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Singaporeans are usually thought to have too much optimism in real estate investment. However, this thought is an over simplification. Generally speaking, people in any countries and cultures are overtly optimist when it comes to investing in real estate. This can be illustrated by the fact that in United States, in 2006, the total home loans debt was 99 percent of the GDP. Actually, compared to other countries, Singaporeans are not very crazy about real estate investment. When it comes to property investment, there are many misunderstandings in Singapore, and all of these misunderstandings needs to be clarified.
How does real estate market works
One of the popular methods to make money in Singapore is by renting and selling residential property. However, this wealth generating technique may not work always. A common way to make money from real estate market is by buying a house with a low interest loan and then renting it out. When the market is good, rent will pay off house loan. In few years, when property price goes up, the owner will sell the house and make profits from his investment.
Let me illustrate this. You buy a house for $800,000. You pay $3000 as easy monthly installments. You rent this house for $4,000 per month. After paying repayments to the bank, you still have surplus money. After 15 years you sell the house for $1.2. You have made a whopping profits of $400,000 plus the surplus of $1000 every month. This is how you turn your house into money generating tool. In 15 years, you will get 72.5 percent return on profits.
Bank interest is just about 0.8 percent per year. If you had saved $800,000 in a bank, in 15 years you would receive just about $901,560, which is just a meagre gain of $101,560, and this is one-fifth of what you normally make by investing in the house. Furthermore, you don’t need $800,000 to buy a house. To buy a house all you have to do is pay 20 percent of the price, which is about $160,000. Rest of the financing will be done by the tenants.
You might also be considering inflation. Normally inflation rate (the rising cost of goods) in Singapore is about 3 percent. Interestingly, since 8 years interest rate in home loan has been 1.7 -1.9 percent. Usually, inflation rate goes up faster than the property loan, the value of debt is always lowered.
Do you think this is too good to be true? You have a point! The aforementioned assumption is too much idealistic. Even though, this wealth generating method has worked for many property dealers, it might not always work in the similar method. When the market does not grow, this technique of profiting from investing in house might actually destroy your wealth.
Investing in housing may be an illusion for some investors
At this time of property slump, you must have witnessed of mortgagee sales. This usually occur when the owner cant make repayments to the bank or is unwilling to pay back the loan. In such situation, the bank takes charge of the property and auction it for the best price. Take example of the units at The Sovereign that are priced around $4 million, or houses at 19 Bedok Walk that are priced around $3.45 million, or units of The Bayshore that are priced about $1.5 million. When bank forecloses on property, the owner may be able to escape losses, and they should consider themselves lucky.
In 2015, there were 241 mortgagee listings. About 80 percent of this listings were residential property. After the 2008 Global Financial Crisis, this is the highest recorded number of mortgagee listings.
Apart from mortgagee sales, there could also be major losses in the real estate market. Take example of The Ritz-Carlton Residences. A unit was bought for $3,815 per square foot in 2013, however, it was resold for $2,508 per square foot in 2016. The owner incurred a loss of $4.3 million, which is the biggest loss in housing market in the last 10 years.
Another major loss was made at Hillview regency. A seller resold a unit at $776 per square foot which was bought for $1,263 per square foot. The seller also incurred Seller’s Stamp Duty because the owner did not own the property for minimum occupancy period. The seller lost more than $677,000.
How could the investor incur loss when we have stated how can an investor make profits by investing on property. The following points might give the answers:
- The buyer loses one of his major income source
- Income from rental is far below the bank repayments
- The buyer is unable to cope with rising interest rates
- The buyer sells when the market is going down
- The buyer loses one of his major income sources
When the buyer loses one of his major income sources, how will he pay back his loan? If the investor does not have strong financial support, he has to sell the property because he is unable to cover the mortgage payments. When the property is sold during the market slump, he is likely to incur heavy loss.
Here lies the importance of holding, building emergency funds, for example. If you don’t have financial backing, insurance coverage during illness or unemployment, or no saving, investing in property can be very risky. When the investor has emergency fund, it can at least cover mortgage payments for couple of months during the time of income lost.
Income from rental is far below the bank repayments
When the house remains vacant (no occupants), rental income is nil. When there is no rental income, the property does not earn anything and it will become a liability. Apart from vacancies, rental prices may also drop down because of various reasons, for example there is competition in the market (more houses than the tenants). In such scenario, rental prices cannot cover the mortgage payments fully and the investor will begin to make a loss.
This issue can be solved, though. Get in touch with a good property dealers to find tenants. Furthermore, when you are buying property, check the demand as well as rental rates.
It is interesting to note that some developers also give rental guarantees. They offer compensation in case you don’t find a tenant within a given time.
The buyer is unable to cope with rising interest rates
Interest rates for the property loan always fluctuate and there is no perpetual fixed rates. In Singapore, fluctuations of property loan interest rates is based on the Singapore Interbank Offered Rate. Since 2008, even though interest rate in property loan has been low, unlike the current 1.9 percent interest rate interest rate may go up by 3-4 per cent.
It is very important to understand refinance loans in order to keep interest low if you are investing in property. Since most of the banks charge low rates in the introductory phase of three years, many experienced investors go to refinance loans every four years. If you want to make profits from housing, you will have to lean how to do this. When you are paying high interest rates, you will make less profits.
The buyer sells when the market is going down
If you think when you are selling the property the market will always be high, then you have the wrong notion. There are many unpredictable factors, for example, weak economic situations, cooling measures in the market and property loan curbs, cooling measures.
Having said this, there are also chances of making profits during the market meltdown. Nonetheless, chances are low.
You should make sure that you have strong financial backing and patience to ride the melted market. On a positive note, whenever property market rebounded in Singapore in the past, it went sky high.
Most of the investors make good profits from property investment
The key to generate good profits from property investment is the ability of holding. Make sure you can hold the property until you want to sell and not because you are forced to sell. If you don’t have enough emergency funds, saving or insurance coverage, making profits from property will become illusory.
Last but not the least, if you are a home owner you should think twice before you buy property and become an investor. As a home owner, you don’t generate rental income from your property, also you can’t simply sell your house. Where will you live when you sell your house?
As a property investor, you will have to make correct decisions. One, you have to buy property at the right time (when the price is low) and sell at the right time (when the price is high). It is very likely that you make one right decision, go wrong with another decision right.
Likewise, you must know what you are doing. Putting your entire money in one expensive property is a bad decision. The right decision is when you put your eggs in different baskets instead of one basket, in other words diversify your investments. Home owners should never rely on property investment as their only retirement policy.
Still, the real estate could be the safest and high yield investment for the investors who can take right decision and meet the right conditions. In 2016, there were 271 foreclosures, however, this is nominal compared to the millions of profitable units.
This is a real property and not an illusion, the Gem Residences. With Gem Residences is proud of its exquisite high end units that suits the needs of a modern individual and family. Gem Residences is under the famous developer, Evia Real Estate Pte Ltd.
