Property investment potential profits - Is it an illusion?

Dec 13, 2018


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Recently there was a report released that forecasts private residential property prices to grow annually by 1.5 to 3.2% over the next two years. In other words, property that fetches $1,500 per square foot (psf) in today’s market could cost up to $2,300 to $2,900 by 2030. With the given optimistic projections that has been released by authoritative sources, buyers can consider the potential downsides of investing in properties. By being aware and vigilant of the risks, they can focus on potential gains. We are talking about private residences across Singapore and not Housing Development Board (HDB) unit in Yishun or Queenstown.

The typical property investment way is to purchase a house by taking home loan with low interest rate, preferably lower than inflation rate, the house is then rented out. The ideal situation would be where the income generated from rent will be more than the pay for property loan. As time goes by, when the property price appreciates, investors can sell off their properties at a profit.

For example:

Condo bought at $800,000

Bank loan that costs $3,000 monthly installments

Condo rent at $4,000 per month

With the monthly rental generating income for you and after repaying the loan, you still gain $1,000 every month.

15 years later, property value increases, it is now worth $1.2 million. You can sell the house making $400,000 in profit (the difference between buying price and resale price). That has yet to include the earnings from rental at $180,000 ($1,000 a month for 15 years, assuming no vacancies during this period). In total you have made $580,000.

This is a lucrative return of about 72.5% over 15 years. A typical fixed deposit at the bank might give you interest rate of just 0.8% annually. However, if you had put $800,000 in the bank instead of investing in a house, you would have probably earned $901,560 after 15 years. The gain is $101,560 which is a fifth of the profit your condo made.

What’s even better is that you would not need the full $800,000 to buy the house. You only need down payment of 20% or just $160,000. The rest of the house is paid for by the tenants, since the rent they pay is used cover the mortgage.

You can consider the rate of inflation is around 3% in Singapore, that is on a complex level. However, your property loan interest is far below this; as for home loan rates that is below 2% for more than a decade. Since inflation rises faster than property loan rate, this means that the real value of your debt is diminished.

If this sounds too good to be true and you are guessing if there’s a catch, you are right. What we described earlier is an idealistic situation. Don’t get us wrong because the method above has worked for thousands of property investors and is one of the tried and true methods of growing wealth. But, under the wrong conditions, property investment can turn into a wealth-destroying liability. For some investors, housing profits turned out to be illusion.

There was property slump in year 2015, we have witnessed a huge number of mortgage sales. These occur when a property owner is unable willing to make mortgage repayments and the bank forecloses on property. Bank will attempt to auction off property at the best price to get it.

Some of these prominent properties like four bedder unit at The Sovereign in Meyer Road (indicative price around $4 million), a two-storey terrace house at 19 Bedok Walk (around $3.45 million) and a three-bedroom unit at The Bayshore (around $1.5 million). By the time bank forecloses a property, the former owners should count themselves lucky to get away from the minimal financial damages, let alone profits.

Even outside of mortgagee sales, there have been incidences of steep losses in the property market. One of the most noteworthy, the sale of a three-bedroom unit at The Ritz Carlton Residences Singapore in Q1 2016. The seller, a permanent resident (PR) from China, bought the unit at $3,815 per square foot this year. The total loss of $4.3 million, one of the worst recorded in decade.

Another significant loss was a sale at Hillview Regency, during which the seller bought a unit at $1,263 per square foot but resold it at $776 per square foot. In addition, the seller only purchased the unit in 2015, but sold it earlier this year. They incurred Seller’s Stamp Duty (SSD) of $137,600. In total, the seller is estimated to have lost over $667,000 from the transaction.

Based on the logical scenario above, these losses happened because of the profits from property investments become illusory. The key to success in property investment is to have holding power; ensure that you sell when you want to and not because you are forced to. A property investor needs to make two correct decisions, not one - they must buy at the right time, and also sell the right time. Investors who meet the right conditions, property may be the safest, high-return investment available.

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