I have my reservation to the Straits Times Article titled – “Home rents falling, but yields not plunging yet“. Just by looking at the title, I have the impression that yield is supposed to fall in when the rents are falling. At first, it feel logical that if we are receiving a lower rent, our yield should reduce accordingly, but on second thoughts it is not entirely true.
How to calculate yield
Yield is basically the percentage of rental income over the property price/value. Any changes in yield is dependent on not only the rental income but also the property value.
Yield = Annual rental income / Property Value X 100%
When will yield plunge?
Let’s assume the reduction of rental income by 15% in three scenarios of property value behaviors (less 15%, stays the same, more 15%)
From this simple example, there are two scenarios where the yield is reduced, the most unlikely case is the increased property price when rents are falling. Another situation where yield has dropped is when the property prices stay the same while rents are falling, which is equally unlikely. The most likely outcome (which is happening right now in a down market), is both rents and property prices are falling at approximately the same rate. Hence, we see that the yield is actually not falling as expected.
When rents and property prices fall at the same time, yield will not plunge
Do note that, yield can be highly sensitive for different home owners who have different entry price, loan percentage and tenant supply, so please do a quick estimate for yourself!
Have you planned for retirement? Do you know when and how can you achieve it? If you have some plans, do use this total financial health model to validate your plans again. If you do not, understanding this model will help you to set down some goals for retirement.
The total financial health model illustrates the complete summary of your financial status (current and future) and how different elements are very much connected to one another. For most of us, your real estate is the largest asset you have and due to its sheer size, the way you manage it will have significant impact on your total financial health. Hence, total financial health is so important because it is a dashboard to keep all aspects in check and ensures an overall optimal growth.
Let’s start off with some definitions:
Income – sources where you can receive money: Salary, bonuses, business, dividends
Spending on investment – purchase of shares, bonds, deposits, business, real estate
Assets – valuable items that generate income: real estate, financial portfolio, cash, education, skills, expertise, experience, network
Liabilities – obligation to pay usually arise from the exchange of an asset: mortgage, loans, credit cards
Standard of living – the level of comfort, necessity and wealth you are living up to
Income Generates Commitment and Enjoyment
Arguably, you have two ways to spend your income, either on commitment or on enjoyment.
To spend on commitment, you are setting aside some money committing to save X amount, to have enough money to buy a matrimonial house, to have enough funds to start-up a business and the list goes on. All these funds will one day have the chance to turn into the asset you have been planning for which will then be able to generate income, thus creating a compounding loop. Furthermore, when we are able to harness the power of leveraging wisely, it will help us achieve our goals much earlier at low risk, thus creating a leveraging loop.
To spend on enjoyment, you are spending to keep up to the perceived lifestyle you want for yourself and your family. Most of this cost of living will neither help you generate more income nor create more assets. As you progress in your career, this perceived lifestyle, more often than not, will progress in the same direction proportionately which forces you to spend more. You may start to eat at fine dining restaurants, buy luxury hand bags, watches and clothing etc. Furthermore, as you become a parent yourself, the expenses for your child are inevitable. Notice that there is no loop in this manner of spending your income, the money you spent has just left you and ended up in someone else’s pocket.
This is the most important loop in this model. If you are an accountant, this is similar to retained earnings. If you are an electrical engineer, this will make your financial circuit board a closed circuit providing a continuous flow of electricity. This is essentially reinvestment of the income generated from your assets; the more reinvestment you make, the faster you can grow your assets. Note that not all assets generate cash, and one obvious example is the car you bought to be parked at the car park most of the time.
For example, if you bought a flat and rent out one or two rooms, you are using your asset (flat) to generate income (rent). Also, the interest and dividend earned from your deposits and shares are a form of income as well. As a result, these additional incomes will be added to your income stream, hence creating a compounding loop.
By the name implies, this loop created leverages or more commonly known as loans. Such credit facilities allow people to borrow money to buy larger items but only required to repay at a later time period by paying some interest. As long as the interest rate of loan is lesser than the annualized gains in investment, such credit facilities will continue to be appealing, hence creating the leveraging loop.
