Buying property can be one of the most rewarding investments you can make. Not only does it serve its purpose as a place to live in, to work from, it is a great investment that can make you more financially secure many years down the road. Here are 6 reasons why you should definitely invest in property.

Provides a Home and Workplace

The first investment property one should acquire should always be your own home. Unless you are staying with your parents and happen to be the only child, you should always make preparation for the eventuality you would have to move out and get a place of your own. Getting an own home is also often a priority for getting married and starting a family. For those with your own small business or home business, you can consider investing in a Small Office Home Office (SOHO) unit. SOHOs are built in a way that your office and home are separated but just a doorstep away. It provides the convenience of working near home and still allows the separation for you to not bring work home.  Good SOHO designs also allow for visitors to visit your office section like an office building, but blocks off the residential section for complete privacy for the residents.

Acts as a Saving Tool

If you do not own a home, you would have to rent and that would make the landlord rich by giving your hard earned money to the landlord every month as rental. You should always pay yourself first and that’s to pay yourself rent for staying in the house. You will save a lot of money by paying instalment for a housing loan as opposed to paying rental. Firstly, you will save money on the differential between the instalment and the rental; rental is higher than instalment in most cases. Secondly, you will save money on the principal portion of the instalment as that money goes towards reducing your loan instead. The only true cost for owning a home is the interest charges on your bank loan and of course the opportunity cost of not investing the money is other assets. The capital appreciation of the property and the reduction of loan will increase your net asset values faster than you can imagine.

Rental for Passive Income

If you already have a house, should you buy another one? Absolutely! That’s assuming you have the savings and the income capacity to pay the instalments for another house. You can then rent out the house and become a landlord! The tenants will now work for you as they are paying you rental to make you richer. If you took out a loan for 30 years and you manage to get a tenant to pay your instalment for you, the house becomes yours for free in 30 years! Furthermore, if you manage to lock in a rental rate above your instalment, you also get positive cash flow from your property.

Hedge against Inflation

All things kept constant, barring an economic downturn, property values will go up in the long term. That’s because properties are known as a good hedge against inflation. The combination of lower supply of land, increased demand through population increase, rising construction costs all will push property prices up. Inflation is generally at an average of 2-3% per year; as such one would expect property prices to go up in the same proportion. This is only applicable to long term as in the short term; there are many factors which can cause the property prices to spike up and down compared to the actual value.

Never Become Zero in Value

Unlike investments in stocks and businesses, a property cannot become zero in value. Properties are physical assets which sit on land; as such there will always be a value to it. Stocks and businesses however, can become bankrupt and the real risk of losing everything is there. While there may be short term fluctuations in value, the long term potential of property is always upwards as described above. There are some exceptions, where once sought after properties become desolate, infested with criminals and gangsters, the property prices will become very depressed and may never recover.

Leveraged Investment

Property investment is the only investment where the bank is willing to lend up to 90% of the purchase value. Reason is simple, banks also recognize the long term value of properties and getting a housing loan may be the only way for most people to acquire a home when they most need it. The leverage helps to magnify the returns of both rental and capital appreciation on capital invested. For example, if you bought a property of $500k with 20% down payment and the property appreciates by 10%, you have already made a 50% return on your investment! ($50k increase based on $100k down payment). The flip side is if you speculate in properties, the leverage will work against you in a downturn and can cause massive losses.

YOU MAY BE familiar wtih Calvin Yeo, whose favourite investing instrument are REITs and whose articles on REITs have appeared on several occasions on NextInsight.

Through REITs, he derives high dividend payouts based on the REITS' income from renting out their properties. As we got to know Calvin better, he has shared with us that he has also been investing directly in properties.

He is an owner of several residential and commercial properties in Singapore and Malaysia. In the latter country, he spends most of his time, running a business operation in Kuala Lumpur (while faithfully keeping up his postings on REITs on his blog www.investinpassiveincome.com).

Calvin has been running the business for the past two years since returning from New York where he worked as an investment banker. He quit in the midst of the global financial crisis when M&A deals dried up and bonuses were about to collapse for any banker who could hold on to his job.

We asked Calvin, who is 29, if he would do an email interview to share his experience and insights into how he invests in property. He kindly obliged.

Why invest in property?

Calvin: Property is one of the best assets for both income and capital appreciation. A property provides a home / workplace, so it serves a very basic purpose which everybody needs. If you do not own a property, chances are you would have to rent and that's making the landlord rich.

Property investment acts as a saving tool as you should pay yourself first; that's by owning your house and paying instalments on your housing loan. As the property serves a basic need, you can also rent out your property for rental income, so your tenant will have to work hard to make you the landlord richer.

Properties are also known as a hedge against inflation as property prices and rental value tend to go up over time due to increasing land costs, construction costs etc. Finally, property investments are also leveraged investments where you borrow money from the bank to magnify your returns.

