Leverage up and buy investment properties now?

UPDATE (December 2016):
I sounded the alarm 4 years ago.

"Many who bought their properties three to four years ago are settling for rents that don't cover their mortgage payment..."
Mortgagee listings this year expected to reach or surpass the 237 recorded in 2015, which exceeded the 236 in 2008 during the global financial crisis. A mortgagee's sale occurs when an owner defaults on the mortgage.
Source:
http://www.straitstimes.com/business/property/more-properties-could-be-up-for-auction-if-interest-rates-bite (8 Dec 16)
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8 March 2012
Today, I stumbled upon an interesting if disturbing bit of information. "Online loan" is the hottest in a list of keywords being searched for in Yahoo Singapore! For whatever reasons, Singaporeans are leveraging up or looking to it, it seems.

With the economy almost at full employment, it is harder to imagine people borrowing because they are in dire straits. Then why? They could be borrowing to fund purchases of consumption goods or to put into investments.

I also continue to read articles and see advertisements telling people how they could own real estate with little or no cash. How is this possible?

The low interest rate environment is here to stay for the next couple of years, with what is happening in the USA, Eurozone and Japan. As Dr. Marc Faber said, a low interest rate environment encourages people to take risks. Is this a bad thing?

I have been told by many that a judicious amount of leveraging could magnify the returns from my investments.

So, with zero gearing in my personal balance sheet now, am I a stick in the mud when it comes to leveraging?

I do understand the benefits of leveraging and, indeed, without it, I would not have been able to make money from real estate investments. However, I would leverage sparingly and would try not to take the biggest possible loan or the longest repayment period, given a choice.

On the other hand, savvy investors who know how to exploit low interest rates would probably benefit a lot more. The fear is always in overdoing it. Overdoing it?

Yes, too much of a good thing is probably bad. I am talking about overleveraging, of course.

A simple understanding of 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.

The Singapore government is prudent in capping the loan to value limit at 60% for a second mortgage. In the event of a crash in the property market, it is unlikely that property values would decline by more than 40%.

However, some people have purportedly found ways of going around this ruling. Indeed, from their claims, they have probably found ways around any ruling. If we were to do a search online, we would find websites and blogs with such claims. To find out more, however, we would have to pay to attend related seminars.

I would caution that there are reasons for why the cooling measures are here. Whether the reasons are good or not would depend on where we stand.

However, it is obvious to me that the government is sending a clear message that they want property prices in Singapore to lower in the next couple of years, not that they need to do much more to achieve this.

Given the rising vacancy and lowering rentals in the last few months, how would things look when record numbers of condominums are completed over the next few years?

Over the next 2-3 years, supply of completed new units is set to surge as the government’s current efforts to address the undersupplied HDB and DBSS markets bear fruit and as the bumper supply of land parcels for private housing in the government land sale programme is developed. We estimate that an average of 33,434 units of housing could enter into the market annually between 2012-2015 or 3.5x the average over 2004-2010. This compares with an average household formation of 18,000-26,000 over the past few years.

The current low interest rate environment and low vacancy levels are supportive of rents and the positive rental carry makes property investments attractive. However, with the large incoming supply over the next 2-3 years, vacancy rates are expected to trend up and this would exert pressure on rents and yields, resulting in a drag on prices.

Source: DBS Vickers.

Betting against the government and basic principles of economics, buying more investment properties now, does not seem like a savvy thing to do. Overleveraging would make this worse.

Related posts:
1. Should we be staying invested or in cash?
2. Selling a private property just got harder.
3. Buying a private property as a owner-occupier. Think like an investor.
4. New or resale property?
5. Be a real estate owner the easy way.

The US consumers are back!

There is a saying: "old habits die hard". This is why I always say what we see happening in the global economy is not just a function of economics and politics, it is also a function of culture. For any culture to change their practices, it would usually take an entire generation and the will to change has to be forceful.  Usually, this means that reality must have shifted so much as to burn an indelible mark in the psyche of its people.

Thus, we saw the Americans saving more when it looked as if their country was plunging into a bottomless pit in the midst of the global financial crisis (which, by the way, originated in the USA).  A worsening of the crisis was averted by the decisive actions of the US government.  With the spectre of prolonged hardship receding, it seems that the American consumers are back at what they do best.  This is a double edged sword, I do not doubt.  However, it is good news for the economy while it lasts.

