Your search results

Discover the 7 Unique Attributes of Real Estate Investing

Posted by Jayson Ang on January 16, 2023
| 0

Real estate is without a doubt one of the oldest and most valuable asset classes out there; no wonder 68% of the world’s wealth is held within the four walls of homes. It’s a significant commitment to make the biggest purchase of your life, and it should be given due consideration.

Real Estate offers advantages over other investment vehicles like stocks, bonds, and luxury goods – and in this article, we’ll show you why! We’ll explore 7 unique traits of real estate investments and give you an inside look at why this asset class could be a great choice for you. So, if you’re thinking about investing in real estate, or want to know more about the different options out there, this article is for you!

#1 High Leverage 

Real estate is one of the few asset classes where buyers can leverage their purchase to amplify their returns – almost like taking a loan from a friend while playing Blackjack and betting big, confident of a win! By definition, leverage is the use of borrowed funds to magnify gains.

Leverage is often seen as a risky venture, only available to those with considerable means. The upside is that any potential profits are increased; the downside being that any potential losses can be equally as large. Take the stock market for instance – no broker would permit a customer to purchase $10,000 worth of stocks with just $2,500 in cash, and expect to be repaid the remaining sum at a later date.

If you’re buying property in Singapore, you can usually leverage up to 75% of the total cost using a bank loan, while putting down the remaining 25% in cash or CPF. This means you don’t have to pay the full price upfront, which is great news for many first-time homebuyers! The extent to which you can leverage will depend on your particular situation and profile, but this ratio provides a great starting point.

The only limitation to leveraging a purchase is the requirement to demonstrate the capacity to make the loan’s monthly payments – usually verified with proof of income and the assessment of any other debts.

Leveraging real estate can be a smart investment, as you only need to cover monthly mortgage payments and the bank’s interest – plus, you’re essentially taking advantage of the bank’s money, as the debt is reduced over time thanks to inflation. As the value of the dollar decreases, the exact amount paid to the bank is still the same.

An example of this is the monthly mortgage for a HDB flat purchased 30 years ago – it could have been hundreds of dollars back then, but thanks to inflation, the value of the dollar has gone down, making this a very small amount now. Put simply, inflation can be a great way to decrease your debt when taking out a loan from the bank.

#2 Capital Appreciation

In Singapore, where space is a premium, the value of real estate often rises, offering homeowners a profitable opportunity to sell their property for a higher price. With demand for homes consistently strong, capital appreciation of real estate can be expected to continue.

The demand for real estate, along with a diminishing supply, has been pushing up prices in the housing market. This is clearly seen in the current prices per square foot of new launches, which are much higher for smaller sizes. Ultimately, it all comes down to the rising price of land for developers – a cost that is unfortunately passed on to consumers.

The real estate market has seen a significant rise in capital appreciation due to an increase in construction costs. Not only has the scarcity of construction materials contributed to this, but the lack of labour has also had an effect. In 2021, the pandemic triggered a sharp rise in home prices and the condo resale market experienced impressive growth in all districts of Singapore.

With leverage, a buyer can put down a $250,000 downpayment on a $1,000,000 home. If the price rises by just 5%, that would equate to a $50,000 return – a 20% yield on paper! Mind you, other costs such as interest, stamp duty, and legal fees should also be taken into account.

#3 Income Generation

Real estate stands apart from other investments as it has the potential to bring in a reliable and steady source of income from rental payments. Homeowners have the option of leasing out the entire property or parts of it, thereby increasing their monthly cash flow. This cash can then be used to pay off their mortgage, invest in another property or put towards their other expenditures. However you choose to use the extra funds, it can bring a greater degree of flexibility to your budget.

#4 Useable

Real estate isn’t just for renting, it can also be used for its primary purpose – living in! Much like a luxury car, a handbag, or a watch, a house can bring immense value to its owner. After all, a house is not only somewhere you can live in, but also a place where you can spend most of your time. Plus, you can easily decide whether to rent it out or have family members over.

#5 Flexible Repayment Options: Equity Cash Out / Term Loan

As mortgages take a long time to repay, homeowners can reap the rewards of their property’s appreciation through Equity Cash Out. This increased liquidity opens up possibilities for longer-term planning and investing, or even getting a second home. In other words, it gives homeowners greater financial flexibility!

Stretching mortgage repayments over a longer timeframe may not be for everyone, but it can be quite advantageous if the value of the property keeps increasing and buyers wish to access their equity without selling.

In Singapore, equity term loans are only available to private property owners and are subject to certain restrictions. The maximum loan amount is 80% of the property value, less any CPF contributions made to the property purchase and any existing debt. Furthermore, the Total Debt Servicing Ratio of 60% applies, unless the total loan amount (including the new loan) is lower than 50% of the property value.

