Real Estate Investment in Singapore is Not a Speculative Game
[Full Disclosure: I’m a licensed real estate salesperson with PropNex. Updating and maintaining this blog helps me condenese and express my thoughs about the real estate scene in Singapore. Hope you enjoy the read! Feel free to ask me any question here, or drop me a DM on Facebook.]
Occasionally, you find yourself discussing real estate with friends or acquaintances. You hear words such as ‘I suppose the market is… I think it should be a good time for… It must be beneficial to…’ I will now let you in on what is widely ignored but critical to your real estate handlings: investing in real estate is not a speculative game. It is a science. There is an actuarial science behind how you can shortlist the right properties, regardless of whether it is an investment property or your primary residence. In this article, I will walk you through the mechanisms behind
Cost vs Affordability
For a property seller to turn a profit, a buyer needs to materialise paper gains for the seller. In simpler terms, for you to make money, somebody has to lose the money.
You might be thinking, ‘Are there actually buyers who are willing to lose money so that I, as a property investor, can make money?’ It may seem far-fetched or illogical, but this is, in fact, how all businesses work. Our economy revolves around the basic principle of supply and demand. Property sellers provide the supply, while property buyers provide the demand. What most people don’t know is that there is a massive pool of property buyers (demand) whose primary concern is not cost, but affordability.
What are the implications of this? First, let’s dissect the difference between cost and affordability; they are not to be confused, because they point to two very different things.
1. Cost = the price the buyer has to pay for the property
2. Affordability = buyer’s assessment that it is within a reasonable price range when benchmarked against their income
The following scarcity theory will give you a good example of cost vs affordability.
Example: On a regular day, a rose in a flower shop costs you $1. But come Valentine’s Day, that same rose will cost you anywhere between $5 to $10. This is because the demand for roses shoots up on Valentine’s Day, but more importantly, a flower priced at $5 is still within the range of affordability for most people.
The same theory applies to real estate. As long as a property is still within the range of affordability, there will always be room for capital appreciation. Of course, there is another important element to this argument. Roses are central to Valentine’s Day; they are considered as the symbol of romantic love. In the same manner, this theory applies predominantly to the ‘right’ properties, which have a desirable location and impressive features.
Mortgages and Profit
Now, say you took out a loan from the bank to buy the ‘right’ property. You may think that the cost of the property would transfer onto the second buyer, but this is generally not the case. The affordability of a property does not diminish for the second buyer even if they are helping the first owner turn a profit on the property.
Take a look at this example:
A property investor buys the property for 1 million dollars,taking out a 75% loan to be repaid over 30 years. Assuming a 1.8% interest rate, this brings the monthly mortgage to $2,697 per month.
The property investor then sells the property at 1.2million, thus making a profit 200k. The second buyer also takes out a 75% loan to be repaid over 30 years. Assuming a 1.8% interest, the monthly mortgage rounds up at $3,237 per month.
There is a clear difference of $540 per month in mortgage between the first owner and the second owner of the property, giving the first property owner a whopping profit of 200k. And it is still affordable for the second buyer.
Hence, turning profit from real estate investments is not a far-fetched dream. With your profit, you can boost your retirement fund or invest in another property. Financial freedom is incomparable in that it gives you choices — you have the freedom to do whatever you desire. I count this as one of the best things you could have in life.
The question remains: if the above is common knowledge, why would the second buyer still choose to buy over from the first owner?
The reason is surprisingly straightforward.
Let’s assume you and your family need a car to get around quicker and more conveniently. You have the choice between a Honda or a BMW. Both vehicles give you the same use-value, but the BMW comes with a higher perceived value and a certain level of prestige. And as a consumer, you would most likely go for the BMW if you enjoy the recognition that it brings, and if it is within the range of affordability.
There is a huge group of buyers (demand) who are willing to pay for a particular lifestyle, as long as they can afford it. Cost is not their primary concern. The only thing left for you to do is to identify these groups of people, buy property strategically, and sell it to them later.
In doing so, you can build your wealth up to pay off your property in full with other people’s money.
The ‘Right’ Properties
Let’s look into what a ‘right’ property is and how you can identify them. This is arguably the most important element of the entire process, because what you offer to buyers will determine their interest in buying it from you. Pay extra attention and consider all factors.
The first question you should ask is why people would buy the house — what is it for? Generally speaking, people buy properties for reasons outside of profit-making to:
1) Fulfil their emotional needs
2) Establish their own space to start a family
3) Upgrade to a bigger property due to an increase in family size
4) Downgrade to a smaller property due to a decrease in family size
5) Be in closer proximity to a school or workplace
6) Be in closer proximity to elderly parents
These are just some of the reasons why certain people buy property to fulfil an essential need. Moreover, a large group within them shun the idea of real estate being an investment vehicle because of the fear of its cost. Understanding the science behind buying the ‘right’ property and selling them to these groups of people at a later stage is essential to turning profit in real estate.
Conquer your fears of investment
In truth, we only have around four decades of our lives to accumulate wealth in preparation for retirement and legacy planning for our next generation. Grasping opportunities when they present themselves is absolutely crucial. This allows us to be ready even in times of crisis or uncertainty.
While we are fighting to achieve our dreams, we need to remember that real estate is an inevitable part of the journey of life. You either can spend your own money paying off your property, or turn a profit by selling it to another person who is willing to pay more to fulfil an emotional need. With the latter option, you end up staying in your own property for ‘free’.
It only seems reasonable for you to make the first step forward.
You might think that investing in real estate is only for the wealthy. Or that it is too costly for you to engage in.
You might ask yourself,
‘How much money can I actually make from real estate?’
‘What if I am unable to sell the property and have to incur the cost of property ownership?’
‘If I buy this property for investment, would I still be able to afford to buy a property for my own stay?’
‘Where will I stay if I spend all my budget on buying a property for investment?’
‘Isn’t real estate investment only for the rich? How will I be able to profit from it?’
This is the time to return to our opening thoughts. Real estate investment is a science. At its best, it is not based on speculation, but well-informed decisions. Those who understand the science behind selling properties that fulfil the emotional needs of others can turn the biggest profits.
If you want to be a savvy real estate investor, learn the science behind it. Understand what type of properties are worth buying, where to find them, and how you can sell them for the highest possible price. Buyers have the luxury of spending based on emotions, but sellers have to operate with logic and strategy.
Bank interest rates are currently at an all-time low, which gives you a promising head start in your real estate investment. But of course, there are buyers who see this as a good time to enter the market due to the prevailing negative sentiment. With the uncertainty caused by the ongoing Covid-19 pandemic, you will also realise that there is a huge room for prices to go up eventually, as developers are cutting into their profit margins just to be able to sell the units. Always look at different perspectives, analyse the situation, and mince your numbers carefully.
If you are looking to learn more about real estate investment, drop me a DM on Facebook — I would be more than happy to share with you a template I created which teaches you the exact things to look out for when buying property for either investment, or your own stay. You will be sure of what to expect behind every move you make and every door that you unlock.
All you’ve got to do is to fill in this form, and my team will be in contact with you shortly to follow up.
Stay safe and speak to you soon!