"In particular, before investing in property, investors should be aware that rising vacancy rates, declining rentals and impending interest rate increases mean that they may not always be able to rely on rental income to service their investment property loans.", noted MAS in its latest Financial Stability Review.
In this article, I will briefly provide some tips on property purchases.
Do not listen to the advice of others blindly
I know of an individual who listened to his property agent to buy many properties for investments. These purchases were highly leveraged. The individual did not do her own calculation and planning but followed the advice of her property agent blindly. Her financial situation is now so bad that any fresh graduate’s financial situation is better off than her. She lost all her properties, sold them at massive losses and owe the bank a mountain of debt.
Hence, do not listen to the advice of others blindly. They can be your friends, relatives, property agents or even your spouse.
It is possible to make a lost despite buying at the bottom
The Edge reported that a property seller lost $111,000 despite buying it near the bottom of the market. Why is this so?
Every property is unique. This means your friend’s massive gain in property investments does not imply your property will also make money. It is like buying a stock in which the stock prices may not necessarily move in tandem with the broad market. This is due to non-systematic risk in stock. For property, there is also a non-systematic risk. Such a risk is unique to each property.
In order to remove such non-systematic risk, the only way is to diversify into many properties. But this is not possible for most people as the capital and debt required will be too large. That is why it has been said that property investments are meant for the ultra networth.
I know of another individual who diversified into 10 residential properties but these are overseas properties. While it appears to be prudent, these overseas properties did not do well. After taking into account of high taxes, maintenance, interests payable for the mortgage loans and foreign currency risk, the net rental income is practically zero. There was no capital appreciation for the past 10 years.
Over exposure to properties can ruin your retirement
MAS also warned that the more households pay towards property, the less they have left over for retirement. In the MAS report, it suggested various property monetisation schemes such as Lease Buyback Scheme offered by the Housing Board and Silver Housing Bonus.
In my personal opinion, neither the Lease Buyback Scheme and Silver Housing Bonus are safe options. The Silver Housing Bonus requires the sale of existing property in order to downgrade and the Lease Buyback Scheme is the sale of remaining lease. As the population ages, there will be huge number of individuals hoping to sell their properties anyway. The question is this: who will be the buyers? I doubt there will be any except the government which will end up being the ultimate buyer. Effectively, this means taxpayers are going to bailout those who have failed to plan for their retirement.
Buying a property is not retirement planning
In Singapore, purchasing a property for investment is probably not retirement planning. It is more like speculation. Why do people buy property when it is so expensive? Some people buy small apartments because they cannot afford larger units. But have they ever considered whether will there be a sustainable rental market? When the rental income is not sustainable, how can they rely on it for retirement?
I have met a number of individuals who are now suffering because they place all their eggs in one basket. They are suffering because their rental yield is a pathetic less than 2% and they are constantly worried that their property will be left vacant. They do not have any other significant source of passive income because all the eggs are in a single basket. Of course they can sell if they really run out of cash. But the problem is that everybody will want to sell at the same time because Singaporeans are asset rich but cash poor. I would say that in 20 years time, the perfect storm will be coming when retirees have to sell their properties all at the same time. Who will be the buyers? Perhaps during that time, I can pick up a few properties!
So, how should one plan for retirement? I advocate the 1/3 approach which is 1/3 of passive income deriving from rental income, 1/3 from annuities and 1/3 from high risk investments such as stocks/unit trusts. Unfortunately Singapore property price will cost at least $1.5m for a decent condominium. For this asset allocation to work, one networth has to be at least $4.5m excluding the residential property! As it can be seen, the property game is actually for the rich. The average joe shouldn’t try to act rich by investing in property.
The bottom line: If you don't have an asset of $4.5m (excluding residential property), don't buy another property!
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