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Investing or speculating in real estate?

Tuesday, July 31, 2018

Reader says...
My friend bought 2 units private condo (District 9-10) last year and early of this year.

One for own use and one for investment purposes (still vacant as at to-date).

As recently all banks increase the loan interest.

Thus, I asked him whether it is stressful to service the two condos.

He told me...


Any idea whether Singapore property sure will increase price?

See so many en bloc recently, I believe developer here won't anyhow dump their money.

Isn't it?

AK says...

Your friend knows for sure his recent D9 purchase can make $300K three years from now?

After all the costs that comes from holding it vacant for three years?


He probably knows something I don't.

As for property developers, they have tons more money than we have and they probably have easier access to credit than us too.

When we owe a few hundred thousand dollars to the banks, we are at their mercy but when we owe  hundreds of million of dollars to the banks, they are at our mercy.

If things should go downhill from here, (most) property developers probably can weather the storm but can we?

It is only too easy to feel invincible during good times but we should stress test our finances to see if we are really invincible or is it all in our mind?

I know some people think I am against property speculation but, really, I am not.

It isn't something I would do but I am not against other people doing it.

As long as the people who do it know that they are speculating and if they have more than sufficient ability to do so, go ahead.

The problem I have is with people who

1. are speculating but think that they are investing


2. are really not financially strong but have only enough spare cash to follow the herd.

Anecdotal evidence shows that these people are more common than not.

Those who expect property prices to double in the next 10 years like it did from the Global Financial Crisis a decade ago are more likely than not going to be disappointed.

We should not let the fear of losing out force us into following the herd.

Ask what are we really losing out on anyway?

What do we gain by doing this?

What do we lose by not doing it?

My experience has been that if we buy a property that is a decent investment (see related posts at the end of this blog), its value will likely hold and over time it could enjoy capital gains.

Of course, it is never my way or the highway.

I just don't have much confidence in my power in speculation.

A blog published earlier today:
Condo investment has been a drag.

My own experience:
1. Property investment philosophy.
2. Affordability and value for money.


WTK said...

Hi AK,

I think that it's quite risky holding two properties with the mindset that they will generate profit. I am not inclined on such approach which leverages on debt. I will rather utilise cash which I can afford to lose. The place of utilisation is in stock.


AK71 said...

Hi Ben,

It really depends on how deep the speculator's pockets are and how much he is willing to risk?

Speculation isn't for everyone but not everyone knows this. ;p

AK71 said...

Jack James says...
The problem now is ...... you need to be really cash rich to even qualified to speculate the property . This bar has been raised very high . Good luck to all !

AK71 said...

Spur said...
The attraction is the use of leverage ;)

But people forget leverage is double-edged sword :O

For speculation, only buy during bad recessions. But even this is risky in Singapore's context due to the huge supply of private housing, combined with the controlled pace of immigration, combined with aging population.

The huge oversupply, both existing as well as upcoming for at least the next 5 years, is the main reason for high vacancy rates and depressed rentals.

Add to that ICA becoming stricter in approving or renewing work passes, companies reducing housing allowances (ang mohs becoming commoditized as more Europeans willing to come to Asia for the jobs).

Potential property tycoons should make weekly prayers at Kwang Im temple for govt to open foreigner floodgates & property developers to stop building for 5 years.

AK71 said...

AK Tan says...

In any investment, the key to making money is 1) know what you are doing and 2) have holding power. The beauty with property investment is in its leverage - where else can you get 30 year loan at 2-3% with only 20-30% money down? That said, the issue with leverage is that you need to pay your principal plus interest regardless of whether your asset increase in value or not

AK71 said...

Raymond Ng says...

Agree the leverage part.

But the most important is the property price.

Like I shared earlier in other post, I bought similar unit at $680K vs my neighbor paid for $860K.

High price means higher mortgage payment and interest.

In summary, higher principle and high interest cost.

Tony King said...

Hi AK,

Thought of sharing an alternative (optimistic) view on property as investments [I'm a fan of Robert Kiyosaki, author of Rich Dad Poor Dad].
One of the board game Cashflow, kinda illustrate the difference between stocks & properties, the focus should be on the cashflow coming in.

