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Real Estate Investment


“A man complained that on his way home to dinner he had every day to pass through that long field of his neighbor’s.  I advised him to buy it, and it would never seem long again.” - Ralph Waldo Emerson
 
 
 

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1) What are the characteristics of real estate investment?

Real estate or property investment is different from non-property investments in the following aspects:

  • There is no central market for properties and current prices cannot be easily determined.
  • Property market is an Imperfect Market, meaning that there are no comprehensive and easily obtainable information on past transacted prices and other pertinent details to base rational decisions on. Due to buyers' and sellers' unequal knowledge or ignorance, there exist hidden opportunities and threats.
  • Properties are tangible, having a physical form and needs physical maintenance.
  • A unit of property is indivisible into smaller units for easier affordability.
  • It requires a larger capital outlay, as compared to other investments.
  • Properties are illiquid, meaning that they cannot be quickly and easily disposed off and converted to cash.
  • As properties rarely appreciate quickly in value and rental income, this is a long-term investment.
  • Due to rather lengthy and cumbersome acquisition and disposal processes, and generally slow growth in value, property prices are more stable and less volatile.
  • Properties have utility (usefulness) and intrinsic (internal) value by themselves, they rarely plunge to near-zero value like some stocks in times of economic crisis.
  • Future rental income, the amount and date of increase are more certain and easier to forecast by virtue of tenancy agreements.
  • There are higher management and transfer costs for properties.
  • Upon disposal, properties are subject to Real Property Gain Tax (RPGT), and changes in RPGT affect gains.
  • Properties and property markets are vulnerable to government legislations.

 

2) Why invest in real estate?

First, let us be aware of the difference between being rich and being wealthy. Being rich is about having money. Being wealthy is about owning income-generating assets such as businesses or real estate. Money riches in bank is more or less stagnant, and is likely to shrink due to inflation or currency depreciation, and can be easily squandered by careless spending. Wealth grows in wisely chosen assets.

There are many advantages of investing in real estate:

a) Stability

  • Due to its utility and intrinsic value, property prices rarely fluctuate wildly or crash to the rocks. Well-chosen properties can hold up their value better than many other investments in times of economic crisis.
  • Conservative financial institutions such as banks and insurance companies, with all their financial acumen and wisdom, invest your money in real estate - which speaks a lot about the soundness of real estate investment.
  • Study of long-term trends indicate that value of real estate generally increased steadily over the years.

b) Leverage

  • Leverage is an awesome concept - its power can be demonstrated by a person moving a large rock with a long pole (lever) supported by another rock (fulcrum) underneath.
  • Likewise, a large property can be acquired with a 10% down payment by a person, and 90% margin of financing (lever) from the bank (fulcrum). The 90% loan is actually Other People's Money (OPM).
  • Leverage is possible for property purchase because property is a durable, immovable and income-generating product considered as a good collateral by the bank.

c) Capital Appreciation

  • Real estate is limited in supply and is a non-reproducible resource. With growing population and expanding commerce and industries, prices will only go up, as growing demand exceeds limited supply.
  • Real estate value generally appreciates faster than inflation. A rising tide raises all ships.
  • It is prudent to let inflation naturally increases your wealth, instead of letting it erode your riches.

d) Equity

  • Equity is your share in the property, which is the total installments you have paid, minus interest.
  • Paying installments is like putting money in a bank as saving. In a property, equity grows.

e) Cash Flow

  • Rental income less all operating expenses and monthly loan installment may produce a surplus - a positive cash flow which is money in pocket every month.
  • It is important to find a property that produces positive cash flow for investment. In contrast, a property with negative cash flow eats into your saving.
  • Due to leverage, cash flow in property is often higher than other investments in cash-on-cash return.
  • Positive cash flow can make you financially free, and even very rich, if similar investment is repeated successfully.

f) Control

  • In other investments such as shares or mutual fund, you have no control over the operating decisions except to buy or sell. You are often in the dark about how the managers handle everything that affects your interest.
  • In real estate, you are the manager in control of the property's performance. You can make sure that operating expenses low are kept low, rental is maximized and vacancy period cut short by creative methods.

g) Improvable

Unlike other investments, you can physically improve on your property to increase its value and make it easier to sell. There are even investors and speculators who specialize in buying run-down properties and fix them up to sell at good profits.

h) Livable

Properties are the only investment that you can live in. When not rented out, you can let your children, relatives, friends, guests or employees stay in them.

“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.” - Theodore Roosevelt

 

3) How is money made in real estate investment?

There are basically two ways - Equity Buildup and Cash Flow Growth.

Equity is your share of the property. Equity = Property Value - Debt. When a property appreciates in value, your equity increases. When your debt (home loan) is paid down, again, your equity increases.

