A lot of people say they’ll invest in property when they get rich, which is the wrong way around. You’re supposed to invest to get rich, not get rich and then invest. Here’s how to (safely) get into property, without millions in the bank:
1. As boring as it is, you must learn how the leveraging works
As a non-millionaire, your ticket into property investing comes from the high degree of leverage you can get. For example, to buy a property that costs $1 million, you don’t need to have most of that million dollars; you’d just need around $50,000 in hard cash, and $200,000 in your CPF.
The key advantage of property is this huge amount of leverage provided by your home loan. On top of that, a home loan is one of the cheapest loans you’ll ever get in your life (around two per cent per annum).
But it’s important to understand how to use home loans right. There are ways to keep the costs down (e.g. refinancing or repricing at the right times, or purposely accepting lock-ins when they’re to your advantage). There are also ways to find the cheapest rates out of the hundreds of packages available, and to avoid pit-traps like obscure board rates.
To be blunt, learning about home financing is going to be one of the most boring experiences in your life. If you read the home loan terms aloud, small animals around you could keel over and die of sheer boredom. But you’re going to have to study it, if you want to be a property investor.
2. If you want to see your home as an investment, prepare for some discomfort
Is your first home just a stepping stone toward something better?
For non-millionaire investors, buying a second house to let is way out of budget; their only recourse is to treat their own house as a form of investment. That can mean dealing with certain discomforts.
It might, for instance entails buying in a neighbourhood with good growth prospects, but not a place you like personally. Or you might have to buy in a location so ulu, it looks like it belongs on a National Geographic cover (but development over the years will mean there’s a long-term payoff.)
You’ll also want to seize value buys, such as a house priced unusually low given its quality and location; but that might put your workplace a 90 minute bus ride away.
Which also leads us to say…
3. Make sure everyone you involve is on-board with the plan
If you’re not rich yet, you’ll probably need some help getting that first investment property. That often means roping in family. But be careful:
If you’re married, make sure you and your spouse have a shared vision on the property. If you want to use the house as a stepping stone, but your spouse sees it as a forever home, then you’re cruising into a storm. And of course, your spouse must be onboard with buying a house that’s a great investment, but far from the children’s school or a workplace.
If you involve other family members in your property investment, make sure there’s an investment plan that everyone understands and agrees on. Write it down. If you co-own a condo with your parents, for example, you don’t want a situation where you’ve secured a buyer, but then your parents disagree with the sale.
Always remember that property investment requires infrequent but deep decision making. You won’t need to make a lot of decisions every month (you may only need to make a decision once every few years) – but when you do make a decision, such as who to sell to, or how to rent, that decision has tremendous financial impact; there is much less room for error.
So when the time comes for that crucial decision, everyone you’ve involved must be pulling in the same direction.
4. Develop an attention to detail
If your plan is to buy a house and then “sit down and shake leg” for 15 years, you’re in for a shock. A pure home owner, or a super-rich investor, can afford to ignore small increases in home loan repayments, or maintenance fees edging upward.
(Even then, some of the richest investor we know still focus on such details).
But as a starting, small-time investor, even the small costs eat into your gains. When you always claim the flat 15 per cent on tax deductions, instead of tracking the exact costs of utilities and maintenance, you could lose money.
When you don’t refinance despite a cheaper loan package being out there, you lose money.
When you don’t crunch numbers to work out the cheapest renovation loan, don’t check on the management committee at AGMs, and don’t realise the difference between fixing an electrical issue on a Sunday versus Monday*, you could lose money.
These small expenses are like cockroaches: ignore one or two, and suddenly you’re wondering why you’re up to your eyeballs in them.
As a small-time property investor, don’t be afraid to fit the Singaporean definition of ngeow: you need to be picky about every little detail of the house; right down to checking where your contractor is getting supplies, and checking the prices of those supplies yourself.
If you’re naturally laid back, or “big picture” oriented, you’d better be ready for a big shift in mindset.
*Some contractors charge more on weekends
5. Always be six months ahead on expenses
You’re not a millionaire yet, so this is important:
If you were to completely lose every income source tomorrow, your home loan(s) should stay paid for another six months. That’s the minimum standard to shoot for.
In a major financial disaster, you’ll need to sell. But if you don’t have six months, your property agent – no matter how good she is – won’t have the time to market the house, conduct viewings, negotiate, and secure a good price. The faster you need to divest yourself of a property asset, the less you’ll make from it.
Or if you’re renting out the property, six months means you don’t need to rush into the first tenant you find, just to keep the rent paid. Desperation is how landlords end up with negative rental yields, or bad tenants.
Want to know more about property investing for non-millionaires? Come talk to our experts for advice.
On 25th May 2019, we’ll be conducting a talk at HDB Hub (Toa Payoh) about property investments for the average Singaporean. Come and discover the methods used, and ways to invest safely. We’ll also have a panel for you to ask all your questions.
Tickets are just $20, or as low as $10 for early birds. Get them here.