Eg. If you stay HDB, your kids move out or for whatever reasons you can squeeze out 1 room to rent out, that room rent at $600, now our home has changed from liability to assets (rich dad's definition) as its bringing in income. If your home utilities is $200 or less, then your cashflow is $400 coming in each month.
To use a normal, typical kind of property investment as reference, timing, location & abit of luck are needed. When you look back at 2003-2006, a condo costs $500-700K, even a semi-D in Sgoon Garden can be purchased at under $1mil. Of coz, now, like another author / blogger Property Soul said, in this multi-years cycle, its definitely not bottom, & it may or may not have peaked, but as one's disposal capital grows it may be better to spread into different asset classes for different assets cycle.

I had 2 friends that were really long term, they purchased property & held for 5years & the other 30+ years respectively, the latter one is suffering the downcycle now but there's no more mortgage to pay, just the drop in cashflow after offsetting his maintenances, utilities & sinking fund contributions. He's not entirely rich exactly, as his expenses pile up with increasing income, and now that his income drop, he's back working but its definitely better had he not had invested in the condo in his 30s.

Whether companies or properties, all have ups & downs bah, the old days of dividend stocks like Starhub, M1, SPH had their dividends cut, so still need to know what assets one is holding, its prospects & biz... Key is cannot just buy & forget... must still "monitor"

My 2 cents worth of thoughts...

AK71 said...

Hi Tony,

Thank you for the well thought out comment.

I enjoyed reading it.

I always say we should try to be pragmatic and not be overly optimistic or pessimistic.

It should be the same when looking at investing in properties too. :)

AK71 said...

Ah Foong says...
are properties same as REITs? investor buys at a unit in the trust, while the trust buys properties with 30-40% leverage, any property they sell can be returned to unitholders. however, the risk of the debt is on the REIT, not the unitholder. While being a private property owner, he personally is being exposed to the debt. Am i missing something here?

AK says...
There is also concentration risk that comes from holding to one investment property. The counter party risk is also magnified.

Anyway, like I said, as long as speculators know that they are speculating and as long as they have deep pockets, if they want to take risk, ok lor. :p

AK71 said...

We might want to take note that betting on higher future prices of our homes is not investment.

It is a form of speculation.

We should note that there are many people who have lost their bets.

AK71 said...

Reader says...
Interest rate keeps going up and the rental keeps dropping.
Tenants want to rent only 3 months or 6 months because expect rentals to drop again.
The monthly mortgage payment is higher than my rental income now...

AK says...
Yes, the writing was on the wall.
Unfortunately, too many threw caution to the winds and bought into the story that there is never a bad time to invest in properties and overstretched their finances.
Now, they have to pray that interest rates do not increase too quickly and hopefully the local rental market picks up but, to be honest, things will likely remain tough.

AK71 said...

Lim Der Shing says...
Fair comments ak. To add another datapoint, I don’t consider myself a property investor for sure, but so far all my 3 local property buys have been pretty profitable. Better than the 2 kL ones actually. Actual gross annualized return probably 2+% leverage and around 4+% on net asset (remove loan value).
So my experience is really match inflation last 10 years.

AK says...
Gong xi gong xi. :)
10 years ago, just coming out of the GFC, local property prices were still pretty attractive. That was when I purchased a condo in D9 which I sold after holding for 2 years or so. :p

WTK said...

Hi AK,

Having read this post several posts, I am of view that property investment is not my cup of tea. Investment portfolio (DIY share investment) is my preferred choice and gives me the peace of mind with the generated dividends covering my expenses.

To each of our own.


AK71 said...

Hi Ben,

There are so many things we can invest our money in.

Don't follow the crowd.

It is important to consider our own circumstances and objectives. :)

Money Speed said...

An Investment is only good if it generates income when you acquire it. Those people who place a % to buy the pre-TOP property and calling to sell upon 3 years holding period, is no difference from placing a bet at the Casino. And most annoying about these people, they place the bet, and calling out to sell the ticket for a 100% margin. Isn't this the same as hogging or in Chinese 黄牛

AK71 said...

Hi Money Speed,

Absolutely, these people are speculating although they might think they are investing.

Of course, if their speculation goes well, they might think they are great investors. ;p

Fortunately for them, Singapore seems like a good place for property speculators and property agents are certainly encouraging them.

I have no ill will towards these people but it just isn't something I would do.

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