Property investment is the only investment where a bank can readily lend you up to 80-90% of your asset value, hence increasing your returns by more than 5 times.
 

Calvin Yeo in his landed property which he lives in in KL, where he is currently based.

When did you start investing in property?

Calvin: I started when I was in Malaysia and looking for my first house two years ago. The fact that I was paying rental for a house made no sense to me as I could easily afford the downpayment required and the instalment amount would be lower than the rental I was currently paying.

After acquiring my first house, I invested in another house within the same development as I saw extremely good value.

What are 2 examples of solid property investments that you have made in terms of yield, capital appreciation, choice of location, etc?

Calvin: The first would be my own house, which I bought for slightly under a million ringgit in the upscale Mont Kiara location which is very popular with expats. The property has more than doubled in value in less than 2 years with some buyers asking for as high as 2 million ringgit plus. I knew this would happen eventually as the property was extremely undervalued for a landed property in this area, I just did not expect it would be this fast.

Calvin Yeo's condo at Tropics comes with upmarket furnishing to attract premium-paying tenants.

The second example would be a condo, Tropics, which I bought in PJ. It's conveniently located on top of a major shopping center and therefore I saw the potential of the condo. I bought it for about RM 350k a year ago, today it is worth at least RM 450k, an appreciation of close to 30% in a year.

The property is currently rented out at over RM 2k a month, achieving a rental yield of close to 8%, or about double of the mortgage interest rates.

I came to know of this shopping complex through a friend who asked me out to watch a movie. I was really impressed by the shopping mall.One thing led to another -- my girlfriend and I began hunting for units at the condo on top of the shopping mall, called Tropics.

We found out that older condos in the area were rented out for around RM 2k per month for studios, so that was our benchmark in calculating rental yield.

By buying a subsale unit, our risk was already decreased significantly as we know what type of tenants the shopping center would have, the quality of workmanship and also the view from the unit. Some of the units have a clear view of a cemetery! 

Are you inclined to buy completed properties rather than yet-to-be completed properties?

Calvin: Yes. There are several reasons:

a. What You See Is What You Get:  You will be able to see the actual unit before you commit to purchasing it. This is quite important actually; you will see the exact layout, the quality of furnishing, the view, who the neighbours are, occupants of the development, surrounding amenities and more. All these factors are critical factors to rentability of your unit, so it’s great to be able to see them, reducing your risk considerably.

b. Cheaper Prices than New Properties: Subsales properties are not always old and dilapidated, in fact, some are newly completed! In my opinion, those new completed properties usually represent a good buy especially if the price is still below the launching prices of new projects.

c. Instant Rental: Once the transaction is completed, you will be able to rent out the unit for income instantly. Better yet,if the purchase comes with a rental agreement, saving you the agent costs and searching costs. This is another very important factor, getting Instant Returns once you actually own the unit instead of having to wait.

d. Ability to Calculate Rental Yield:  Even if the actual unit is not rented out, it is quite easy to derive approximate rental based on other units rented in the same project. Ability to calculate rental yield is an important determinant of whether the price you are paying for the property is reasonable. The higher the rental yield, the better the price is.

There is a spread of views on the outlook for the Singapore property market but they are largely negative or at least cautious. What is your own take on the property market over the next 2 years?

Calvin: I would also be cautious, if not negative for both Singapore and Malaysia properties. For Singapore properties, the persistently low interest rates are creating artificially high prices for the properties. If you look back at the Asian Financial Crisis in 1997, it was the same case where very low interest rates have driven the property prices to unsustainable points just before it all blew up in the Financial Crisis.

While some people make a case where there has been a consistent undersupply in properties in the last few years, the government has responded by releasing lots of land
banks. The numbers of new properties coming on stream in 2012/2013 are tremendous and it may take the market a while to absorb them.

For Malaysian properties, the interest rates have been rising at a healthy level hence interest rates are not the key issue. The problem lies with the demand and supply; overbuilding is a real danger as the population may not be large enough or even rich enough to absorb all the new highly priced properties being sold in the market. The fact that valuers and banks also work hand in hand with developers to sell properties at overvalued prices with low downpayments like 90-95% leverage means there is substantial speculative risks in properties.

What is your current position – hold or sell - with regards to your investment properties? Why?

Calvin: I am holding all my properties as I have bought them at significantly lower prices than what they are worth. All the properties have also exciting new developments around them which have the potential to push the prices up even higher. The current secondary market is very slow, so it will be difficult to get a good price at this point of time. I am also getting decent rental from the properties, hence I have no rush to sell them.

The key is to be comfortable with your debt service ratio and leverage level. Ideally, all the investments should be at least cash flow positive or neutral, so you would not have to come out of your pocket to pay for the differences between the rental and instalments. That way, you can take your time and sell only when you believe the value is good.

Recent stories by Calvin Yeo:

CAPITARETAIL CHINA TRUST – Overlooked High Performance Retail REIT

K-REIT: "Why I will sit out this one"