They invested in multiple properties and are now retrenched. (Two questions we should ask when buying investment properties.)

UPDATED (DEC 2016):

People do lose their jobs and for those who are financially leveraged to the max, it could be hell.

A reader's comment:

"...recently I attended a workshop at LLI. I spoke to an uncle in his 50s who is unemployed after he was retrenched... He has friends in the same industry who bought multiple properties and are currently retrenched as well... Other friends working in a prominent engineering company received letters asking them to opt for voluntary retirement after 59..." 





Full comment: here.

If those multiple properties are rented out and if the rentals are able to cover the mortgages, good. 

With the rental market being what it is (i.e. high vacancy rate and declining rents) or if the properties were purchased in the last 3 or 4 years (i.e. relatively high purchase prices and low rental yield), his friends (without an adequate emergency fund) could be in trouble.





Don't let greed get to us. 

Always stay grounded. 

Over leveraging (explained at the end of this blog post) could lead to trouble.

Financial prudence will not make us rich overnight but it will ensure we avoid painful falls some of which we might not recover from.





(Up to November this year, more than 800 transactions involving non-landed private properties were loss-making, double the figure in 2015. Analysts told The New Paper that "unprofitable" deals are common in a cyclical downturn where market sentiment and employment prospects are poor. Expectations of a US Fed rate hike by the end of the year, which would increase interest rates here, are also driving these loss-making sales. Source: The New Paper, 13 Dec 16)




------------------------
We always hope to make money from our investments and this could happen through capital gains, regular income or both. 

Knowing our motivations for being invested will go a long way in determining what are suitable investments for us.

It is well known that the luxury segment of the residential property market in Singapore has never been very good for income investors. 

In recent times, it has become worse. 

A gross rental yield of 2% is considered to be quite good for some properties in this segment, it seems, if tenants could be found at all as vacancy rate has been climbing.

Well, investors who bought into luxury residential properties in Singapore were probably going for potential capital gains and not rental income, anyway. 

This means that they hope to sell their properties at a higher price to another buyer later on.

The early birds did quite well but, increasingly, more buyers are resorting to leasing out their properties due to a lack of buying interest. 

This has depressed rentals further in this segment.

When monthly rental income declines to a point where it is unable to cover the mortgage payments, we could see fire sales and there is plenty of anecdotal evidence that this is already happening.





"According to Colliers International’s research, the average monthly gross rents of luxury/super-luxury apartments slid by yet another 1.4% QoQ to $5.20 per sq ft per month as of 2Q 2014, following the 1.9% QoQ fall in 1Q 2014." Source: Colliers International

I have been receiving emails offering discounts on properties in Singapore and some of them are of the high end kind. 

A small one bedroom (shoebox) apartment near Orchard Road for $1.1 million, down from $1.3 million, anyone?

I think that it is a sign of the times and we won't be wrong to expect more discounting both by developers and more marginal buyers of luxury residential properties here.

Buying a residential property in the hope that we could find buyers who would pay a much higher price for it in a short time is no longer a game we can play in Singapore unless the entry price were to be so attractive that even after accounting for the seller stamp duty (payable if the property is sold within 4 years of purchase), we could still make a decent gain.

However, if a developer had to resort to a 20% discount in order to move unsold stock, what makes us think that we would be able to sell at the pre-discounted price to anyone else? What? Not now? Maybe, 4 years later?

Well, with many more projects to be completed in the next few years, if anything, the secondary market will become even more challenging for sellers. 

Indeed, prices are more likely to trend downwards in the next few years than not.





When we take a speculative position, it is important that we understand that it is a speculative position. 

It means that we should be able to exit rapidly, cutting our losses, if required.

With conditions the way they are in Singapore now for the residential property market, this would be extremely difficult and also costly to do. 

For people without deep pockets, it could even be disastrous.

What do I mean by deep pockets?

Sometimes, we look at some companies' numbers and we might wonder why they have debts although they have more than enough cash to repay their debts.

It is because we should always have ample liquidity close at hand to take advantage of opportunities.

Having ample liquidity also means that if things go wrong like they sometimes do, these companies could pay down their debts rapidly.





Take a look at this company's numbers, for example,

So, for the more adventurous ones in our midst, please think again and again before handing over that cheque when temptations find their way into our mailbox.





"Is it a good deal?" is only the first question we must ask.

"Do we have deep pockets?" is an important second question.

"...overleveraging is a situation when people are borrowing money, hoping to make money but do not have enough capital assets to cover any likely future losses." (See related post #5)




Related posts:
1. CCR, RCR or OCR for rental income?
2. How to be rich when the world collapses?
3. Smaller apartments' prices more resilient.
4. Don't think and grow rich!
5. Leverage up and buy investment properties now?

