Imagine yourself doing nothing but collecting money every day, that has to be one of the biggest fantasies to many Singaporeans.
In the past, only the wealthiest in the world have this privilege and this has been the most well-kept secrets of wealth for thousands of years.
What you might not realize is that you and me are lucky enough to live in the era where anyone has a chance to tap into this. The Investment strategies used to be exclusive for the rich, now are available to you too.
This secret has been tested countless times from ancient lords who own the lands to industrial capitalists who own the factories. The wealthiest spend all their time and energies to build Income Generating Assets (IGA) so they don’t need to work anymore.
One of the easiest ways to build IGAs is to own property which generates rental income. But the rich don’t just buy property like most of the people do, they do it in different ways. Let me explain…
If you think property investment is about flipping properties, buying low and selling high, that is a deadly misperception.
If you don’t want to work, you have to work to earn enough money so that you won’t have to work. – Ogden Nash
You see, the rich enjoy their lives and do what they love to do. Flipping property itself is just another rat race, and you will still never be able to retire. What you want is income without much working.
There is nothing more deceptive than an obvious fact. – Arthur Conan Doyle
I was first enlightened by billionaire Phillip Ng’s stewardship concept. The assets owned by the wealthiest people are obvious, but not straightforward. They are a little different from what most people understand, and that little difference, my friends, makes all the differences in wealth.
Here is how the wealthiest choose their property investment… Optimally Leveraged and Discounted Properties. But before we dive into the details, let’s clarify some wrong perceptions.
Most people’s properties are liabilities to them, not assets
When it comes to investment in Singapore, you cannot ignore property. Land ownership is perhaps the most ancient expression of wealth, and our little red dot certainly gives solid proof for this.
Thanks to our insanely overpriced property market, nearly all of our Singaporean billionaires were built upon real estates. This, unfortunately, gives a false impression that you will never go wrong by buying property, it is no surprise that property is preferred retirement asset for many Singaporeans.
Conventional wisdom always sound simple and intuitive but often half true. It is the fine details which makes some richer than the other. – Ivan Guan
The secret of investing in property for income was popularized by Robert Kiyosaki’s “Rich Dad, Poor Dad”. While many people repeat the story that car is liability and property is an asset, many failed pay attention to the details. I always hear people say:
I am buying this property for own stay and investment.
This house is the asset I leave to my children.
If you look carefully at Robert Kiyosaki’s diagram below, you will realize owner stay property is a liability to you, NOT asset.
This is simply because you pay the mortgage every month, and the house never puts money in your pocket. If it generates income, it is an asset. If it generates expenses, it is a liability.
On contrary, what the rich do is very different. They own multiple properties and the properties are rented out to generate income for them.
Physical Properties could be the worst “investment” in your life.
In a detailed report, Jesse Colombo, the man who predicted US property bubble, pointed out how vulnerable Singapore property market is.
Singapore’s house price-to-income ratio (Property Price / Annual Income) is 25.38. That means most of Singaporeans have to work more than 25 years to pay off their mortgage loans. In another word, if you “invest” in a property and stay in it. It is an “expense” for the rest of your life.
It is probably hard to grasp this concept because such phenomenon is a norm in Singapore. But if you have a chance to compare this globally, it may surprise you:
- U.S.’ average house price-to-income ratio is 2.16
- Germany’s ratio is 4.78
- U.K.’s ratio is 6.73
- Japan’s ratio is 6.99
So now you should understand, with the same amount of capital, Robert Kiyosaki can buy 11 properties in the US and you can only buy 1 in Singapore. He will then rent out 10 of them to collect income while an average Singaporean is still struggling to pay off his debt.
You shouldn’t own a Singapore condominium for rental yields
According to Global Property Guide, despite the recent drop in property price, the rental yield remains poor at 2.35% to 3.00%. The central area Condo rental yield is as pathetic as 1 to 2 percent as shown.