With the increasing volume of mortgagee sales serving as a stern reminder, this leveraging loop has to be structured hand in hand with the compounding loop to ensure a sustainable growth in your financial health.
Where Do You Stand Now?
Generally, there are four stages for wealth progression, compute the following to see where you stand.
Your Total Asset = Principal amount you have paid for your property + shares + bonds + deposits + cash + other assets
Your Total Liabilities = Mortgages + car loans + credit line + other liabilities
Spending on Investment (monthly) = contribution to your deposits + repayment of mortgages + purchase of investment products + other assets
Expenses (monthly) = spending on necessity / wants + recurring bills + insurance premium + other expenses
Once you get the numbers ready, simply compare asset to liabilities and spending on investment to expenses with reference to the following table. Note that the class you belong to is not determined by the absolute amount you have, but rather the ratio of how you are allocating your money.
In order to put this wealth progression into perspective, let me use an example of a young newlywed couple, see the following table.
If life is a game of chess, our property is just like the Queen, it is the most powerful asset that could undoubtedly provide you the unfair advantage to win the game when it is used correctly. Whether you are a salaried employee or running your own business, as long as you own a property (or going to), you will need to play this game well. No matter which stage are you at now, if you are able to strategically move your Queen, there will be plenty of opportunities available for you to win the chess game.
You may be wondering why are there still record breaking transactions from public housings when the property prices are on downslide since Q4 2013. Here is a key reason that resulted in a handful of public housing units sold above the million dollar mark (or close to). It is the price inelasticity of supply.
Let us recap the general economic rule that when supply increases, the price will be reduced eventually. At the start, due to scarcity of supply, the price will be relatively high as seller will do their best to push the market price as high as the buyers will bid for. In this situation, buyers are willing to pay the premium and this is the phenomenon of perfectly price inelasticity of supply. Thereafter, with this record selling price (a new price ceiling), it will entice more sellers to come in and hence shifting the supply to the elastic side. With more supply, the market will soon force the price down to an equilibrium; a reasonable market price. It is a free market.
You must have already heard of the recent record breaking public housing transactions. Just to name a few;
$1,088,000 – Pinnacle @ Duxton, 5 Rooms
$1,028,000 – City View @ Boon Keng, 5 Rooms
$990,000 – Pinnacle @ Duxton, 4 Rooms
$955,000 – Toa Payoh, 5 Rooms
$900,000 – Clementi, 4 Rooms
These record breaking transactions happened only when the supply is perfectly inelastic, or at least in the eyes of interested buyers. When this happened, the seller then has upper hand in negotiating for a higher price.
Would I buy a property that has perfectly inelastic supply? Probably not worth spending that amount unless I have a really good reason for it.
Ask yourself, do you really need to buy that particular unit at this moment? Are there other similar units available?
In short, do understand your needs thoroughly especially when you are buying a property with perfectly inelastic supply.
P.S. If you have too many factors to consider, you may use this pairwise comparison matrix to identify your deciding factor. you can download it here or read more about it in my other post on the 3 stages of buying.
Are you buying a property the right way? A typical buyer will go through three stages in any property purchase and by going through these sequentially; he will have the right financial and psychological preparation to get the best deal for himself.
Reality Check –Should I buy?
A trigger event must have happened that cause you to start thinking about buying a property. Whether is it hearsay from your colleagues making good profit from property or to get a larger house for your parents to stay in together. Hold your horses!
Before you start jumping into stage two to start searching for a property, the very first question you should ask yourself is “am I eligible to buy a property?” There are more than handful criteria but here are three important ones.
Eligibility to purchase
Buying a property is not straightforward (even if you are loaded with cash) due to the complex policies to maintain a sustainable property market. For e.g, if you are a foreigner or Singapore Permanent resident (SPR), you will need approval from the Land Dealings Approval Unit in order buy a restricted property to stay in. Other than citizenship, the list goes on as follows which I shall not go into detail in this post:
Property type (Public new, Public resale, Private restricted, Private non-restricted)
Loan quantum approval
Current ownership of private property (for purchase of public housing)
Income ceiling (for purchase of public housing)
If the sum is not spent on the property what can you do better with it otherwise? Buy a car? Or start a business?