Equity home loans may appear attractive, however, it is important to note that CPF cannot be used to pay them like with other types of home loans, plus, there are added legal and administrative expenses associated with securing the loan.

Let’s examine the structure of an equity term loan:

Mr. A bought a house in 2012 for $1,000,000. Thanks to price appreciation, ten years later, the home is now valued at $1,400,000, and though Mr. A has made some progress on paying off the loan, he still owes $400,000. So, the bank has agreed to offer him an equity term loan of $170,000 based on the calculations made.

The final loan of $170,000 in cash came with an incredibly low interest rate, which could mean that Mr. A pays even less interest with his refinanced loan than his original one. Although the process of obtaining an equity term loan can be lengthy and complicated, it’s still a great option for taking cash from properties that are doing well without needing to sell the entire asset.

#6 Debt Financing instead of Equity Financing

Real estate is financed through debt rather than equity, making available a wide range of financing options. This means that when your property increases in value, you get to keep all of the profits – the bank doesn’t share in your windfall!

Banks here are primarily concerned with making money through regular and predictable payments, which is achieved by collecting interest on top of the initial sum lent. However, in the event of an inability to repay the loan, the bank is legally entitled to take possession of the property as security.

#7 Illiquid in Nature – Low-Volatility/ Safe Haven

The liquidity of real estate is generally lower than that of other asset classes such as stocks due to its physicality (and size!). The process of buying or selling a property typically takes anywhere from 3 to 6 months, with the first three spent on marketing and locating a buyer, and the next three dedicated to negotiations and the transfer of funds and signing of legal documents.

Apart from numerous legal commitments attached to a property, the liquidity of real estate differs around the globe based on the laws that oversee the buying and selling of such. Nonetheless, Singapore’s property market is usually less liquid than other countries due to our cooling measures. For instance, private residential properties have to be held onto for a minimum of 3 years as owners usually don’t want to pay Seller’s Stamp Duty which is applicable during the first 3 years of possession.

Compared to residential properties, commercial ones have more liquidity as they are not subject to the same regulations. Nevertheless, the physical aspect of real estate and the hefty price tags associated with each deal make transactions comparatively rare when compared to other investments. But illiquidity does have a silver lining, as it steadies the market and brings down price fluctuations. This may mean lower price increases, but also protects the property from sudden value drops.

In Singapore, the government regulates the real estate market and imposes rounds of cooling measures to safeguard it from potential bubbles. These steps have enabled a steady and balanced flow of investment in the sector, allowing investors to remain confident in their investments.

The pandemic has highlighted Singapore’s status as a real estate safe-haven, as foreign investors found ways to invest in our properties despite the high Additional Buyers’ Stamp Duty (ABSD) rates. With its reputation for being highly efficient and low on corruption, Singapore has become an attractive asset for investors, prompting many to buy local property.

Good Debt Vs. Bad Debt

One of the cornerstones of real estate investment is being able to differentiate between good and bad debt. While a substantial investment may seem like a drawback, it is, in fact, a smart move: investing in real estate serves as an inflation buffer and generally offers attractive returns should you ever choose to resell. Through leveraging, you can take advantage of inflation to eventually pay off the debt.

As opposed to buying something that’s guaranteed to decrease in value, like a car, which won’t give us a return on our investment, investing in real estate is an inflationary asset that can bring rewards.

Conclusion

To wrap it up, real estate is a great asset to store value due to its diverse features. Apart from its usability and illiquidity, it also allows us to leverage other people’s money to grow our investment. If you’re still pondering over asset inflation, stay tuned to my upcoming article! I am always here to answer any of your questions or have a friendly chat!

You May Also Like …


Don’t Miss Out: Take Control of Your Life in Your 30s and 40s
All Blog Posts Opinion

Don’t Miss Out: Take Control of Your Life in Your 30s and 40s

As we sail into our mid-30s, time seems to accelerate and soon enough we find ourselves heading toward the big...
Read More
A Step-by-Step Guide To Upgrading From an HDB Flat To Your a Private Property
All Blog Posts Buying Tips

A Step-by-Step Guide To Upgrading From an HDB Flat To Your a Private Property

Having a dream of upgrading from an HDB flat to a private property is not an uncommon one for those...
Read More
It Seems Like Less Folks Living In HDB Flats Are Chasing After The Dream Of Owning A Condo
All Buying Tips

It Seems Like Less Folks Living In HDB Flats Are Chasing After The Dream Of Owning A Condo

In Singapore, the appeal of owning a condo after owning a Housing Board flat seems to be losing its charm,...
Read More
3 Property Owners Reveal Their Major Mistakes: The Pitfalls of Ill-timed Home Sales
All Opinion Selling Tips