To put the figures into perspective. If you intend to use your rental to cover your mortgage payment. a 2% rental yield means that you definitely have a negative cash flow. Moreover, you need 40 years rental to pay off the loan (assuming 20% down payment) without even accounting the interest payment.
How the rich play the property game
Most savvy property investors follow two rules, using optimal leverage and buying property at an insanely discounted price. This may sound simple but not easy to implement.
#1 Optimal Leverage
Leverage is really the principle which separates those who successfully attain wealth from those who don’t.
If you pay a 20% down payment – or $200,000 on a $1,000,000 asset, you essentially use a small percentage of your own money and the majority of the purchase is being provided by the bank. So even if your property has a rental yield of 3%, the rate of investment is roughly $30,000 over $200,000 investment, a 15% return!
This is essentially a Financial Leverage, which profits using other people’s money (a.k.a OPM). The rich are the master of leverage because it allows them to build more wealth than they could ever achieve by their own resources and personal limitations.
However, understanding leverage is just the beginning. Most people save years for the down payment and spend their life on paying the mortgage. That is the traditional financing.
What the real savvy property investors do is often “creative financing”. With their network and an army of professionals, they may never pay anything for the property transaction, a true application of OPM.
But I won’t discuss much as it is too complicated and has very limited application in Singapore nowadays due to the regulations. Let’s leave it to the secrets guarded by the rich.
#2 Insane Discount
If you are a VIP of some fashion brands or shopping outlets, occasionally you may be invited to a special event to enjoy some exclusive discount.
The rich also have this kind of events to buy at a huge discount comparing to the market. The only difference is that they buy properties.
We all know rental yield and property price are in reverse relationship. If you can buy a property much cheaper than the neighbours and rent out at the market rate, you will get a higher rental yield.
This idea is so simple so it is often ignored by property investors. But this is probably the only way for you to build GOOD income generating property asset.
You see, when the market was good, people just pay any price, and they earn 2–3% yield. The savvy investors will only move if there is an insanely good deal, and they move fast.
From Singapore’s historical rental yield chart, you can see in 2008 during the financial crisis, the mass market rental yield can be as high as 5% because the properties were all sold at distressed prices!
On the other hand, mortgagee sales is another secret of the wealthy to accumulate property assets at a discount.
Some of the non-financial tactics are discussed extensively by PropertySoul in her book “No B.S. Guide to Property Investment ¨C Dirty Truths and Profitable Secrets to Building Wealth Through Properties”. It is a great book, you should grab a copy.
What is the right way to invest property?
I hope I have provided you with a broader perspective on this matter. Physical property is not just a simple buy-and0hold investment. To recap:
- Owner stay property is a liability, not an asset
- The current rental yield in Singapore is too low to be excited about
- The rich play the property game with two rules, optimal leverage & insane discount
- Buying at a huge discount is your best bet to build property portfolio for your retirement income
Let’s go back to Singapore’s property billionaires. You may realize the biggest beneficiaries of this whole property boom are never the property buyers, but the property developers and operators.
According to Forbes, the richest man in Singapore late Ng Teng Fong owns Far East Organization and Sino Group, which developed more than 700 hotels, malls and condos in Singapore and Hong Kong.
Kwee Brothers control Pontiac Land, privately held property developer and hotel operator that owns Singapore’s Ritz-Carlton, the Regent, Conrad Centennial and the Capella.
The moral is that rich run property investment as a business. Although property investment rewards well, unless you want to be in the same trade, you don’t want to bet all your life savings into physical properties for your retirement as it just gives you another job to do.
In fact, you don’t even have to run a business to build your property empire. We are lucky enough to live in an era where Real Estate Investment Trust (REIT) is readily available to retail investors like us. REITs give us access run our own property empire without billions of dollars. If you have not heard about REITs, click here to read more.
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Do you agree Singapore condominiums are not worth investing? I would like to hear from you.
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