Is Property A Good Investment

In old times, people invest in gold. As the nation develops, people starts to become savvy and started investing in many other vehicles. Many are investing in entry level investments that doesn't tie their finances down too much.

In the last couple of years, I have been considering the option of investing in properties. This mode of investment can be easy, but can be among the toughest for a few reasons (not limiting):
- Large amount involved (20% downpayment, partially in cash or fully in cash)
- Low liquidity
- Monthly maintenance
- Being on top of the curve of a product life cycle (lowest being raw land, highest point being homes itself), the curve fluctuates from there

With so much downside, why would property be worthy of consideration? A few simple reasons:
- Long term or even retirement plan
- Property price crashing
- Lower risk as compared to stocks, Unit Trust, or even savings (look at banks that collapse recently)
- Rental income to take care of monthly installment


Property Prices
Property price peaked during 1996. Thereafter, a spite of economical and social setbacks caused prices to erode. They include:
- Asian Crisis in 1998
- Terrorist Attack - 11 Sept 2001
- Sever Acute Respitory Syndrom (SARS) - Year 2003
- Tsunami - Boxing day, 2004 (this has minimal effect on us)

The economy only started to recover in 2005. Property price peak around the last quarter of 2007. Many said prices in 2007 reached the peak of 1996. Over the period of 1996 till 2007 (a period of 11 years), property price had not grown at all! It only reach the last peak (1996).

With the current global economical downturn, which is expected to last till 2010 (i hope), the next possible peak could be between 2012-2015, assuming the global crisis ease off by late 2009 and nothing else happens. But be wary, if the global financial crisis stablised and starts to clear by late 2009, the next possible recession can happen between 2012-2015. Read one of my post on Baby Boomers.

Assuming property price climbs to a healthy level by 2012, where is the growth since 1996? Even if prices reaches 1996 price in 2012, there is still room for growth (16 years growth).


The Right Price
Property (private) prices started to loose ground. Demand had fallen in recent times. Owners started to panic when the October 2008 market correction happened, wiping out many investors' savings. Some had to resort to selling their properties. This caused property price to plummer by about 20%.

Another group of owners will also resort to panic selling in coming months or a year. Some of these investors had over committed and bought more than they could chew. They are unable to secure a loan given their Debt Service Ratio.

As such, this group will end up dumping their property investment. Having paid 20% cash downpayment when they bought the property and property market softening drastically, in addition to their inability to secure a loan, they will be forced to sell their property at whatever price, which includes having to top up cash to sell.

For potential investors, there is no real right time. A savvy investor will be able to sniff out good deals. Some market research will be required to understand the price trend.

When people are buying, don't buy. When people are coughing, look out for the right gems, not germs.


Long Term Plan
Assuming, if one buys a second property as an investment, and assuming he owns it throughout his life, here is a few benefits that the investor can/may enjoy:
- Retirement plan (assuming, rental income being about current money value of $2,000 per month)
- No need to rely on childrens to give them allowance when they retire
- Fully paid by the time they retired
- Mortgage better be insured. In the event of a Total and Permenant Disability (TPD), insurance will pay off the balance mortgage
- During occurance of TPD, and having the property fully paid, the rental income will help the invalid to sustain his expenses.
- Inheritance for their childrens


The Mortgage and Rental Income
Assuming it is a 2 room condo. Here is some calculation:
- Purchase Price : $600,000
- Downpayment : $120,000
- Loan : $480,000
- Tenure : 30 years
- Interest : approximately 2% or lesser (current 3mths SIBOR = 0.92%, 12mths SIBOR = 1.243%)
- Monthly Installment : $1,774 per month (approx)
- Monthly Maintenance : $200 per month (approx)
- Rental : $2,000-$3,000 per month

With this, the monthly rental will take care of the monthly financial requirement (installment and maintenance).


The Downside
With the current economy, consumer confidence is extremely low, job security is at stake, income is uncertain. Property price may not recover in the next 3 years. 100% rental may not be available thus there may be months without rent.

The downside has to be addressed before deciding on any major investment. With most downside being addressed, the investment is one with "Calculated Risk".

Bare in mind, even in a bull market, there will still be people loosing money and make that person, Not Be YOU!