By guest contributor Calvin Yeo (reproduced with permission from his blog www.investinpassiveincome.com)
I am sure many of you have heard of how people like Donald Trump and Li Ka Shing became billionaires through Real Estate. Can Real Estate do the same for you? How can you make lots of money through Real Estate? However, do note that Donald Trump and Li Ka Shing did not make become ultra-rich through Real Estate Investment, they made huge bucks doing Real Estate Development.
Why Real Estate Development is so Lucrative
What makes Real Estate Development so lucrative? In Singapore, developers buy land at a Price per Square Foot per Plot Ratio, throw in the costs to calculate breakeven price and then markup a good 15-25% to determine theselling price. It is quite transparent as most land sales are publicly announced and analysts always state expected selling prices. So it’s reasonable to assume a 15-25% margin, which is still a huge amount for development sites, e.g. condos can have Gross Development Value of hundreds of millions, 25% of $100 million = $25 million.
In Malaysia, property developers make obscene amounts of money as they normally buy land really cheap, calculated from a simple Price per Square Foot basis. Furthermore, developers leverage on the bank’s money and pre-sell the developments before even starting to build! Now you know why developers are so rich.
Real Estate Development is normally carried out by famous huge developers like Cheung Kong Holdings, Capitaland and Trump Organization etc. Normal people like you and me probably wouldn’t have the resources or know how to develop properties. You can choose to be a boutique developer, but since banks normally do not like to finance land purchases, deep pockets are necessary to procure the land. Pre-selling the site can also be difficult for a small developer without a long track record, so construction and development costs may have to be borne upfront.
Developing is also a high risk game, one which unless you are highly loaded or part of a Public Company, you have no choice but to succeed or you will go bust. The wrong market timing or wrong development strategy can make a small developer bankrupt overnight. I know this as I have been part of a development that went really badly. Just one wrong move can destroy all the years of hard work and profits. So I have the utmost respect for the niche Real Estate developers, but Real Estate development is really not my cup of tea, at least not right now.
How About Real Estate Investment?
So now we come to Real Estate Investment, where the strategy is to buy property at a good value, make Passive Income from rental and also gain from Capital Appreciation. Since Real Estate Investors learn to invest at the right time and not overleverage, a market downturn is of little concern to a seasoned Investor. Unlike the Real Estate Developer who needs to sell as soon as possible to reduce debt burden, a Real Estate Investor can patiently wait for the right timing while collecting rent at the same time.
My Real Estate Investment strategies centre on Rental, which is really the Passive Income we are looking for. Some people have made huge money in very short periods, but I attribute most of it to be simply luck. Investing in Real Estate without looking at Rental is not investing at all; I will talk about Real Estate Investment vs Real Estate Speculation in a later post. A Real Estate Investor does not need to make money by selling; he/she makes money by holding the Property and collecting Rental.
So now that I have set some expectations, I would like to reiterate – Real Estate Investment may not make you massively rich overnight, but it is still one of the strongest Passive Income generators and has the potential to keep pace with inflation at least.
Guest contributor Calvin Yeo is the founder of the Making Passive Income blog.He graduated with a Business Major in Finance and Accounting and spent a few years working in an investment bank. The knowledge from his studies and working experience serve as a good base for him to grasp the ideas for passive income generation.