3 Property Owners Reveal Their Major Mistakes: The Pitfalls of Ill-timed Home Sales

Let's face it, the web is bursting with rags-to-riches tales of successful homeowners. And with realtors consistently showcasing deals that...
Read More
Introducing Top 5 Power Property Tips
Top 5

Introducing Top 5 Power Property Tips

Hello, everyone!  We are excited to welcome you to our blog posts!  On this blog, we will be sharing daily...
Read More
Transaction Volumes Remained Subdued Due To The Dearth Of Inventory In Q4 2022
All Reports

Transaction Volumes Remained Subdued Due To The Dearth Of Inventory In Q4 2022

URA Flash Estimates As we come two years post-pandemic, the Urban Redevelopment Authority (URA) estimates reveal a moderate 0.1% quarter-on-quarter...
Read More
Discover How The CPF Accrued Interest Can Impact Your Property Sale Proceeds
All Blog Posts Buying Tips

Discover How The CPF Accrued Interest Can Impact Your Property Sale Proceeds

Singaporeans are renowned for being smart and savvy - especially when it comes to selling their homes, whether it's an...
Read More
Are You Considering Paying Off Your Mortgage Loan Ahead of Time? Is It the Right Financial Move?
All Blog Posts Buying Tips

Are You Considering Paying Off Your Mortgage Loan Ahead of Time? Is It the Right Financial Move?

For many Singaporeans, owning a property is a dream come true - a milestone in the journey of wealth-building, creating...
Read More
5 Risks Upgraders Should Be Aware of To Avoid Financial Troubles When Progressing Their Property
All Blog Posts Buying Tips

5 Risks Upgraders Should Be Aware of To Avoid Financial Troubles When Progressing Their Property

Imagine yourself sitting with a real estate agent, talking about your future financial objectives. You express your aspiration to increase...
Read More
Top 5 Instagram-Worthy Spots in Singapore
Mandarin Top 5

Top 5 Instagram-Worthy Spots in Singapore

Singapore, a beautiful city-state known for its stunning architecture, lush greenery, and vibrant culture, is a photographer's paradise. The island...
Read More
The Sneaky Role of Property Appraisals in Shaping Singapore’s Home Prices
All Buying Tips Opinion

The Sneaky Role of Property Appraisals in Shaping Singapore’s Home Prices

At times, it feels less like a precise science and more like tossing a set of tarot cards into a...
Read More
The Top 10 Traits Of A Good Real Estate Agent
All Blog Posts Buying Tips Top List

The Top 10 Traits Of A Good Real Estate Agent

When it comes to real estate transactions in Singapore, selecting the right real estate agent can be the key to...
Read More
Downpayment For Condo: How Much Do First-Timers Need In Singapore?
All Buying Tips

Downpayment For Condo: How Much Do First-Timers Need In Singapore?

The process of purchasing a home in Singapore is rarely described as a walk in the park. The journey towards...
Read More
Beware! Spot These Warning Signs Before Making a Home Purchase!
All Blog Posts Buying Tips

Beware! Spot These Warning Signs Before Making a Home Purchase!

It is important to thoroughly check the condition of the home you are considering purchasing to ensure it is not...
Read More
A Comprehensive Guide for Buying Landed Real Estate in Singapore
All Buying Tips

A Comprehensive Guide for Buying Landed Real Estate in Singapore

Imagine the possibility of owning a terrace house that's priced around a cool $4 million. A hefty sum, isn't it?...
Read More
5 Proven Strategies for Increasing the Value of Your Singapore Property
Mandarin Top 5

5 Proven Strategies for Increasing the Value of Your Singapore Property

In Singapore's competitive real estate market, adding value to your property can be the key to making a profitable investment....
Read More
Investment 101: The Top 5 Best Long-Term Values In Singapore’s Property Market
Buying Tips Mandarin Top 5

Investment 101: The Top 5 Best Long-Term Values In Singapore’s Property Market

Investment 101: The Top 5 Best Long-Term Values In Singapore's Property Market When it comes to purchasing property in Singapore,...
Read More
When Should You Consider a Shorter/Longer Home Tenure?
All Blog Posts Opinion

When Should You Consider a Shorter/Longer Home Tenure?

For the financially conservative Singaporean, a lengthy home loan tenure can be daunting. Borrowing money can cause immense stress, and...
Read More
5 Things to Know About Singapore’s Public Housing System
Blog Posts Buying Tips Mandarin Top 5

5 Things to Know About Singapore’s Public Housing System

5 Things to Know About Singapore's Public Housing System With over 80% of Singaporeans living in public housing, it's important...
Read More
Top 5 Must-Try Foods in Singapore
Blog Posts Mandarin Top 5

Top 5 Must-Try Foods in Singapore

Top 5 Must-Try Foods in Singapore Singapore, a melting pot of cultures and cuisines, offers a diverse and tantalizing array...
Read More
1 2 3 15

Compare Listings