Property craze is always happening in Singapore, especially during the booming period when plenty of success stories can be heard.
Property Investment is so popular that when a person is asked what he knows about investing, the first thing that comes into his mind likely is Property. Owning a second property is always a dream of many. If a person has already owned second property, high chance that he would want to own the third, forth…and many more if they can.
Property investing is certainly not a problem but it becomes a problem if one thinks Property Investment is the only way to generate wealth; it becomes a problem if the entire investment portfolio is highly concentrated on property; it becomes problem if one becomes desperate, and venture overseas without knowing the risk involved.
Few questions that Investors need to ask before they venture into Property Investment –
Can I afford Margin Call?
Properties are often purchased with loan. When the property prices are rising, owner and banks are both happy. No one would bother each other so long as the mortgage payments are made on time. However, when the property prices start to fall, especially when prices are crashing; it is not only the owners would be depressed, banks have the right to trigger margin call when the property price falls below certain level. Margin call means the bank is asking the borrower to top up cash to fulfill the margin requirement. Therefore it is extremely risky when one keeps on buying properties without emergency cash reserve to standby to weather such possibility. When property meltdown happens, it is like the domino effect, contagion, fast and furious.
Is it easy to sell?
When the property market meltdown start to happen, chain of margin calls happen, credit crunch likely to happen at the same time, the market would be chaotic. It would not be easy to find buyers. Property is well known for its illiquid characteristic.
Is property investment really lucrative as thought?
In today’s context, the answer is no.
If we do the sum, assuming the gross rental yield (Annual Rental/Asset) of about 4%, 20% down payment, after all the expenses such as interest cost, property tax, maintenance, depreciation, and income tax, the ROE is a single digit percentage return. With a single digit ROE at such a high Financial Leverage of 5 times (Asset/Equity), this is definitely far from good.
Therefore, be smart, be aware of the risk.
