Fact Finding for Property Buyers

There was an interesting article in a free circulation yesterday. The person who wrote in urged the government and related bodies to implement a fact-finding process for potential homebuyers in Singapore. Property acquisition is a financial decision and it should start with finance.

In my opinion, there are two groups of buyers in Singapore; owner-occupiers and ’speculators’. I have come across very few buyers who are thinking of holding long-term with Singapore properties. Buying is the easy part; holding is a test of your perseverance and your vision of reaching your long-term goals. And because there is no capital gains tax in Singapore hence speculators are encouraged in this market.

And perhaps many dismiss the idea of holding property long term in Singapore; the idea of fact-finding becomes irrelevant. The speculators would want to dispose their assets as quickly as possible to the next buyer. However, having said that, owner-occupiers generally do their sums before they take the leap.

My investors are all long-term Australian property investors. I don’t entertain short-term speculators and hence it is paramount that I conduct proper fact-finding for my clients. As a trained engineer, I have been doing that for a long time and without sounding too arrogant, I am happy to say most of clients are pleased with what I have done for them…

Three weeks ago, I met up with a prospect-cum-good friend, and to protect his privacy, let’s call this person Mr. C. It’s has been over a year since we first met in the CBD. Things changed and he has moved on to another company and is doing very well. His career has taken off big time and he updated his recent events to me.

Some years ago, he was lured into acquiring a student type accommodation with promise of good yield from a local agent representing a developer from Australia. Believing he would be able to obtain finance of up to 70%, he signed the contracts and they have gone unconditional. Let’s call this investment property IP#1. Lately he bought a residential unit from another agent. Let’s call this second investment property #IP2.

He reversed his decision to hold on to both properties and he sold both securities prior to settlements. The respective agents that sold him these two investment properties managed to sell them for him, IP#1 being sold at the original price and #IP2 higher than what he has originally bought.

It was quite refreshing to me. In my opinion, I felt he ‘lost out’ on a very good opportunity in disposing #IP2. Some months ago, he told the valuation for #IP2 is higher than the purchase price and to be honest, that kind of price cannot be replaced especially at the location where he has bought. If he has settled it, he would have ‘instant equity’ created in his portfolio.

Not to mention if he is to refinance and uplift his equity next year or the year after, it would be quite comfortable and easy for him. By on selling his property, he lost money in agents’ commission, and some other fees (he still manage to reap some profits in the end) that he otherwise would not have incurred if he didn’t sell. When I was talking to him, I was trying ‘tracking his chain of thoughts’. Then I realized he had a very strong trading mindset. He was obviously trying to ‘get out’ and consolidate his position when there was an opportunity to. And the thought of getting into ‘debt’ was obviously too trying for him.

I said to him that if I were him, I wouldn’t have sold it because in 10 or 20 years’ time, it would be 4 times the value of what’s it worth now. I guess I was just being frank, and if that offends him, too bad. I was just being frank and straightforward. At the end of the day, the decision was his. He has spent a great deal of time researching on properties he had acquired only to on sell them before settlement for a profit that’s not worth mentioning. How does that work…?

Reserve Bank of Australia Governor Glenn Stevens has not ruled out a possibility of a rate cut in Jan 2009.

Traditionally the RBA Board does not meet in the month of January. The first meeting next year has been scheduled on Tuesday, 3 February 2009.

Following this month’s 100 basis point cut to reduce the federal cash rate to 4.25%, further economic uncertainty has caused debt futures market to predict a further 25 basis point cut in January 2009.

With increased home loan approvals in October, the benefits of a 300 basis point cut since September ‘08 is beginning to surface. Whether it will prevent the Australian economy from going into recession remains to be seen. On a more optimistic note, in response to a question, Mr. Stevens said Australian house prices were unlikely to decline by 30 to 40%, like the US, because of an undersupply of housing.

“I think we can rest easy,” he said.

Mr. Stevens said Australia was unlikely to fall into a “deflation trap” amid falling energy prices.

Last night I had a very interesting meeting with the Founder (and his main marketing man) of one of the largest trading education groups in the region. Together with two very good mates, we held interesting discussions on business opportunities, trading and property investment.

During the discussion, I was asked about the state of the property market in Melbourne since I am constantly looking at that market. Without a single hesitation, I answered, ‘I don’t know’. The reality is it didn’t quite matter to me the state of the property market. As Singaporeans are pretty used to the huge ‘peaks and troughs’ of the Singapore property market, the state of the market becomes a critical topic for discussion. In Australia, yes prices do plunge, but statistically, prices don’t plunge 30%!

