3 Scenario To Consider Before You Buy A Property For Investment
With the implementation of several property cooling measures, the market may seem to be stabilized. The trend of property speculation has begun to die off. However, property investment is not the past. Investors are abundant even though property prices are still at the higher end, whereby several good projects are being offered by reputable developers such as gem residences for sale. The approach between an investor and a speculator is totally different, investors buy to let, while speculator buy to flip. A good investor looks for both good rental yield and capital growth. If you are considering investing in property, here are 3 different scenarios to consider, whereby property agent isn’t telling you.
- Using your retirement fund for property purchase
Let’s just say you have a sum of money in your retirement fund. And you are currently working with a full time job and contributing monthly to your retirement fund. And you have a sizeable disposable income to pay for your down payment. Your monthly contribution to the retirement fund is sufficient to cover the monthly mortgage rate, thus you do not have to fork out extra cash for payment. With that in mind, the real estate agent claims that you will be living in a condominium for free.
Here are a few details which are not being highlighted by your real estate agent. The logic is basically flawed. Ultimately, the money being utilized is basically your own retirement money. It may come with its own risk factor, whereby if you either lose your job or getting a lower salary during your future job, you will be unable to repay the monthly mortgage. The property may be a stressful financial burden.
- Rent your property, and using the rental for monthly mortgage repayment
Let’s assume that you had already purchased your first property and living comfortably in it, but are seeking for an upgrade or investment. Assuming you have a sizeable amount for down payment. The property agent would suggest you to buy a condominium, and you can rent out your previous property and use the rental money to cover your new monthly installment for your condominium. By doing this, you will be living in your condominium for “free”.
Here are what is not being highlighted. The logic here may seem to be legit and sound. However, there are two assumptions in deriving this strategy, failing either one would cause the strategy to backfire against you.
Firstly, the rental yield may be lower than your soon to be monthly committed mortgage repayment. This is because many people fail to include several expenses beforehand, such as agent commission, up keep cost, management fee and tax. Once all this factors are to be considered, the actual income yield may be a quarter lower than what is expected.
The second assumption is assuming the previous property will always be rented out. Vacant period to find a potential tenant is not taken into consideration by most beginner investors. In this current market, even the top REIT manager do not guaranteed a 100 percent occupancy rate. If the market is slow, you may also need to consider lowering the monthly rental in order to attract tenant. To be on the safe side, it is recommended to assume the net rental income to be a maximum of eight months from your gross rental income.
- Buy a condominium and repay the installment using monthly rental yield
This is the scenario every property agent is pitching towards property investor. The story would always begin with paying for down payment, a guaranteed rental yield scheme and rental yield would be used for monthly installment. By doing so, when the mortgage is fully serviced, you will own a property for free.
Fundamentally, leverage is being employed in this strategy. Leverage I layman is where someone borrowed money to make investment with a limited capital in hand. It is a common practice for the current property investor. But do bare in mind, leverage is a double edge sword. It will either be absolute gain or a enlarged loses. At the same time, losses will also be magnified. Assuming, if you pay a down payment of 400,000 for your 1 million property, and subsequently sell it at a loss of 20% at 800,000, half of your initial capital which sum up as 200,000 would be lost. Many new investors also did not add in the extra interest by the time the mortgage is fully serviced.
Property investment is practically a risk management game. The rules are simple, by making decision based on the least risk factor such as interest rate risk, liquidity risk, market risk, policy risk, and job (secure income) risk. A take home note would be, to avoid over leveraging one-self.