Bonds, REITs and the instant gratification of yield.

The message that inflation is eroding our wealth because the banks here offer such measly interest rates for our savings has become quite pervasive. 

I am sure that the message has been good for sales in some industries too as many more people are worried now. 

I know my parents talk about it a lot more these days.




So, what do people do? They go hunting for higher yields. One of the easier things to do is to go to the banks and invest in products which promise yields which are much higher than the said interest rates. 

Many also go to the stock market to look for stocks, bonds or preference shares which offer yields that beat inflation.

In the hunt for higher yields, we might want to keep this in mind:

"Always remind yourself that investing is a long term activity. So, avoid the instant gratification of yield... think carefully about how you are getting that yield... But there is a tendency in this environment for everybody to feel like 'I've got too much cash rotting in the bank, earning nothing, and I have to do something with it.' ... Don't just buy the highest yielding investment out there. Historically, that's how people get themselves into trouble."  - Tad Rivelle, CIO, fixed income, TCW.

Is the low interest rate environment we see the new normal? Won't interest rates go up again? Pause and ruminate on this for a bit.

When we are offered a high yielding investment, we should ask how the investment is delivering the promised yield and if it is sustainable. If sustainable, for how long is it sustainable? What is the likelihood of a capital loss at various entry prices?

I like how Tad said we should avoid "the instant gratification of yield". 

It sounds similar to how we should try delaying gratification in consumption as we try to build wealth.

By saying that we should avoid "the instant gratification of yield", Tad is probably suggesting that we could possibly get in at a lower price in future and get a higher yield then, everything else remaining equal. 

The suggestion that people who get in now could lose money as prices fall in future is there as well.

I don't know if Tad had a working crystal ball when he said what he said but I know I don't. Could the low interest rate environment persist? 

It could but with experts saying that interest rates could rise sometime next year, shouldn't people in long term and perpetual bonds be worried? 

What about people in interest rate sensitive investments like REITs?

If interest rates should rise, yes, these investors should be worried. However, the bond holders should have more to worry. Why? 

Well, if interest rates rise, it is probably because higher inflation demands it. 

Bonds are not businesses. They are IOUs issued by businesses. They only have to pay the agreed coupon and nothing more. 

Bonds tend to do badly in an inflationary environment as interest rates rise.

For REITs, we can reasonably expect their asking rents to increase in an inflationary environment. There will be constant adjustments made as cost of new debt becomes higher but as long as rents are lifted higher in tandem, there is really no issue, everything else remaining equal. 




So, when investing in a REIT, one of the things to look at is the possibility of higher asking rents in future which involves a whole gamut of considerations which mostly can be neatly sorted under two headings, "supply" and "demand".

When the Fed finally decides to raise interest rates, I am sure that market prices of yield instruments will take a hit just like they did middle of last year. 

How big a hit? 

I have no way of telling but I have an inkling that prices would in all likelihood overcompensate to the downside.

Depending on what our existing investments are, some will suffer more than others but chances of any investor escaping unscathed would be slim. 

So, now, do we liquidate all our investments and do a Chicken Little which is what some people have done?

Well, we could but knowing that I don't really know, my preferred method has always been to stay invested while maintaining a high level of liquidity. 

So, doing what I do means being able to continue receiving income from my investments which increases the level of liquidity that I have.

After all, what is the best way to ride out volatility? Having plenty of cash.




So, bonds or REITs, before we plonk in any money now, we might want to temper our expectations by reminding ourselves of the risk that comes with the instant gratification of yield.

Related posts:
1. Get paid more waiting for opportunities.
2. How to earn 6.3% interest after 4 years?
3. Nobody cares more about our money.
4. Never lose money in REITs or real estate?
5. Perpetual bonds: Good or bad?

When is it OK to be nice and unhappy?

Recently, I had a chat with a reader till about 1.30am in the morning. It was on the topic of insurance. Mind you, I wasn't giving any advice. I am not allowed to and I know it. We were just bouncing ideas off each other, she said, and she overheard me talking to myself.

In a recent blog post, I said that we often meet nice people in life and the reader I chatted with is a nice person and so is her husband. How could I tell?

Many of us are nice people who are considerate towards others. Unfortunately, nice people very often get taken advantage of in life. In the case of the reader, she had wanted to make adjustments to her insurance policies but her insurance agent had objected because:

"he said he'll have financial penalty if we withdraw some policies after buying 2 new ones this year from him"

So, what is the reader's plan?