I recalled a statement made by Christopher Joye, Director of Rismark International in The Weekend Australian Review, 1-2 November 2008. He mentioned, “Sensationalist and unsubstantiated claims predicting large house price falls in Australia ignore the empirical facts that house prices are determined by both demand and supply”. In my opinion, there’s already a shortage of accommodation in Melbourne as witnessed by record levels of population growth, fueled mainly by immigration numbers, coupled with the crisis and drop in building approval rates, the only confirmed trend is rents are going to rise.

I looked at property investment from a ‘holding cost’ point of view. I do care if the price is right, by doing some comparables around the estate. But that’s as far as I go. I do not professed to be a statistical Guru, or a full time property market researcher because that’s not my job. It’s difficult to say how market has performed, because to me median prices are not the true indication of the state of the property market.

Put it this way, you acquired a property. At settlement, you secured financing and the valuer came back with value equal to or higher than the contract price (usually valuers will cheat by looking at the contract price so they rarely return a value higher than contract price). You financed it and it’s cashflow positive and you continue to replicate what you were doing without max-ing out on your borrowing capacity.

So, what happens if property prices drop?

Well, as long as you keep up with repayments, banks don’t really bother you. The critical thing is to have a tenant secured and that can be organized by a professional property manager.

It makes sense to me…and I sure it does to you as well…so how’s the market performing again, mate…? Have a great weekend ahead!

 Another round of rate cut by 100 basis points brought relief to home owners, property developers and investors. In a widely anticipated move by the Reserve Bank of Australia, it announced a rate cut of a full percentage point, bringing interest rate down to 4.25%. It’s the third consecutive rate cut since October 2008.

Banks are expected to pass on the benefits of the rate cuts to consumers and business owners. If banks pass on the savings to consumers, there would be a $250 per month savings in interest cost on a $300,000 loan.

For property investors on a standard variable rate, more rate cuts are expected come Feb 2009 (RBA does not meet in Jan) and increased rental, you can be assured of an improved cashflow from your property portfolio.

For full article report, click HERE.

Since I posted an earlier article on 460 Victoria Street, there has been quite a bit of enquiries asking for more information about the development. From an investor’s perspective, the idea of acquiring a 1-bedder makes good sense. A check with various portals shows 1-bedders currrently asking for $340 per week within the vicinity. Assuming there’s no increase in rental within the next 24 months(which is highly unlikely as developers stopped building because of credit squeeze and record levels of migrants into Melbourne), the cashflow analysis is as such:

Property value: $320,000

Rental Income:   $17,680 (52 weeks)

Outgoings:
Interest on a $256,000 loan: $10,240 (Indicative fixed rate @4% per annum)
Indicative Body Corporate: $885.55
Council Rates:   $1,200
Water Rates:   $250 (estimated)
Contents Insurance:  $250

Cashflow:   $4,854.45 (+ve)

So if you are seeking to improve the cashflow of your property portfolio or expand your property portfolio, a 1-bedder in this development with low body corporate would suit. Needless to say, we have not taken into account non-cash deductions which will increase the tax credits for investors if you hold for the long term.

There are not a lot of 1-bedders left in this development, so drop me an email if you are interested.

In the October 2008 issue of the Australian Property Investor (API) magazine, the editor examined the reasons why investors chose to rent instead of having a mortgage over their heads for a place they would own. Personally I felt this is a very important issue, especially for non-resident Aussie property investors to understand. Under the Foreign Investment Review Board (FIRB), non-resident property investors can only buy new off-the-plan or previously unoccupied established residential homes. If resold, they can only resell their properties to Australians or permanent residents in Australia.

Lots of non-resident investors are confused whom they would be reselling to should they need to resell their investment properties in future. One group of people whom they can resell to is property investors who are seeking to increase their portfolio of investment properties. These investors, residing in Australia may be renting but are seeking to expand their portfolio with a good mix of investment properties.

Why would investors themselves rent why they could afford to possibly own a home themselves?

Well, renting gives them the flexibility to live in a suburb they may not be able to afford at this point of time. Rental for residential properties is about 4.5% to 5% but mortgage repayments prior to rate cut in Oct ‘08 are over 9% per annum. Renting needs no maintenance and hence renters need only move their furniture into the newly renovated home and start leading the lifestyle they desire from day one. Besides that, renting does not require a deposit, hence the money saved can be used to increase one’s property portfolio instead of owing a home that doesn’t gives any tax breaks. If a couple works from home, renting also allows them to gain significant tax breaks, allowing them to slice their rent and electricity bills in half and reduce their overall income tax bill. Hence renting does have its clear advantages.

