Wise advise to property investment

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Wise advise to property investment

Postby chrwork » Fri Mar 04, 2011 6:27 pm

Many of us want to start in this business but don't really know "how to do".
Here are some insight of property investment and wisdom that will benefit you for your investment.

Here I will outline essential tips, you can consider which might help in your decision as a property investor. These are gathered over the years from books, seminars and personal experience in investment. Hope this will help to share some light into investing in this industry. The money is definitely in property! Therefore, make the most out of every property investment!

Diversification
The general rule of not putting all your eggs in one basket applies to the property industry as well. Though in reality, an investor understands that in order to have a more diversified portfolio, he should not just focus on one industry but branch off to other industries such as finance or business. In this case, the investor only majors in the property industry. The main reason to diversify a portfolio is to reduce risk, or to "hedge". If done well it creates more consistency and improves overall portfolio performance.

If one part of the investment sector has poor performance and another is performing the investor is able to achieve a better result than if the portfolio just contained the poor performing asset.

In essence it all boils down to investor protection and knowledge. By diversifying, an investor allows a margin of error within your investment decisions by covering as many angles as you can.

In the property industry alone there are three main ways an investor can diversify his portfolio:

Property sector diversification - Commercial, Residential, Industrial

Geographical diversification - Spread risks over different economies or different geographical locations. Emerging markets can be advantageous to invest in because the property prices are expected to rise over the period of investment and emerging markets can provide huge capital gains. Established property markets provide more sense of stability, with respect to economic factors such as inflation, and from a paperwork point of view such as ownership laws.

Indirect property investment and direct property investment - REIT's, PIF's and PIN's (Real Estate Investment Trusts, Property Investment Funds and Property Investment Notes) and actual property ownership where an investor buys to lease, or even car parks and marinas (alternative direct property investments)

In the micro aspect, it is always good to have a mix of long term properties with high yields and short term properties with possibilities of higher capital gains in one's portfolio.

The 10 Seconds Rule
The 10 seconds rule of 8% for leasehold is applied by investors to maintain a high margin of safety. Meaning the first 10 seconds of considering a property should be the yield for the investor.

1) With about 8% yield, you will be having good positive cashflow every month even after paying interest and principle per month. (taking advantage of low interest at about 2-3% for commercial properties)

2) Even if interest rates do increase to 4 to 5 percent, the investor will still have positive cash flow.

3) With about 8% yield, it is easy to sell the property at a higher price for someone to buy with 4% yield. Eg. I have a $1 million property with 8% yield = $80K/ p.a. in rental. With $80k in rental, if someone were to buy the property at maybe $2 million where their yield is 4% with $80K rental income.

4) There are many people out there who will accept 4% yield, therefore selecting a property with higher yield becomes easier to sell. Buying property with 4% yield, to find another investor to buy at 2% yield might be more challenging.

5) Depreciation and maintenance of asset. With a higher yield, repair and renovation cost can be covered easily, allowing the investor to stay afloat instead of bleeding and worry about such costs.

It is possible for Singapore HDB shophouses, industrial properties and even overseas properties to give such yield. Singapore's residential sector on the other hand can sit out for a while for the prices to cool.

Profitable investments come with a high ‘margin of safety’ in the event:

1) Property prices of property drop

2) Property rental drop with economic downturns

3) Interest rates increase

4) Repair/renovation costs incurred

5) The need to sell the property; a property with a positive cash flow is easier to sell

Keep Your Golden Goose
The story of the golden goose though has different versions to it but the moral of the story is similar. The most common version is a cottager and his wife had a goose that laid a golden egg every day. They supposed that the goose must contain a great lump of gold in its inside, and in order to get the gold they killed it. Having done so, they found to their surprise that the goose differed in no respect from their other goose. The foolish pair, thus hoping to become rich all at once, deprived themselves of the gain of which they were assured.

The two main ways to make money in property is capital gains and through rental yields. Each investor differs in their risk appetite, of course the more risk and investor is willing to take, the more he is able to make in the property industry in capital gains. Some flip properties hoping to make several hundred grand in the short run, while others hold on to a property for the long term due to the good rental returns. In this rule, the investor who has a property with a high yield of 6 - 8 percent. At the same time, he was presented with an opportunity to own a brand new property with the possibilities of high capital gains in the near future, however in order for him to purchase the new property he has to sell off his current property which is giving a good yield.

Here the investor has the possibility of making a lot of money in the short term or hanging on to a constant rate of return for a longer period of time. In this scenario he understands that the ideal outcome of a high capital gain is still just only a possibility that could be affected by an unforeseen economic downturn, change in property regulations and other factors. He would only purchase the new property if he had enough cash to invest into it without selling his current property, thus keeping his "golden goose".

courtesy from www.multiplyyourdollar.com
source link : http://www.multiplyyourdollar.com/property-tips.html[/b]

chrwork
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Postby 30plus » Fri Mar 04, 2011 6:59 pm

I guess there is no residential property in SG can give you 8% raw yield, maybe except 1-2 very old one in Geylang.

And it did not talk about leverage. This is the most damaging tool to kill property investors in bad time.

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Postby tankee » Fri Mar 04, 2011 8:46 pm

if anyone know which $1m property that gives $80k rental per year, do let me know. I'll chiong there. :wink:

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