Are properties good investments? I have some experience investing in property (in addition to writing a property blog), and in this post I will share my opinion with you. But please note that this is not financial advice – every individual’s situation is different so do your sums (or consult your advisor) before you make any investments.
Here are my top reasons why properties make good investments:
1) Cheap leverage available to help you boost your return.
One of the biggest advantages of investing in property over other assets is that you can borrow a large sum of money at a low interest rate to buy a house. If the price of your property goes up, your return on the money you invested is multiplied.
Of course if prices fall, your equity will decline even faster. But as long as you are not too greedy and have holding power, over the long term you will usually come out fine.
And when you buy the right property at the right time, you can make a lot of money. Imagine getting a bonus of several YEARS pay when you sell your property for a profit.
2) Can generate passive rental income.
You can rent out your property (or a room in your property if you are living in it) to generate rental income. This rental income can help to offset your mortgage, part of which is going towards the principal repayment, thus helping you to build equity in your investment. If your yield is high enough, you can even get positive cash flow after paying off your mortgage and the maintenance fees.
3) Ability to make enhancements
If you’re the kind of person who likes to fix things, you can add value to the property by doing a renovation, or sprucing up the interior design. Even just a fresh coat of paint can do wonders for the value of the property.
4) No capital gains tax
Like stocks, there is no capital gains tax when your property appreciates in price and you sell it for a profit (unless the IRAS comes after you as a property trader). Contrast this with your employment income where up to 20% of it (depending on your tax bracket) goes to the taxman.
5) Property is a well trodden path towards wealth creation.
If you look at the Forbes 40 richest people in Singapore, you will see many people who made their fortunes developing and investing in real estate on that list. Or just look around you – the average Singaporean’s wealth probably comes more from the appreciation of his HDB flat than from any other asset.
Disadvantages of investing in property
But properties do have some disadvantages versus other types of investments that you should be aware of.
One disadvantage is that properties are troublesome to buy and maintain. House hunting can take lots of effort and time, the negotiations to buy can be complicated, then there are the repairs, dealing with tenant complaints and so on.
Also properties are an illiquid asset – that means it is not as easy and as quick to convert to cash when you need it. Selling a property may take months depending on the market.
And the biggest obstacle for most people when investing in properties is that it requires a large amount of capital to get started. Saving enough money to buy one property could take a couple 3 to 5 years of scrimping.
Please note that I am not recommending that you go and invest in properties right away. In fact, now that prices (based on the URA Price Index) have surpassed the peak in 1996, you should be extra careful. Don’t forget Warren Buffett’s advice: “Be fearful when others are greedy and greedy when others are fearful.”
And property is not the only avenue through which investors can make money. A smart investor can make money in any asset class IF he knows what he is doing. You need to figure out where your interests, knowledge and abilities lie before investing. And I wholeheartedly believe that you should only invest in something you know (i.e. don’t blindly follow the crowd).
The point of this article is that because of the advantages I have described above, and based on my experience and what I have observed, property is the most common way for the average person to build up a significant amount of wealth.