"so, we decide next year, we'll be firm with what we think is right..at least he said within 1 year, if we terminate old policies after getting new policies, he suffers. So, next year, after the 1 year is over, we'll want to terminate some."

Isn't the reader being exceptionally nice? I think so. She really has no obligation to behave like this but she is being considerate despite being rather unhappy. I hope her agent appreciates it.

Personally, I had one such experience too when I bought an insurance policy when I first started life as a working adult. It was a whole life policy bought from a relative.

When the policy was delivered to me, it had riders which I didn't want (and I told him beforehand that if the product must be sold with the riders, I would not be interested) because it bumped up the premium by some 15% and it was a lot of money for a young working adult. He ignored my wishes because he needed the sale to hit some quota to qualify for some incentive trip.

I had wanted to cancel the policy but the relative objected and sought my dad's help. My dad told me not to cancel the policy because it would jeopardise the relative's career and I kept the policy despite being very unhappy. I lost all respect for that fellow (the relative, not my dad) since.

Nice!

Sometimes, it really doesn't pay to be nice, does it? To be nice, sometimes, we end up unhappy and paying more. So, how? Is it OK to be nice and unhappy? It depends.

We have to learn not to be nice and not care what some people think of us. Some people don't matter to us and, therefore, what they think of us should not matter at all.

Do you find it hard to tell who these people are? Well, if we know who are the people who matter, then, it becomes easier. The people who matter to me, ranked in order of importance:

1. Immediate family.

2. Close friends. Extended family.

3. Co-workers we work closely with.

4. Boss (whether we work closely with him or her does not matter.)

5. Friends less close. Co-workers less close.

So, anyone else should not matter much, if at all.

What should matter more to the golfer? The golf ball or the grass?

Over the years, I have become more discerning with requests for help and mindful about taking care of my own interests. There will always be people out there who would covertly or overtly try to take advantage of us. We should know this and beware.

There is still that boy scout in me but boy scouts grow up too.

Related posts:
1. To let go or to hold on to a position?
2. Nobody cares more about our money than we do.
3. Response from AK to accusations regarding seminar.

Get VVIP discount at condo launch!

We always see things like "early bird discounts" or "VVIP discounts" when there are new condominium projects here and although I am not saying that they are all just a lot of hot air, I think that it is only prudent that we take claims like these with a pinch of salt.

After all, I have not come across sales people who would tell clients, "Hey, don't buy. Even after the discount, it is still not value for money." Sales people must always say optimistic stuff to their clients and look the part too.

"Being a salesman and an actor were not that dissimilar: It is a good lesson in covering up your feelings. No one wants to buy from someone who looks depressed." -------- D. Scott

Someone who recently visited a showflat received a strong dose of such optimism and shared her thoughts with me in an email. I would like to share a little bit of it here:

"So how did the agent try to convince me it is a good deal? The usual talk on
1. FH property and offering to show stats on the ROI in the area.
2. Discount is very attractive. 8% special discount + 5% VVIP discount if buy this weekend.
If you refer to the transacted prices of nearby developments which I included here, it is obvious that there is no discount to speak of."

Comparing with recent transacted prices of surrounding properties is something I do too and that was how I snagged good (i.e. undervalued) deals before. Comparative analysis is quite simple to do and I do it a lot in my investments in the stock market.

Now, in another blog post, I asked, "why would we want to buy a property that has priced in future value?"
(See: Buying a property: Affordability and value for money.)

Although this is not the motive of the question, it could give an impression that property prices would definitely go up in future but what if they were to go down instead?

Entry prices are important and if we ended up paying prices too high, we would have no margin of safety to speak of.

We should remember that nobody cares more about our money than we do.

Related posts:
1. Buying an apartment: Considerations.
2. Where to buy shoebox apartments for investment?
3. Apartments with rental yields of 4.95% to 7.3%

Emergency funds: Have joint savings accounts.

Someone wrote to me and said,

"Even with passive income, your representative will have to wrestle to get your affairs settled.  This takes both time, effort and even some muscle power.  My greatest fear is being poor and going to bed hungry. My next greatest fear is being half-dead.  Sigh.  .  . I worry a lot."

I have a simple solution to this. What is it?

Have joint savings accounts with our loved ones. I have two such accounts, one with my mother and one with my sister. In case I were to be incapacitated in any way one day, they have access to the money in these accounts.

As adults, we naturally want to have a clear line separating "my" money from "your" money. After all, we have our own lives to build and our own dreams to chase. However, having at least one joint account with someone we love and trust really makes sense.

For example, I know that many couples, married or not, have joint savings accounts to which they contribute equally on a regular basis. Such joint accounts could serve many purposes including paying for regular household expenses.

