Monday, September 23, 2019

What Should You Look Out For When Buying Your First Investment Property?

When we buy a property for investment purpose, our immediate goal is to ensure that the property is cash generative and can at the very least cover the basic expenses that we incurred such as mortgage interest, maintenance fees and other one-off costs such as agent fees, renovation costs and so on.

Anything that are generated above that will go towards repaying for the principal payment, which technically means you are increasing the equity value of your property over time. 

Your equity value can increase in two ways, which is a function of two variables.

The first is through capital appreciation of your property.

The second is through a reduction of your liability (principal mortgage).

The Equity Value of Your Property is Your Money eventually, so it is important that they are being increased over time.

If you are a renter, which means you are sitting on the opposite fence of the buyer, you are technically expensing off your book, which means it will be a cost in your P&L. Your equity value do not increase, so in the long run it is likely that you will be worse off.

If you are an owner, you are also expensing off through depreciation of your asset, plus any mortgage interest you have to repay back to the bank, but we assume here that the useful lives of the asset is going to stretch longer.

This is why a great majority of Singaporeans are mostly homeowners, instead of renters.


So what's the 3 Most Important Things you should be looking out for when investing in a property?

The first would be the Profiling of the Property.

This includes the location of the property, the floor plan, the finishing quality provided from the developer, the facing, the tenure lease of the property and so on and so forth.

In Singapore, location is one of the most important profile of a property, especially when we thought about being conveniently linked to transportation availability and also convenience to nearby malls and/or groceries shopping.

This brings to the next important point to note which is Rental Yield.

Rental yield is a function of two variables.

The first is how "cheap" you've purchased the asset from and how much it is valued at.

The second is how much rental you can get from the property that you are leasing to.

For example, if you purchase a 1 bedroom + 1 study in a central location area for $1m, and have them rented out at $2,800/month, this would equate to a 3.36% rental yield.

This is assuming an unleveraged number.

Most of the people though does some form of leveraging when they purchase a property so the actual yield is actually a lot higher, even after netting off the mortgage interest and other fees you have to pay.

There are ways you can increase your rental yield through a few creative ideas.

For instance, I know someone who's partion a wall in the living and dining room area to make a 1 bedroom + 1 study to become 4 rooms, and start charging each tenant on a per room basis based on $1000/room. This way, he is able to obtain $4,000/month, which translates to 4.8% unleveraged rental yield.

Now that all the upside is taken care of, the last factor you probably have to look out for is cater for Risk Management.

In this world, not everything will go according to your plan so it is important that you cater for the risk downside when that happens.

For example, during bad times, it may be more difficult to find tenants that are willing to pay a premium rental for your room. It is also likely that the rental rates will be suppressed when times are bad and when they can find alternative cheaper place to rent elsewhere.

In addition to that, you'd also have to cater funds for wear and tear every once in a while, which might take up quite a bit too.

Last but not least, banks might also increase their mortgage interest which means you are paying more financing costs than the original rates when you make your purchase.

Ultimately, there are a lot of factors to consider from when you make your investment in property.

Property investing has been lucrative for most people because of what historically property has performed but historical date is certainly not a reflective of future performance and it would be foolish to think that we could extrapolate data like that.

But if you are savvy and prudent enough, property investing can still be a lucrative investment for you to make.

Thanks for reading.



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