Net Cash Flow, if positive, is cash income. Net Cash Flow = Rental Income - Expenses. As rental rates go up over the years, your net cash flow increases too.

Equity Buildup and Cash Flow Growth can happen simultaneously to make you wealthy.

“Landlords grow rich in their sleep.” - John Stuart Mill


4) I have a very secure job to take care of my family, why should I invest in real estate?

Generally, only a small percentage of salary earner, usually at the top of corporate pecking order, makes enough to be financially wealthy. Upon retirement, savings do not increase other than the meagre interest they accrue, and are likely to dwindle due to inflation. Jobs in the ever-changing economy and employment trend may become less and less secure in future, who knows?

 

5) My future employment prospect is uncertain, how can I make the monthly repayment if I lose my job?

A property with positive cash flow will not burden you. In fact, it produces income to help you should you become unemployed. Make sure that the properties you invest in have rental income equal to or exceed the expenses (monthly repayment + maintenance fee), and you can't go wrong, rain or shine!

 

5) Property investment sounds complicated, does it take an expert to do it?

The greatest enemies of human being are fear, ignorance and confusion, regardless of what we venture into. You need to be well-informed of the right things to do, and the right property to buy, but you need not be an expert. Property investment is not a high-IQ game reserved for gurus.

Real estate is one of the easiest investment to understand as it is closely related to our living experience. We keep hearing that ordinary people of average intelligence succeeded in real estate investment, often with just some good advice, common sense and dumb luck!  

You may not know the whole property market, but you can pick a small area that you know well (near your home) to start with. Don't make it complicated. Learn along the way as you invest.

 

6) Is real estate investment risky, that I may suffer heavy losses if I fail?

There is little risk in acquiring positive cash flow properties. If you buy a property where the rental income is equal or greater than the expenses (monthly loan repayment plus maintenance fee), how can you go wrong? There may even be surplus money in your pocket to spend.

It is said that you make your money in real estate when you purchase, not when you sell. If you buy it lower than market price, you won't lose money selling it any time. However, if you buy it at market price or higher, you'll have to wait for the property to appreciate to make a profit. You'll be at the mercy of the future property market to bail you out.

If you make a mistake by paying too much for a property, the generally escalating property prices will forgive you by rising in tandem with inflation over the years, if you keep it. Just be more careful with inferior locations where property prices wallow in depressive levels.  

 

7) Is is true that you must purchase properties with good timing?

The world is not lacking in opportunities, it is only lacking in people with sharp eyes and good judgment. If you look long and hard enough, you'll find the opportunities, any time. If you keep waiting for the right time, years can pass by and you lose not only investment time, but also opportunity cost.

Spectators do not score goals, you have to be in the game to win. Search actively for good investment properties, any time is a great time to buy a great property.

 

8) It seems all the good investment properties are taken, where do I find the big frog hopping on the street?

Whenever the economic forces change, there comes opportunities. Employment rate may drop and people need to unload investment properties. Interest rate may rise and many good properties remain unsold. Populations shift to up-and-coming areas, and unappealing locations become vibrant due to rejuvenation.

People relocate for new jobs, marry and remarry, families grow, old folks pass away, businesses fail and debt-ridden dudes go broke. People need to buy and sell properties all the time, sometimes urgently.

Shrewd investors sell when everybody is buying, and buy when everybody is selling. They don't compete with the crowd, they don't succumb to herd instinct. The little fellow finds smaller deals that the big guys are not interested in or overlooked.

Good property investment opportunities exist everywhere, all the time. (As for the big frog, if you still can't find it, look in the mirror! Just kidding, you should look near the pond after the rain.)

 

9) How do I know if property investment suits me?

When you consider all types of investments, you may ask what an ideal investment would look like. It is commonly agreed that best investments have the following characteristics:

  • Security of capital - that the investment is not too volatile and drops like a rock in times of economic crisis. And when capital is needed back, the investment can easily be converted to cash - liquidity.
  • Security of income - how certain the investment produces income, and if the future income growth is able to counteract inflation.
  • Minimum inconvenience and expense in management - how much of work involved and cost incurred to manage the investment. For shares and mutual fund, there is none. For properties, the landlord needs to get a tenant, collect rent and do repairs.
  • Minimum inconvenience and expense in selling - the ease and cost of disposing an investment for cash.

Note that property investment fulfills the first two criteria above, in safeguarding capital and securing rental if rented to good long-term tenants. However, property investment falls short of the last two ideals, in that it incurs expenses and requires management, and disposal process is lengthy and costly.

