Why Invest in Property? The Pros and Cons
While there a lot of careers to choose from, there are generally only two ways to earn – either through active or passive income. Any compensation you get for fulfilling a task, delivering a service or managing others is deemed your active income. You’ve worked for it, spent time on it and, therefore, deserve to be paid because of it. Majority of the population rely on this for their day-to-day expenses, leisure funds and savings
Passive income is trickier to practice than it is to explain. It’s any income you earn without actively and regularly putting any effort into it. For example, when you put money in the bank and after a year and earn 2% from it, that’s passive income. You didn’t work for the 2%, rather the money you initially put in worked for you.
That is the beauty of passive income. You can be busy with the grind all day or relaxing in the beach, and you’re still earning all the same. The key is to find the right investment for you.
Investing in Real Estate
There are so many investments available for people to choose from, but many Singaporeans will tell you that the holy grail of all investments is real estate. Of course, this would vary depending on your tolerance, how much time you have to study investments before you want to start and how much you’re willing to invest.
Real estate is an income generating asset. That’s what makes it eye catching for anyone who has ever thought of investing in it, especially Singapore’s elite billionaires who built their empire on real estate. Not only are you earning from capital gains, but you’re also receiving rental yield.
While this has shaped the mindset of many Singaporeans to aim for property investments, it’s important to find out what the pros and cons of investing in property are. Only then can you truly assess if this is the investment for you.
Why Invest in Property
1. Monthly Income
If you’re lucky enough to find a property that can be successfully rented out – whether that’s commercial or residential, a condo or a house, then you now have monthly income. While, at the minimum, this may only cover your monthly mortgage, you now have a property that pays for itself while it appreciates in value.
With the internet, many Singaporeans are even looking to AirBnb and other short-term rental sites to rent out their properties to tourists who would pay higher than long term residents because it’s still much cheaper than a hotel.
This is a trick that most modern property investors are now sharing. Instead of using all your own money to invest in property – which usually means waiting until you have enough, you can use bank financing to pay majority of it. With this approach, you can buy a $500,000 property for $50,000, and let the bank handle the rest.
Think of it this way: a 10% return on a $50,000 worth of stocks is $5,000 while a 10% return on a property worth $500,000 is $50,000. That’s all the money you initially invested paid back. As your asset continues to appreciate, it will outgrow the interest that you have to pay the bank. This is how your property makes you money.
Some really savvy investors don’t even shell out any their own money but still earn millions from their property investments.
3. Stable Investment
Take banks as your cue in looking at real estate as a relatively stable investment, especially in comparison to other markets. Most banks will happily loan you 90% of a property’s value, but seldom will they do the same for other investments. Experts attribute this to the fact that property is always in demand and almost always appreciates.
While it’s true that the Singaporean property market has experienced a decline in the past few years – all artificially induced, research shows that it’s now ripe for a comeback, making it the perfect time to invest. This is also the reason why a lot of properties are recently being sold en bloc.
Why You Should Rethink Investing in Property
One of the many reasons why property is stable is because it takes longer to buy and sell. That makes the market less volatile, but that also makes the investor less liquid.
You can easily get rid shares if you’re in dire need of the money, but a property takes a while to sell. You need to find a credible broker, and they, in turn, will need to stage it, advertise it and conduct open houses. If you’re lucky, it sells in a few weeks; if not, a few months.
2. Ongoing costs
Unlike other investments, the physical structure of your real estate investment depreciates. It requires constant maintenance for the upkeep, insurance costs and mortgage. Even more if it’s a residential property that requires association dues and repairs requested by tenants.
These ongoing costs can rack up to a lot of money, especially if the property is old or not built well. That’s why it’s imperative to invest in a property where the rental income is higher than all the possible expenses that it would incur maintaining it.
One of the main challenges in owning an investment property is finding a tenant, and the right one at that.
Whether you invested in a commercial or residential property, renting it out is important to ensure that you’re getting the monthly cash flow that can pay for all the ongoing expenses. If it doesn’t have tenancy, you’ll have to cover all the costs out of pocket.
This is probably why some property investors – or the property managers that they hired – are not as strict in vetting tenants. They’re more than happy to just have a room rented out that they neglect to see the nightmare that could spring from bad occupants. There are tenants who would refuse payment, cause damage to the property or get too many complaints from their neighbors. As the owner, you need to wary of them.
Property Investments in Singapore
Singapore is definitely a great place to invest in property. It’s a strategic location with a progressive government that supports the continued growth of the market. Even foreigners can take a piece out of this pie. They can invest in everything from commercial, industrial and even residential properties, apart from landed residences. The latter is reserved for local property investors.
If you think that you can easily wade through the disadvantages of investing in property, then welcome to the remarkably rewarding world of real estate investment. With discipline and up to date strategies, you can follow the long line of successful Singaporean investors who have made property their bread and butter.