In this new series of blog on “Investing in Singapore Property“, I would like to go a little bit more in depth on this exciting topic. Under the main topic of Singapore Property Investment, there are many sub-topics to be discussed, including locations, leasehold vs freehold, rental yield vs capital appreciation, types of property, government URA’s masterplan, and more. Hence, it will spread over several blogs for this topic.
In this post, we will discuss on why invest in property.
Why Invest in Property?
Since the beginning of the modern world, property/real estate investment has always been one of the mainstream investments in the world, along with other mainstream investments like stock and bond. Traditionally, most of the wealthiest persons in the world always have interests in real estate. For example, majority of the richest persons in Hong Kong and Singapore are in real estate, according to Forbes Report. Investing in real estate is the best kept secret for the wealthy, and it has generated and will continue to generate tremendous amount of wealth for those who play the real estate investing game well.
The simplest reason is because we human being always need a roof over our top, so housing is the most basic need for us. And as society advances, cities are being built and jobs are being created, then we need offices, shopping malls, hotels, industrial buildings/factories, and others to meet those needs. The needs for real estate will always be there, no matter how technologically advanced the world has become.
Generally speaking, there are 2 main ways real estate can produce wealth, from capital appreciation and rental income. We will talk more about this in the next blog.
Here, let’s talk about some of the reasons why you should invest in property, specifically, residential property.
Property investment is perhaps the only form of investment where you can take advantage of leverage, in the form of mortgage. Other investments like share and bond, you cannot take a loan to invest in it.
Leverage is real power for those who are savvy in investing. Borrowing money from banks to buy property means you only have to pay the downpayment of that property instead of the full amount, thus leveraging from bank’s money.
If you subsequently rent that property out for rental income and use the rental income to pay back mortgage, then technically speaking your tenant is paying for your mortgage and helping you to build your wealth. If your mortgage is 20 years and the rental income is just enough to pay the monthly mortgage, in 20 years time the mortgage will be fully paid off by your tenant, and you now own the full value of the property (without loan) and become fabulously rich.
Another benefit of leveraging is from capital appreciation. Example, imagine you pay 20% downpayment for a property and get 80% of mortgage from bank for a $1 million property, so your initial outlay is $200k (plus other expenses like stamp duty and legal fee), and your mortgage amount is $800k.
In several years time, assuming that property value has gone up by 20% to become $1.2 million, what is your investment gain if you were to sell it at $1.2 million? From capital appreciation perspective, it’s only 20%, but based on this example where your downpayment is only 20% (Because of the power of leveraging of 80% bank loan), a 20% of capital appreciation would mean a 100% of return for you as an investor, make possible only because of leveraging.
Of course this is a simplistic example without factoring in things like stamp duty, legal fee, and other expenses, but I believe you get the idea and realising the power of leveraging, and you can only use this leveraging power in real estate investment, not in other forms of investment like shares and bonds.
Flexibility, 100% Control, and Ownership:
Real estate is a tangible asset, unlike other forms of paper asset like share and bond. It means you really own a piece of property and have the flexibility to decide what to do with it.
You can rent your property out for rental income, and you can also decide to live in the residential property yourself. You cannot do that with other forms of investments, where they are intangible.
Also, unlike in stock investing where you do not actually own the company that you invested in (Only a tiny share of it), in property you do have 100% control and ownership. With that ownership, you can make decision for your own good, including who do you want to rent to, how much is the rental, how do you want to furnish your property, and if you want to sell, how much will it be, and etc. You are like the CEO of your investment, unlike in stock investment where that company has a CEO who will make the decisions instead of you.
Property values always go up in long term:
Despite the short term volatility due to economy cycle and other factors, property prices, especially in Singapore, always go up in the long run. There are many reasons for that but I will highlight 2 major one.
First, inflation is a constant, in anywhere of the world. Cost of living is always going up, it means the cost of property development is also always going up, including the cost of land acquisition, cost of labour, and cost of materials. Thus, property price will go up.
Second, population growth. The world population is constantly increasing, and there are more people living in the same size of earth now than comparing to the past, and in future, more people are fighting for the same space. According to WorldMeters.info, the world population in 1980 is at 4.4 billions, and in 2018, it’s at 7.6 billions and growing!
In Singapore, population in 2018 is at 5.8 millions, and it’s projected by government white paper to increase to 6.9 millions by 2030! That’s an additional 1.1 million more people in the already crowded and land scarce tiny Singapore. What this mean to property market is that there will be more demand in the future and therefore according to the economy principle of demand and supply, prices will go up in future.
Good hedge against inflation:
Based on our previous point where we established that property prices will always go up in the future due to inflation, it’s logical to investors that investing in property is an excellence hedge against inflation, and therefore protecting your wealthy and not let it be eroded by inflation.
Many financial experts will advise you that passive income is the key to financial freedom. And to certain extent, it’s true.
Passive income is defined as a source of income coming to you that you do not have to actively work for, and doesn’t involve spending time and labor to obtain it. And hence, it’s logical to think that to enjoy financial freehold, which means you do not need to work for money, you need passive income.
Property investment can offer passive income. By being a landlord and renting out your investment properties, the rental that you receive from the tenant is your passive income, since you do not have to spend time and labor to obtain it.
That is, in fact, the most beautiful part of property investment.
There are many more reasons why property investing is so important for wealth accumulation and retirement planning, but above are some of the main ones.
Of course, above is just a guide, successful property investment require doing proper research and home work, and it’s not risk free for sure.
However, if done right, the rewards is more than worth it.
If you are thinking of investing in Singapore property, we have many years of experience in helping investors getting their right investment property and helping them in renting it out for rental income.
Feel free to contact us HERE for non obligated discussion.
Professional Real Estate Consultant (Singapore)
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