To see if property investment is your cup of tea, look at at the characteristics of property investment as described in Item 1. And consider your personal criteria for making investment decisions:

  • Period of investment - how long do you plan to keep your money tied up in the investment? For property, it is likely to be a long-term game.
  • Personal involvement - are you willing and do you have the time to manage the property? Can you delegate this task to someone?
  • Financial position - do you have sufficient fund to pay for down payment, acquisition costs, and are eligible for enough loan to purchase your intended property?
  • Level of liquidity - do you need your cash back at a short notice? Some properties can be disposed off more quickly than others, and all are likely to take a few months to market and sell, and a further 3 to 4 months to receive the full balance of sale price.
  • Attitude towards risk - are you a risk-seeker or risk-averter? How much of risk can you take? Some properties are riskier to invest than others. But buying property knowledgeably and prudently can greatly reduce risk. If have good risk appetite, remember the famous principle: high risk, high gain. Should you disdain risk, don't forget the other half of that principle: low risk, low gain; no risk, no gain.

*Please also read our FAQs on Characteristics of Real Estate Market, and Types of Investment Properties.


by Aaron Lee, Property Street
All Rights Reserved
For further details please email This email address is being protected from spambots. You need JavaScript enabled to view it.
 
 
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Famous Real Estate Quotes:

“Owning a home is a keystone of wealth.. both financial affluence and emotional security”. – Suze Orman

“It’s tangible, it’s solid, it’s beautiful. It’s artistic, from my standpoint, and I just love real estate.” – Donald Trump

“Every day, you’ll have opportunities to take chances and to work outside your safety net. Sure, it’s a lot easier to stay in your comfort zone.. in my case, business suits and real estate.. but sometimes you have to take risks. When the risks pay off, that’s when you reap the biggest rewards.” – Donald Trump

“Well, real estate is always good, as far as I’m concerned.” – Donald Trump

“I made a tremendous amount of money on real estate. I’ll take real estate rather than go to Wall Street and get 2.8 percent. Forget about it.” –Ivan Trump

“I always felt very secure and very safe with real estate. Real estate always appreciates.” –Ivan Trump

“Ninety percent of all millionaires become so through owning real estate.”
-Andrew Carnegie

“The major fortunes in America have been made in land.”
-John D. Rockefeller

“I would give a thousand furlongs of sea for an acre of barren ground.”
-Shakespeare

“The small landholders are the most precious part of a state.”
-Thomas Jefferson

“He is not a full man who does not own a piece of land.”
-Hebrew Proverb

“Landlords grow rich in their sleep.”
-John Stuart Mill

“Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.”
-Marshall Field

“The best investment on Earth is earth.”
-Louis Glickman, American business executive

“Buy on the fringe and wait. Buy land near a growing city! Buy real estate when other people want to sell. Hold what you buy!”
-John Jacob Astor

“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.”
-Theodore Roosevelt

“Land monopoly is not only monopoly, but it is by far the greatest of monopolies; it is a perpetual monopoly, and it is the mother of all other forms of monopoly.”
-Winston Churchill

“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world.”
-Franklin D. Roosevelt

“Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.”
-Russell Sage

“I have always liked real estate; farm land, pasture land, timber land and city property. I have had experience with all of them. I guess I just naturally like ‘the good Earth,’ the foundation of all our wealth.”
-Jesse H. Jones, former federal government financier

“Buy real estate in areas where the path exists…and buy more real estate where there is no path, but you can create your own.”
-David Waronker

“A man complained that [on] his way home to dinner he had every day to pass through that long field of his neighbor’s.  I advised him to buy it, and it would never seem long again.”
-Ralph Waldo Emerson

“The best investment on earth is earth.”
-Louis Glickman

“It is a comfortable feeling to know tht you stand on your own ground.  Land is about the only think that can’t fly away.”
-Anthony Trollope

“My own recipe for world peace is a bit of land for everyone.”

-Gladys Taber
“There have been few things in my life which have had a more genial effect on my mind than the possession of a piece of land.”
-Harriet Martineau

“Energy efficiency should be on the priority list for all home improvement work these days. Canny builders will be able to provide homeowners with energy efficient measures which help them to save money and the planet.” –Sarah Beeny

“Don’t stretch yourself too much with a mortgage. Buy within your means.. it’s not worth the sleepless nights.” –Sarah Beeny

“At a time when all the other builders were selling homes with basements but without carports, we would sell homes without basements and with carports. This allowed us to provide a more appealing product at a lower price. In other words, we felt we would be giving customers greater value.” – Eli Broad

“In my experience, in the real-estate business past success stories are generally not applicable to new situations. We must continually reinvent ourselves, responding to changing times with innovative new business models”. – Akira Mori