Visa 2Q profit jumps as consumer spending rebounds

Visa posts 33 percent jump in 2nd-quarter profit as consumer spending gains strength
Eileen Aj Connelly, AP Business Writer, On Wednesday April 28, 2010, 6:49 pm EDT

SAN FRANCISCO (AP) -- Revived consumer spending drove Visa Inc.'s fiscal second-quarter profit up 33 percent and the credit and debit card processor forecast strong revenue growth for the full year.

Visa's growth continued to lean heavily on surging debit card usage as customers still prefer paying with checking account funds rather than with credit cards. The increased fees that Visa is collecting from merchants for processing customers' payments echoes the improved sales results many companies have reported in recent weeks as consumers appear to be more confident about spending.

In the U.S., Visa said 19 percent more transactions were made with debit cards and the size of those purchases in dollars rose 18 percent. In foreign markets, 20 percent more transactions were made with debit cards and the value of those transactions in dollars surged 33 percent.

Chairman and CEO Joseph Saunders noted that volume growth fueled the earnings gains, but said the company is "increasingly optimistic that economic growth will gradually improve."

Read full article here.
 
The Bears are Wrong: "The Consumer Is RE-leveraging," Jon Markman Says
Posted Apr 26, 2010 09:34am EDT by Peter Gorenstein
 
The recent data is convincing; The U.S. consumer is making a comeback. New home sales jumped 27% percent in March, rising to a seasonally adjusted annual pace of 411,000, the Commerce Department said Friday. Meanwhile, durable goods orders (large manufactured products) rose the most since the 'great recession' began.

As sure as buying low and selling high is a winning formula, an American with money will purchase goods, says Marketwatch columnist and author Jon Markman. "Anybody who's bet against the American consumer over the long term has gone broke," he tells Aaron in this clip.



Related posts:
New global economic leadership.
Real estate as a hedge against inflation.

Real estate as a hedge against inflation

For the last year or more, I kept hearing and reading the word "deleveraging". Companies and individuals are all busy deleveraging. So, basically, people are saving more money, paying off their debts and spending less. Overall, it gives an impression that leveraging is undesirable and should be done away with.

Marc Faber famously said that, in Asia, the family run businesses in Hong Kong and Singapore have very little debt. Many rich families in Singapore don't have any mortgages. He thinks that Asian real estate will continue to do well. This gels with what Jim Rogers thinks about how we should own some real estate and he, in a recent interview in New York, actually said that he would buy some US real estate now if he were staying there.

In my posts on the subject of gold, I mentioned that I buy gold as a hedge against inflation and that I do not trade gold. We could also buy other tangible assets which would keep pace with or grow faster than inflation and protect or grow our wealth in the process. However, most of us are not in the same league as Marc Faber or the rich families he mentioned.

So, what are we to do if we want a piece of the action and own some Asian real estate? Do we work very hard to save money before we buy that piece of real estate? 100% cash upfront and without a housing loan? Or do we put down 20% and borrow 80%?

Quite simply, like any other investment, the answer lies in timing. Buy when the market is depressed or just turning up and hold for the long term. If you believe that the world is going to see extraordinary inflation in future, this is one thing we should do if we have the means. If we have the money, pay 100% cash upfront. If we only have 20% to <100% of the value, take a housing loan for the balance. As an example, I bought private real estate 6 years ago and took a loan for 80% of the price. The valuation is now 80% higher. If I were to rent it out, I would realise a yield of 7% p.a. This is much higher than the interest rate on the bank loan I'm servicing. Capital appreciation plus steady passive income. Sounds like a high yield stock? Sure does. Having said this, we have to keep an eye on the interest rates. If that goes up significantly and we do not have the means to pare down the outstanding loan amount drastically, it might be time to let go. If I had told myself 6 years ago that I should work harder and save more money before taking the plunge, I would have worked harder, saved more money but ended up poorer. The next time the property market has a correction in price, bear this in mind and take the plunge, if you have not done so already. Inflation is a powerful force. If we have the means, we must do all we can to protect ourselves against it. Buy Japanese real estate