However, the joint accounts I am thinking of hold emergency funds. They come in an imaginary glass case that has the words

"BREAK GLASS IN CASE OF EMERGENCY"

written on the outside in bright red colour.

Having said this, for married couples, a joint account to hold emergency funds makes sense. For couples yet to be married and for singles, it would make sense to have such a joint account with a trustworthy immediate family member even if the money is all yours. (At this point, I hope no one asks me the question which I think someone might ask.)

Yes, we need to have people we can trust to hold keys to these funds. We trust ourselves (I think) but if anything untoward should happen to us, someone else we trust should be able unlock these funds on our behalf.

Still having second thoughts? Hey, this someone we trust and love will be taking on additional responsibilities (with thanks and only thanks), you know?

What's the next thing to do after this?

Keep our fingers crossed and hope that we are the ones who might have to break the glass case and not them.

P.S. There are many ways to make sure that our loved ones have access to our money on short notice, I am sure, and I am just sharing one way here. (See related post #3)

Related posts:
1. Why a meaningful emergency fund is important?
2. Emergency fund: How much is enough?
3. Emergency and convenience cash.

Whole life insurance, universal life insurance and investing.

"It is a horrific investment!"

This blog post is actually a reply to Kenneth Chua, who left very thoughtful comments regarding how whole life insurance has worked for him: here.

Since not many readers visit the comments section, I thought I should bring the comments section in as a blog post especially when I believe I have something important to talk to myself about:


Hi Kenneth,

Yes, times have changed and there are many more options available to us now in Singapore to help us plan for retirement.

When I am in my 60s, I could be amazed by how things might be different just like how my parents find how things are more complicated nowadays compared to the time when they were in their 20s. Life was simpler then.

Well, we are lucky that we have a paternalistic government who, most of the time, do the right things. We still have to try to grow our savings to ensure retirement adequacy on top of what the government is trying to do for us.

With Singapore's core inflation at about 3% per annum, the whole life policies which I have are only tracking inflation with returns of about 3% per annum. While it helps to know that my wealth is not shrinking, it is not growing either.

When the time comes to draw upon the policies (i.e. cashing out at 65 like you said), the sum of money would start shrinking rapidly, both in nominal and real terms due to its utilisation and a lack of growth.

A solution would be to buy an annuity then but, of course, the money would be locked up again. Although most people would not like to have their money locked up, this is a good hedge against longevity risk for people who are not investment savvy.

For me, however, the better solution is to ensure our wealth grows at a faster rate than inflation and the sooner we achieve this, the better. Apart from saving a good portion of our earned income from active employment, investing in income producing assets that will grow in value is my preferred method.

The nice thing about this is that when I reach 65, I wouldn't have to cash out. Hopefully, these assets would still be generating income for me and this would help fund my retirement till my final day in this world.

Thanks so much for sharing. Keep the comments coming.

AK

I also replied to another reader on Universal Life Insurance recently. If you are interested in this, please read comments: here.

Related posts:
1. Inflation! What to do?
2. To retire by age 45, start with a plan.
3. The best insurance to have in life.
4. An annuity: A case study.
5. Matthew Seah explains Blue Chip Investment Plan.

"The amount that is going into insurance goes up every year and the amount that is going into investment goes down every year. This doesn't work. It is a way of investing money poorly."

Time to analyse Breadtalk's ... mooncakes!

Got a pleasant surprise from the organisers of InvestX Congress.

I met them at the MRT station near my office during lunch time and this was what they gave me:

I guess this is what I will be having for my tea breaks this week. Thanks, guys.

New to my blog and don't know what is InvestX Congress? See related posts below.

Related posts:
1. InvestX Congress: Closing thoughts.
2. InvestX Congress: Q&A.
3. InvestX Congress: A letter and more photos.

If you are interested in attending the next InvestX Congress, leave your contact details: here.

Read:
12 Quick Things I Learned From BreadTalk’s AGM 2014 (by Rusmin Ang).

Videos on reaching 55 and what is CPF Life?

Actually, the CPF Board have some very good videos but very few people actually watched them.

Two videos available since 3 weeks ago, one titled "Reaching 55" and another titled "CPF Life", have been viewed online barely 1,500 times and a bit more than 1,000 times, respectively.





Although I have blogged on these topics a few times before, I think videos will be more appealing to some of us. 

So, if you have 6 minutes to spare, here they are:


.....




.....


Not bad but I had to resort to reading the subtitles at times. 

We Singaporeans have a bad habit of "eating up our words" as we speak too fast sometimes.






Share the videos with friends and family who have doubts about the system. 

