By Gerald Tay (guest contributor)
This week’s article is in the form of an email from a reader to Gerald Tay about his views on property as an investment, and his (lengthened) reply to that reader. Enjoy!
Email From Reader:
I am a subscriber of your blog and often read your contributions there! Frankly, as I’m a property agent you strike fear in my heart when you share your dismal views on the property market. I genuinely want to advise my clients correctly in the best way to utilize their funds for a property investment.
May I ask – if you find property to be a poor choice for investment, what would you suggest otherwise? Putting your hard-earned cash in the banks and to having it eroded by inflation is surely a poor alternative and one that even lax investors would try to avoid. Would appreciate you sharing your insights. Hope to hear from you soon! Many thanks!
Gerald Tay’s Reply:
First, do allow me to clarify that my opinions in my blogs are never meant to strike fear into people buying property. They’re meant to impart a strong sense of reality and pragmatism to ordinary buyers and investors.
Second, I’ve never said that property is a poor choice for investment. It’s the investor, not the investment that matters.
Property has been the favorite traditional investment for Asians. Many believe one cannot go wrong when buying property for the long term. This misinformation is terribly misguided by people with vested interest in your money. Property buyers do lose money in property even when holding for the long term.
The Rich make money in real estate?
You often hear people say, “The Rich makes money in real estate.” This is only half true – the Rich make money selling real estate as property developers – and not as retail buyers. There’s a huge difference in creating real wealth selling wholesale and buying retail.
As retail buyers, we’ve to be smart to survive in the large predatory ocean to avoid getting eaten!
J, have you tried climbing a mountain before or driven a race car like a race driver? I haven’t, and most likely you and many others have not either, because we think those activities are very dangerous and could be fatal.
But that’s not the case for professional mountain climbers or trained race car drivers. Why? Because they are trained under the toughest conditions to help them prepare for the many unforeseen circumstances, i.e. the car skidding or the rope breaking halfway up the mountain. Their training prepares them to deal with tough situations. The skill of the driver or the mountain climber is what mitigates the risks for them.
Many investors invest their hard earned money without enough training, education or any specific knowledge of the investment.
Are there opportunities in the current market?
Unless one is satisfied with a less than 4% net ROI with interest rates rising, falling rentals and rising vacancies, I think buying now may not be wise if the buyer is looking to accumulate wealth.
Many investors lack training, education and skills, and hence will never find that gold at the end of the rainbow. Instead, they ended up buying ‘junk’ properties (both local and overseas) because of herd mentality.
The other silly reason they end up with “worthless” properties:insufficient cash for down-payment in our local market. And so they buy ‘shoe-box’ units or cheap overseas properties with guaranteed yields offered by developers.
Even if inflation is 4% and bank deposits are 1%, these are not good reasons to buy any property. But this is what I’m seeing many investors currently doing.
It took me two years of intense due diligence and research, starting in 2001, before buying my first investment property in 2003. It took me three years to partner and trust my overseas partners, do hard due diligence and find co-investors before my first successful overseas joint property purchase in 2013, followed by another in 2014. How many investors are doing that today?
Many investors I know – simply take a queue number or ballot, take two minutes or two hours to make an investment decision on the spot without even understanding exactly what the investment is!
Is property a good hedge against inflation?
High inflation can erode one’s savings. But losing your money in a bad investment choice can multiply that loss.
$300,000 of cash today combined with an inflation rate of 4% per annum will be worth roughly $250,000 in 5 years. Your “loss” is $50,000 ($10,000 a year). A bad investment choice, on the other hand, can lose the investor much more than just $50,000 if you factor in all mortgage interest, expenses, selling the property at below what was bought, renting at a negative cash flow every month, and the mental stress!
Losing money to inflation may be a painful inescapable alternative when there’s a sudden huge oversupply of money in the markets, but losing money in a wrong investment due to greed and impatience is just stupid. Patience is one important key to wealth.
Be wary of the “gurus” who are paid to boost the market. Take, for example, the recent announcement of the Jurong Lake District and the upcoming HSR (High Speed Rail) connecting Jurong and Malaysia. These “gurus” say don’t wait any longer and it’s a good time to buy properties in the locality now. I strongly think otherwise – new launch prices or sellers in that location will ask (or have already asked) for future prices because of the media reporting and hype, thus negating any investment potential.
Slow growth ahead
There will be at least a decade of muted growth in the Singapore economy due to low productivity. The government trimmed GDP growth expectations to just 2 to 4 per cent until 2020 and beyond. By 2030, an ageing population will further curb prices due to lower buying activities. Where do you think property prices will be then? Just look at Japan and you’ll see what’s in store.
Many forecasters have an agenda that reflects the interests of the people who pay their salaries.
If they are paid to be positive, they will be positive.If they are paid to be negative, they will be negative.
Forecasters do not have crystal balls, they simply have bills to pay. Markets (stocks, real estate, bonds) only make money when we trade in them.
I’m a career investor. My investments dictate my net worth. My livelihood depends greatly on making sensible investment decisions.
I can be brutally honest, but my honesty is meant to serve as a wake up call to the many gullible investors out there. I hope they do not lose money because of their ignorance.Property is not a dismal investment tool as long as the buyer is educated. That is why financial knowledge is so important. You can only rely on you.
I hope this helps answer your question.
By guest contributor Gerald Tay, who is the founder and coach at CREI Academy Group Pte Ltd, an organization dedicated to empowering retail property investors with smarter investing philosophy and strategies. He is a full-time investor with over 13 years of solid experience in building his wealth through Property Investment and is financially wealthy today.