Buying a property: Affordability and Value For Money.

Following my blog post on considerations in buying a property for first timers, a reader mentioned how it is all about location and that if we can afford it, always buy a property in a better location.

"You may baulk at the high price for properties in a good locations. But if you have the budget, go for good locations because when you sell in future, you can also sell for a good price. If you buy a property because it is cheap, it is likely to be poorly located with little amenities and poor connectively. When you sell in future, potential buyer may also "hiam" the place.

"Always buy where there are future potential development (for examples, Paya Lebar, Jurong East and Woodlands have been designated as regional centres under the Masterplan)."

Of course, I think that location is important too. 

However, to me, it is never about "affordability", it is always about "value for money".





"Value for money" is a concept that is location neutral when it comes to real estate. 

It can be quite subjective, for sure, but there is also a high degree of objectivity. 

So, when we have a discussion on this, it is important to stay clear minded about what we are talking about.

Example 1:

If someone had bought a resale 5 room flat in a mature estate for, say, almost $800,000 because he liked the location for some reason while a sale of balance flats exercise could yield a 5 room flat in a non-mature estate which could be had for half the price, should we say that he was not getting value for money?

Well, for some of us, it could be really hard to rationalise away the extra $400,000 that had been paid for convenience and familiarity, perhaps. 





However, to the buyer, the location could be priceless. 

Whenever there is a strong emotive element, objectivity is suppressed. 

Don't discuss because it could disgust.





Example 2:

If someone had bought a BTO 2 room flat in a mature estate for a quarter of a million dollars instead of a BTO 4 room flat in a non-mature estate for the same amount of money with an eye on becoming a landlord, would the better location in a mature estate help? 

With the BTO 2 room flat, he could not rent it out until 5 years later while with the BTO 4 room flat, he could rent out 2 rooms and immediately, it would be cash flow positive. 





Of course, we are talking about doing things legally here.

However, if the thought that the BTO 2 room flat in question could appreciate by much more in price and was, hence, a better buy, then, we would have entered the realms of speculation. 

Don't discuss because no one is the wiser.

Example 3:

If person A had bought a condominium that was a 2 minutes walk from a MRT station at $1,700 per square foot, would he be better off than person B who had bought a condominium of a similar size that was a 15 minutes walk from the same MRT station at $1,200 per square foot? 

Assuming a floor area of 500 square feet, we would be looking at a cool $250,000 difference in price. 





Was the proximity to the MRT station worth that much?

If person A decided to rent out the condominium at $3,000 a month, person B could ask for $2,400 and would still end up with a higher rental yield, everything else remaining equal. 

For a monthly savings of $600 (or $7,200 a year), potential tenants could be more than willing to take a stroll to the MRT station and this is a realistic scenario especially when smaller apartments are more likely to appeal to younger renters.





Example 4:

If someone had found a condominium in a good location but it was asking for a significant (say 15%) premium to the latest transacted prices of surrounding properties (and a 15% premium is pretty normal with new launches most of the time), how would that provide value for money? 

Now, if someone had found a condominium in a not as good location but it was offering a nice discount (say 15%) to the latest transacted prices of surrounding properties, wouldn't that be a value buy?


Think a property in a less convenient location is harder to rent out? Try lowering the rental. 

If there was a comfortable margin of safety in the purchase price of the property, there would be plenty of room to lower prices and it would still give a satisfactory result.

Something I like to remember all the time (but sometimes forget):

"Never count on making a good sale. Have the purchase price be so attractive that even a mediocre sale gives good results." Warren Buffett.





And I said this on my FB wall:

"I would like to play the Devil's Advocate here. A rising tide lifts all boats. I know friends who bought properties in not so good location who saw their properties' values going up by 100% too in the last few years. My properties which were in more prime locations also went up by 100% up to the point I sold 2 years ago.

"I believe that keeping an eye on value is more important and that location is, often, a reason bandied around by vested interests to push up prices. If we could buy an undervalued property in a less prime location, from a value for money perspective, why would we want to buy a property that has priced in future value?

"I am not an expert on property investments. I have just used some old concepts about price and value for money here."

Buying a piece of real estate anywhere is a big commitment and the decision making process is complex although making a decision is easy. 

Considering whether a piece of property is "value for money" should be a part of the decision making process although it is not the only consideration.





However, if all else have been taken into consideration, we should remember that it is not about "affordability", it should always be about "value for money".

Note: All examples provided in this blog post are real life examples that I know of.




Related posts:
1. Buying an apartment: Considerations.
2. Buying a property as an owner-occupier?

My travel blog:
Value for money in a box of Mikans?