Professional property wealth planning advice can improve investment returns and lower costs.
(As featured in the Dec 2017 Issue of The PropertyGuru Newsletter)
Increase your probability of success by applying these considerations to your next investment.
Since the beginning of 2017, we have witnessed a robust return of both institutional and retail investors into the Singapore property market. It is no surprise that after four years of muted action following government cooling efforts and where many investors ventured abroad, that this pent-up appetite has returned with a vengeance.
For a new investor, it is crucial to understand the reasons why you place your hard-earned dollars into property instead of other investments.The property market, as with any other markets, is cyclical in nature. But of greater interest to the individual investor is to realise that Singapore’s property market has one of the best long term returns on equity performance out of most investment instruments available. And that has to do largely with the strength of the Singapore dollar, the availability of high leverage, and the attraction of Singapore to the international audience, not just as a region to invest in, but as an asset class on its own.
As a Singaporean and an avid market observer, I have always stressed to my friends that they must invest and remain vested locally, despite the beckoning of overseas properties.Chief among the reasons are that they would be better protected against inflation, which is just as certain as death and taxes, and will be able to see their wealth grow steadily over time through the compound effects of inflation (akin to interest) on their real estate.
As Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”In this article, I will focus on the fundamentals for those who are beginning their journey.Before you embark on searching for your investment property, it is important to have gone through this checklist below.
Prior to looking at any property, you should speak to a property wealth planner about your finances to understand the initial cash/Central Provident Fund (CPF) outlay required. Having an experienced third party do an assessment would help you prevent costly beginner mistakes that could seriously hamper your journey to financial freedom. A responsible property wealth planner would help you assess the minimum cash and CPF required for the down payment, buyer stamp duties, legal fees and miscellaneous costs, as well as advise you on an investment road map for the best acquisition strategy as you progress along and acquire more properties.
2. Loan eligibility
The current Total Debt Servicing Ratio (TDSR) framework makes it especially important for investors to check on their maximum loan eligibility so that there are no nasty surprises after placing a deposit. In this case, speaking to a mortgage banker should be one of your priorities early on.
3. Manner of holding
For investors who already own an HDB flat or private home and are acquiring their second property, a property wealth planner can advise you on the various options available to optimise tax savings (which can be significant) and qualify you for more funding options. This is especially important for those who intend to grow their portfolio of properties and would require access to higher leverage and lower costs.
4. Investment goal and horizon
Having a clear idea of your investment goal horizon helps you filter the segments in which you should focus on.
– Are you investing in properties to provide a consistent source of passive income? In this case, focus on areas with low vacancy rates and a high tenant catchment pool.
– Are you investing in properties short term to ride the market trend? In this case, are you financially prepared to hold on in case a black swan event occurs?
– Are you investing in properties with en bloc potential? In this case, are you well advised on which properties have genuine potential? Not all old properties have en bloc-ability.
After going through the above points, the following are factors that have served me and my clients well in the past as an investment criteria checklist.
1. Capital growth potential
One of the indicators of a good property is how it performs relative to the price index of its district. For example, if a particular project has appreciated more than its district in the past one year, it could indicate higher buying demand that is a result of various factors such as distance to amenities, quality and maintenance, design and facilities, etc.
2. Rental yields
Good rental returns are indicative of a sought-after project. It is important to note that despite being in the same vicinity, there are projects that suffer from high vacancy rates and low rentals even when their neighbour enjoys the opposite. Thorough research is critical to making a good judgement call on the investment grading of a project. Study the rental data not just in the project you are interested in but also in the neighbouring projects to uncover any discrepancies. It could help you find better investments as well.
3. Growth story
Infrastructure investments is one of the common reasons why real estate flourishes in certain areas. This happens everywhere in the world and more recently onshore, we can look at values of Sengkang, Punggol and Jurong as examples of how infrastructure investments have impacted property prices. If the area you are investing in has a massive growth story fuelling it, there is a good chance you will enjoy the fruits in the years to come. Do take note though that thorough research is still necessary, and it is imprudent to invest in just anything just because they are located in growth areas.
4. Below market value
Where possible, investors should look out for properties below market value so as to begin their investment journeys with what we call “built-in profits”. Granted, it is not always possible or easy to find such properties as they are usually snapped up quickly. It is, however, a good guiding principle to consider before you make any decision on a property. At worst, the one you decide on should be at fair market value and at best, below market value.
As a rule of thumb, the more factors above that your property fulfils, the better its investment potential. I would akin it to this analogy. If it fulfils just one out of four factors, there is a 25 percent chance of it being a good investment. If it fulfils three out of four factors, you have a 75 percent chance of it being a good investment. And so on.
Property investment is a team sport and i highly recommend that investors assemble a team consisting of mortgage specialists and property wealth planners to advise them. The collective wisdom and insights will help you prevent costly mistakes and blind spots in your judgement which could take years to unravel.
All the best and i wish you a successful investment journey ahead.