Property Talk: Real-Life Dos and Don'ts of Property Investing

Based on real-life cases of property gains and losses, below are some property investing dos and don’ts you should keep in mind.

Updated on March 09, 2018 8:03 am

Fiona Ho

Real-Life Dos and Don'ts of Property Investing

Property ownership is a goal for many Singaporeans. When done properly, investing in real estate can offer a number of benefits for individuals, including the ability to diversify income streams and to capture long-term capital appreciation.

But just because Singaporeans have a love affair with property doesn’t necessarily mean they will be good investors. People lose money all the time. And for every phenomenal home-selling success story you hear, there’s probably a cash-strapped owner sobbing his way to a mortgagee sale.

Based on real-life cases of property gains and losses, below are some property investing dos and don’ts you should keep in mind.

Dos:

1. Understand the market dynamics of where you are buying.

Mistakes are made by those who rush and don’t take enough time to study the market. If you’re buying property for investment, be prepared to set aside lots of personal time to property research the sector, check neighbourhoods and delve into research analyses that might point you in the right direction. The highest recorded profit in 2017 was made by this savvy investor, who bagged a cool $5.4 million profit from the sale of his unit at The Balmoral.

The seller, said to be an Indonesian based in Singapore, bought the 7,653 sq ft unit at The Balmoral in 1997, during the Asian financial crisis that gripped much of East Asia from the second quarter of the same year. During this period, the property price index (PPI) of non-landed residential properties plummeted 11.8% in 2H1997 from 2H1996.

Similarly, the median $ psf price for units transacted at this medium-rise project in district 10 fell to $931.5 psf in 3Q1997 from its peak of $1,186.5 psf in 2Q1996. Seizing the opportunity, the discerning buyer bought the first-floor unit in August 1997 at a bargain price-tag of $5.2 million ($679 psf). He sold it in April 2017 at for $10.6 million ($1,385 psf). The profit works out to 104%, or 4% a year over 20 years.

2. Prepare to make a long-term investment.

Successful investors have one thing in common—patience. To realise the full potential of a property, you need to let it sit and grow in value over the years. Doing so allows you to harness the twin powers of leverage and compounding to grow your asset base.

Just ask Madam Chong, whose Good Glass Bungalow (GCB) on Leedon Road fetched a jaw-dropping $39.8 million profit in January 2018 after she held the investment property for 21 years.

Madam Chong is a veteran luxury property investor whose penchant for collecting GCBs in the Leedon Road-Leedon Park neighbourhood earned her the nickname the “Queen of Leedon Park”. She purchased the profit-making GCB for $17.7 million ($403 psf) in August 1996.

Over the years, she had flirted with the idea of selling the house and had even put the GCB on the market for $39.5 million ($900 psf) during the last property boom a decade ago. But she had then withdrawn it from the market. Madam Chong’s patience would eventually lead to the $57.5 million ($1,309 psf) sale of the house in January 2018, which translated to a capital gain of $39.8 million—that’s equivalent to the price of a luxury GCB.

3. Invest only if you have strong holding power.

We already know that property investments are highly illiquid. Which is why, investors have to be doubly sure that they have sufficient holding power to weather any fluctuations in property prices and rental demand before making a purchase.

As demonstrated by the Indonesian buyer and Madam Chong in the above examples, greater holding power allows investors to ride out the market’s highs and lows, or wait for market forces to turn in their favour. Neither seller would have made such exponential profits if they did not have strong cash flows to back their holding power.

It’s not just the property’s down payment and monthly instalments that you need to consider. Unexpected repairs, prolonged vacancies or past-due tenants can also lead to financial problems if cash reserves are light. So before buying property, make sure you have healthy cash flow to ensure sufficient holding power.

While there are no hard and fast rules as to how long an investor should hold a property, based on URA caveats from January 2017 to January 2018, our analysis shows that the average holding period for profitable sales transactions with annualised returns of 6 per cent and above was 10.7 years. For these sellers, the average total return was at 113.95 per cent.

Don’ts:

1. Buy overpriced property.

Take it from this Russian seller, who made a $6.6 million loss in 2017. The previous owner had purchased a four-bedroom unit at Seascape at Sentosa Cove from the developer at $12.8 million ($3,146) psf in June 2010, shortly after the eight-storey seafront development was launched.

In comparison, units at the luxury development were selling at an average of $2,710 psf at that point in time, which means that the buyer had paid about 16% above market price.

Some investors justify buying properties at high prices when they expect earnings to outperform the market. But buying at a high price also means there is limited room for capital appreciation, as demonstrated in this situation. Unfortunately for this buyer, he never got to recover his investment costs. The Seascape unit was put up for mortgagee sale at an auction in January 2017 at an opening price of $6.8 million but did not find a buyer. It was later sold at $6.2 million ($1,524 psf), by private treaty in February. The sale translated to an annualised loss of 10.4% an an overall loss of nearly 52% over a holding period of seven years.

2. Misjudge your cash flow.

Most people realise that buying property is expensive business, what with all those taxes, stamp duties and rising interest rates. But few investors actually take the time to consider their short-term cash flow.

Deriving another example from the case of the unfortunate Russian seller, the massive $6.6 million loss incurred from the February 2017 mortgagee sale of the Seascape unit is a strong indicator that its former owner was experiencing some serious cash flow issues.

As mentioned earlier in the article, healthy cash flow ensures holding power that is necessary for investment success, so make sure you’ve got the healthy cash flow box checked prior to making any property-buying decisions.

3. Sell too early.

This might well be a consequence of misjudging your cash flow. In another loss-making sale at Seascape, a 4,133 sq ft unit changed hands at a whopping $5.2 million loss in May 2015. The previous owner purchased the unit for $11 million ($2,661 psf) in December 2011 and sold it at $5.8 million ($1,403 psf).

On top of the loss-making sale, the seller also had to pay a 4% or $232,000 Seller’s Stamp Duty. The sale accounted for the second biggest loss for condos at Sentosa Cove.

Incidentally, the holding period for both loss-making units at Seascape were less than 10 years. This is consistent with our analysis—based on URA caveats, we found that home sellers who made losses from January 2017 and January 2018 held on to their properties for an average period of just 6.2 years.

Article originally published in EdgeProp.sg. Edited and reposted with permission


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