All of us should embrace retirement planning and CPF Life can be a very strong cornerstone for many of us in retirement funding if we help the system to help ourselves.




Related posts:
1. National Day Rally: Retirement Adequacy.
2. How to upsize $100K to $225K in 20 years?

Buying term life insurance: Sharing some lessons.

I received this email in response to a guest blog (see related post at the end of this blog):

Hi AK,

On your latest blog on term insurance, you write that $50 a month can get  fresh grads $500K coverage. I am not sure if you meant to have CI coverage  included, if yes, the premium rate looks unrealistic in current market. To  share my recent term insurance purchasing experience -

It costs a male going 30, non smoking, for $1300 a year for death coverage of $1M, $200k for TPD and CI. This is after 30% discount from Aviva, the discount applies to the whole policy period, till 65. For a female going 25, it is $880 for the same coverage.

I got all quotes from major insurers and found this to be the lowest,  particularly with the 30% discount. If I were to opt for $200k death, TPD and CI coverage, the lowest annual premium is around $900. I feel  additional $400 premium to cover for $800 k death coverage is a bargain from Aviva, and $200k coverage is not sufficient, hence, I opted for this. Note that Aviva gave the discount to policy with coverage of $1m and above.

 
Lessons from this experience:

1. One has to get quotes from as many insurers as possible to know the market rates and to get the best rate.
 
2. Buy term insurance early. In this scenario, for the same coverage, the female got 5 more year coverage and pays less every year, and even less total sum, partly because she buys this term insurance earlier than the male! （I say partly here, female premium tends to have lower premium than male in same age etc.）
 
3. Another reason to buy early is that premium goes up every year due to cost and inflations.
 
4. Insurance industry is very competitive, take advantage if there is a massive discount!

What insurer did you get from? $100 a month is really cheap for that kind of coverage and I am quite sure it is hard to such rates now.

Regards, IIIW

I had clarified that the earlier blog post in question was a guest blog. It wasn't written by me.

We decided to share this email here as it could help many people out there who are looking to get term life insurance. Also, we could possibly get many more people to come forward to share their experience or perspectives.

Related post:
Term life insurance: Why buy term? How big a sum should I buy? How long a term should it be? How much does it cost?

Eldershield: What does it shield us from?

Often, we meet really nice people in life. Sometimes, we meet really nice people who might even influence the way we think. 

One such person for me is a fellow blogger, LP, and he is the blog master of Bully the Bear. A few years ago, I was wondering whether to opt out of Eldershield but he persuaded me not to.





How did he persuade me?

To save anyone who might be interested from having to scroll through the many comments generated by that blog post written in 2011 (yup, when I turned 40), here it is:

"Hi Ak,

"My opinion is that u should buy. 

"Firstly, it doesn't cost much, so 400 per month (should be claim out) is sufficient to hire help to take care of u.

"Of course u can argue that your passive income is more than sufficient to create your own elder shield, but this is just extra protection at low cost. 

"Secondly, I wish to appeal to your sense of public charity - help contribute to the pool of money so that those poor elders can insure against this risk at lower premiums. 

"These people do not have passive income at all, most likely.

"So how? :)"

I decided not to opt out of Eldershield after that.





Recently, he had an exchange of comments in another blog on the matter with my more recent blog post on Eldershield in mind (see related post #2) and I would like to share it here:

LP:
With your first hand experience in eldershield, would you advice a person with say a passive income stream of 7k per month to get a plan that pays 300 per month only upon hitting certain set conditions?

N:
Regardless of the amount of passive income, eldershield is a form of hedging or insurance to insured against the unexpected. So instead of taking up the basic of $400 per month, one should top it up to $1k per month simply using cpf, w/o forking out of pocket, cash. So, yes, eldershield is still applicable, but a higher payout amount, with a higher premium should be the plan.



LP:
Regardless of amt of passive income? Are u sure?

The pt of having eldershield is to provide a supplement to the financial needs to take care of an elderly with the conditions laid out in the plan. If there's already a stream or a sum of money to cover this possibility, the need is no longer present. So why buy something that you no longer need?

Buying an eldershield plan doesn't shield you from getting hit by the 6 activities of daily living as laid out in the plan. It shields you from the financial cost of caring for such a person. If you can cover that cost, there's no need to buy the plan. That's what I think.








LP makes so much sense. I have always thought of him as a strong voice of reason in the world of investment and personal finance bloggers (whenever he decides to blog).

Hmmmm... OK, maybe, I should terminate my Eldershield policy on Monday.

Kidding!

Related post:
1. Eldershield. Opinions, anyone? 
(Great comments!)
2. Eldershield: Is it really necessary?