By Property Soul (guest contributor)
Flying back from Jakarta in the evening, I managed to get a few hours of sleep before boarding the early morning flight to Perth for a week-long family trip. The first part of the vacation was a farm stay in the countryside. After we checked in and made our way to our rented cottage, I could finally rest my body and soul.
I looked outside the windows and found myself surrounded by cows, sheep, emus and chickens. While I was watching the farm animals, they were also staring at an exhausted ‘animal’ lying on the couch. The next morning this exhausted animal was almost fully recharged and followed the family to feed the ‘far more energetic’ farm animals.
During the sheep feeding session, a confused sheep suddenly tried to ‘kiss’ the chest of my younger daughter. Apparently, it had mistaken the logo on her jacket as the dried leaves because they were the same color. I suddenly recalled a similar incident during a school outing to a goat farm in Singapore. We were feeding the goats when one of them wanted to ‘eat’ my child’s windbreaker too. The kindergarten teacher immediately pulled the cloth out of the goat’s mouth.
That left me to wonder: Can the sheep really tell if a wolf in sheep’s clothing is in the herd?
Four questions to judge whether an investment is a good or bad one
Similarly, can property buyers tell a good buy from a lousy investment when approached by the marketers? If they can, why do so many people have regrets buying the wrong properties or investing in doomed crowdfunding projects? (If you missed it, read my recent posts “4 things buyers wish they knew before buying a property” and “Can’t answer these 5 questions? Stay clear of crowdfunding”.)
How many of them are like the innocent sheep that can’t tell the difference between the grass and a piece of cloth and choke after eating the wrong thing? How many of them see all projects or units marketed by developers or agents as good property investments regardless of the quality, location, pricing and return?
The SMART Expo will be back in Singapore again over the weekend. After speaking in three consecutive expos, I am not invited this time. I am not surprised. I did manage to draw a crowd every time. But it was awkward for a speaker like me who talked about risks of buying overseas properties and the reasons to avoid unprofitable investments when the sponsors had paid thousands to market overseas projects and alternative investments there.
Just in case any blog reader asks me the ‘is it a good investment’ question after visiting the expo, here are the four questions to ask yourself. And pardon me for repeating myself again.
- Who are the other buyers?
Are they sophisticated buyers or just laymen of the market? Are they savvy investors or just an “average Joe” like you?
- Can you trust them?
How much do you know about the developer/marketer? Can you trust that it will complete the project on time and with acceptable quality? Will it run away when the market tanks?
- Why are the locals not buying?
Why is the attractive investment not being snapped up by the locals? Why does the developer/marketer have to spend so much time, money and effort to go overseas and market to you?
- Where is the secondary market?
Is there a resale market and a ready pool of buyers for these type of investment projects? Can you easily find anyone to buy it from you or sell it back to the marketer next time?
Two ways tell a good bargain from a bad deal
It is not uncommon to see some buyers boasting that they just bought a good property or a gem with high potential, while it is obvious they are getting the short end of the stick.
There are two simple ways to immediately tell a good deal from a bad one:
- Above or below valuation?
You can always check the valuation online (URA or SRX) from the last few transactions of similar properties.
That’s why you can never enjoy good value-for-money if you buy brand new units in uncompleted projects directly from developers when you are asked to pay ‘future prices’ much higher than similar properties nearby.
For a more thorough research, I recommend checking past transactions all the way back to the last property down cycle.
- Positive or negative return?
There are different methods to calculate the return of a property. A simple way is to calculate the cash-on-cash return for the first year.
Cash-on-cash return = 1st year cash flow / Total cash investment
1st year cash flow = (monthly rent – loan repayment – management fee – property tax – insurance) x 12
Total cash investment = downpayment + stamp duties + legal fee + renovation + miscellaneous expenses
Remember what I said in my book No B.S. Guide to Property Investment?
If there is a probability formula of finding a good deal, it may come one-third from the buyer’s insight, another one-third from the buyer’s discipline (hard work, patience, persistence, etc.), and the last one-third depending on market conditions and opportunities.
And of course, buying the right property at the right time makes all the difference here.
Let me share with you how to tell savvy investors from average ones in my next blog post. Until then, tell me how you know you’ve found a real property bargain or a fake one.