The key to investing in homes

Most of us have heard it all before from the experts. Investing in homes is one of the safest and surest forms of investment. If you cannot re-sell the property for a good profit within a couple of years, you can always hold it for the long term because it will always appreciate.

But if everyone follows this advice, will it still work? Surely it is a recipe for disaster. If everyone is going to earn it the easy way, who will do all the hard work?

Given today’s price levels, the vast majority of Singaporeans who own their homes are sitting on large paper profits. Many are paper millionaires; for them to become real millionaires, they would have no roofs over their heads.

Nevertheless, it is hard to argue against such a track record. In fact, the earlier the property was purchased, the greater the capital appreciation.

Most of us have bought our homes to live in, rather than as a get-rich-quick investments. When you buy for owner occupation, you have a guaranteed tenant – yourself. Instead of rentals, you are paying monthly mortgage payments.

It is a vastly different scenario when you are buying for investment. You do not have a guaranteed occupier. If you are not able to sell your property before its completion, you will have to look for tenants.

You will need to look at the yields and compare that with other forms of investments. You will need to assess the overall housing demand-and-supply situation. You will need to know how the economy is doing – now and in the future.

This means that you will need to do your homework and not go by herd instinct. The herd never gets it right all the time – hence economic and property cycles.

When an owner-occupier times his purchase right, he has one fewer big worry in life.

When an investor gets it right, he gets a windfall and lives the good life, but it never stops there, does it? The euphoria of earning big in a short few months or over one to two years what he could not earn in 10 or 15 years is intoxicating, to say the least. The profits will be re-invested in, what else, but property.

We read of success stories of people starting with a single property and having a string of them within a decade or two. How do they do it? We see many advertisements these days offering courses that will teach us how to make it big by investing in property. It is not a big secret: It is called leveraging – using other people’s money to work for you.

When the value of your home rises significantly, as they always do during an up-cycle, you can secure a loan from banks by pledging your home as collateral. This is because your property’s market value is much more than your outstanding loan.

You can use this loan to re-invest in property. In Singapore, buying a property under construction allows the investor to maximise his leverage. Since only a 20-per-cent down payment is required upon purchase, the investor can, in theory, play with an asset which is worth five times his initial capital.

Some people can own a number of properties in a short time because they are fully invested and fully leveraged. Profits are almost immediately re-invested. Like a person who buys his furniture on hire purchase, it looks like he is the owner, but the furniture is not yet fully his, even though no one else knows that.

This brings me to my last point. When an owner-occupier mis-times his purchase, he spends his whole working life paying for it. When a fully-leveraged investor gets it wrong, like in the real estate board game Monopoly, he becomes a bankrupt and retires from the game.

By Colin Tan, head of research and consultancy at Chesterton Suntec International.

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