I have witnessed many successful property investors who have in excess of $5million or more in their portfolio but are currently renting. My business partner, Steve is one of them. He rents a 3-bedroom unit in the Docklands along Lorimer Street in Melbourne. For many Asian investors who have acquired properties in Australia this is something they cannot come to terms with. However the reality is that this is the way and it is a common phenomenon Downunder and with concerns of recession looming, more would choose to rent instead of having a mortgage that they would have to pay themselves. So for non-resident investors, hope this is some useful information to you…

It’s no secret that countercyclical acquisition is the right way to profit massively especially for instruments where you are betting on capital appreciation. However, the element of fear lingers on the minds of investors and you may end up not doing anything. What you may have missed are hordes of opportunities to profit from the current situation.

Last week, a mate of mine was thinking of property acquisition in Australia. We spoke some 5 months ago and he wasn’t really ready then. However, this time, he is ‘armed’ and ready to take advantage of the current situation. He asked a very good question and I am sure many of you may have the same question in your mind.

What happens if I acquire properties now and the value dips?

It’s a valid question. If you have been a regular reader of my blog posts, you would have known that I am not a property trader. I don’t encourage anyone to trade/speculate properties in Australia for capital appreciation. The tax system is not in your favour in the short term. Rather my focus has always been structuring the finance in such a way that maximized cashflow for your entire property portfolio.

The risk with any property portfolio is the ‘HOLDING COSTS’. It’s defined as the amount of money that is required for you to continue to hold on to your entire portfolio. Just focus on the cashflow/holding costs and you’ll be fine. There are enough instruments/options for you to leverage on. Regardless of conditions in the market, as long as you keep up your mortgage/interest repayments, you should not be unduly worried.

So focus on the cashflow in your property, instead of focusing ‘what happens if value dips…’Nobody can predict where the market is going at the moment. I am not bold/silly enough to do that. All that I can say is if you keep your portfolio, the values will be better off than what they are today in 10, 20 or more years’ time…

Drop me a line or two with your comments, EMAIL me…have a great working week ahead!

Over the weekend, there are at least 7-8 property firms advertising for property launches in Singapore. Well, you can’t blame these property firms for thinking there’s a good opportunity here in Singapore. After all, the positives are still there as far as Singaporeans are concerned. Most are hurt in the stock market, and history showed that whenever ‘doom and gloom’ sentiments are prevalent, there are still opportunistic investors who are armed and ready to take advantage of present conditions to enter the market. However, if I am seeking to invest in Australia, I will be ‘dramatically confused’ if I want to base my decision to invest based on projects advertised.

After putting all conditions in place, I have a near-to-perfect plan for anyone wanting to start acquiring properties now. In PPG (PPG International & PPG Asia), we used the Wealth Builder System to determine the ‘BC’ of a client before recommending the next course of action. Nobody else does that in the market. If you are a serious investor, you must get to know this. The easiest way is to EMAIL me to get in touch with me. Be prepared to leave your contact details as well.

Assuming your BC is determined, you can now go ’shopping’.

I see the following happening:

1. Interest rate will fall to at 4% or 3.5% by the first half of 2009.

2. The rise in interest rate later on will signal the reversal of the economy.

I quote Warren Buffet’s saying, ‘Be fearful when others are greedy and be greedy when others are fearful’. No doubts about it, people are fearful about investing now. The most sinful thing is to do NOTHING, because that means your wealth has got no opportunity to grow. Of course, if you have not much wealth, it is quite understandable that you do nothing right now. Otherwise, you may be over-analyzing and you may be ‘beaten’ by the market before you do anything.

Every advertisement says the AUD has dropped 30% against the SGD and it’s on par with SGD now. If you have buy something now, it’s cheaper. Technically it’s true. Even the AUD depreciates against the SGD further, in my personal opinion, the AUD will still appreciate against SGD in the long run. The indicators are simple: Oil price cannot remain at this level, interest rate cannot keep dropping, and commodity prices cannot remain stagnant. Once the world’s biggest consumerism recovers, demand comes back again, the economy will recover. However, I am not bold enough to predict when.

If you buy something that settles next year (2009) to take advantage of low interest rates in AUD, your holding costs will be significantly reduced, cashflow improved dramatically. Remember the biggest risks pertaining to property is HOLDING COSTS! It’s not the value of the property! If you manage holding costs well, you will be able to grow your property portfolio systematically.

Once the interest rate starts rising, this is where you can convert to a fixed rate. With a fixed interest rate, you are assured of virtually the same holding costs/cashflow in your property. And to put the icing on the cake, if you have another property that is financed in another currency e.g. SGD, you can now hedge your risk. There are just so many permutations to build up your property portfolio. I guess it’s due to my engineering background. I love manipulating the permutations to help my investors build their portfolio. It’s problem solving to the highest level…

If you need any independent advice, do EMAIL me immediately.