Passive Income we are seeking for. Some people have made huge
money in very short periods, but I attribute most of it to be simply
luck. Investing in Real Estate without looking at Rental is not investing at all; I will talk about Real Estate Investment vs Real Estate Speculation in a later post. A Real Estate Investor does not need to make money by selling; he/she makes money by holding the Property and collecting Rental.
So now that I have set some expectations, I would like to reiterate – Real Estate Investment
may not make you massively rich overnight, but it is still one of the
strongest Passive Income generators and have the potential to keep pace
with inflation at least.
Are you considering various options for your own investments for retirement? For sure, you have looked at buying properties. Most people prefer investing in real estate
as doing so has proven effective for numerous times. Real estate does
not usually depreciate. On the contrary, property values tend to rise
through the years as more and more investors get into the real estate
market.
There are various ways to look at real estate as you plan for your own retirement.
You could invest in properties to generate rental or lease income, to
cash out your equity in those, or to sell such assets at much higher tag
prices in the future. Whatever you intend to do with your properties,
you could always be sure those would not fail as investments.
Before investing into real
estate, it would be best if you would get to know more about doing so.
Look at all possible considerations. The advantages and disadvantages of
investing in properties to fund your retirement should be determined. Thus, here are the pros and cons of such investments for your own retirement.
Pros of real estate investment for retirement
Investing in real estate for your own retirement could be most advantageous if you intend to make your investment grow. A real estate property
usually appreciates through time, especially as land prices increase
relative to many factors. You could always intend to buy properties
today and keep those until they could be disposed of at much higher
valuations in the future. Many investors have already earned so much
from buying and selling real estate.
You could use such properties to generate additional income or boost
your savings. You may consider renting or leasing out the assets so you
could obtain a steady flow of income from those. Such revenues could be
allotted as additional savings for your retirement. You may also use a
property as your own dwelling so you would not have to spend on property
rental for your own purposes. Again, you may use the savings to further
bolster your retirement savings.
Property investments could be used as security to possible loans that you may need to further boost your investment activities. Is reverse mortgage available in your market? It is a financial product wherein a borrower could obtain a loan without needing to think about repayment. The loan provider would take over the asset when the borrower dies or when the property is sold.
The cons of real estate investment for retirement
There are several disadvantages of investing in real estate for your retirement. First, the value of the properties could depreciate over time. This is often the problem when investing
in homes or buildings, which inevitably depreciate through the years.
However, some properties may possibly appreciate instead like land or
commercial buildings/units.
Real estate could be harder to liquidate. It may take time to sell
properties. In the future, you may not be certain whether you could
dispose the real estate easily or not. Such investments could easily be
influenced or affected by the economic or business environment.
Lastly, real estate investments could be very costly. You may need to invest most of your retirement savings to buy properties that could certainly bear better interests or valuations in the future. Some consumers argue that investing in other instruments or opportunities like stocks, mutual funds, treasury notes, or high-yielding businesses could be less costlier but better in growing investments for retirement.
Based on the pros and cons, would real estate investment be the best option to fund your retirement in the future? Weigh your options before you invest your retirement funds.
Andrew Black has been working in the finance industry for several years at Australian Lending Centre, where he specialises in refinance solutions.