Buyers have to note that the opportunity cost does not come from the one time down payment or monthly mortgage only, other cost such as renovation, furniture, maintenance cost and bills are not small sum as well.
Timing refers to not just about market timing, but more on individual’s timing in life. Ask yourself, what major plans do you have in the next 5 years? Getting married, planning your first child, oversea work assignment, your child moving out to his matrimony home, parents retiring and the list goes on.
Once you have figured out your 5 year plan, you will see that there is no need to wait for the bottom of the property price dip because no one really knows. For a long term investment that is of heterogeneous characteristic, the best time to buy is always now, if not yesterday.
The Search – What can I buy?
Once you have convinced yourself (and/or your partner) in reality checking stage, you are now ready to move to stage two: The Search.
For many of you, you will spend so much time on this till you get so tired and could make a less wise decision. There are two key items that will make your life easier; to make your search more effective you have to identify the purpose of this purchase and to make the search more efficient you will need a good decision matrix.
The purpose has to be clear for a meaningful purchase. There has to be one goal in your 5 year plan that will qualify to be your purpose of this purchase. It could as simple as “to get a larger house for my parents to stay together”. Once that is decided, you can start by asking yourself the following questions, which will then be the factors for the decision matrix:
Rooms count and space (balcony, yards, garden, pool etc)
A decision matrix is a simple pair wise comparison which ranks the factors in ascending order to help you decide whether if a property is buy or no buy for you, in a systematic manner. These factors are highly subjective and the same property may have varying outcome for different buyer profiles. Note that these factors must be related the attribute of the property excluding the price tag. Here are some examples:
Specific location (Redhill)
< 10 mins walk to public transport
< 10 mins drive to office
Each of these factors will be compared to one another using the matrix shown as follow. For each empty cell, if the factor on the vertical axis is more important than the factor on the horizontal axis, I will indicate “1”. Otherwise, you will see “0”, which means the factor on the horizontal axis is more important. Once the entire table is filled up, you can then sum up the score horizontally to see the final score for each factor and the larger the score is, the more important the factor is to you.
This matrix works best if you have 8 to 10 factors. I have put this matrix in a simple excel file that is available for download here.
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Seal the Deal – How do I buy?
Finally at the last stage, you have come a long way and you are so close to getting the property in your hands. Here are some points to keep in mind to ensure that you are in for the best deal.
DIY or Agent
Say you have done your decision matrix well, you are now reading through the details of several new launch condominiums that are within your budget and finally after rounds of discussion with your partner, you both finally made a decision on one condominium (better if you have already narrowed it down to exactly which stack). On the launch day, you are served by a customer service officer onsite with the showroom presentation and purchase paperwork. The deal was sealed within a day, he got his commission and you have your property. This is how your DIY property adventure comes to an end.
Let’s turn back time a little now, say you have a property agent in your circle and you consulted him on your property purchase intention early, you would have receive a pretty comprehensive analysis of a few condominiums that suit your needs. On the launch day, this agent will accompany you to the showroom and handle most of the paper work as well. Finally the same commission is paid to this agent whom you have spent many days with. This is your property adventure with your agent. This is the start of your long term endeavor in real estate, building up a professional relationship with your agent who not only understands your needs but provides sound and timely advice to real estate.
A successful property transaction is always about matching price points of two parties. The selling or buying price range for a specific property is very critical as it could mean a make it or break it situation. In order to get the price point (range) right, it requires substantial amount of work, and ideally with the help of a professional agent. If the price point (and range) has no intersection with the opposite party, the negotiation will not be fruitful and the best way out is actually to walk away early, see the illustration in the next section.
You have to keep in mind that the price point and range will change as time passes if the property is still not sold, hence do still keep this property in your watch list.
Skillful negotiation comes into play when then selling and asking price range intersects, the greater the overlap the easier the deal can be sealed. Whether who will gain more out of the negotiation will largely depend on the negotiator’s skills and strategy. If you are not a skillful negotiator, I would suggest that you engage an agent with such skills especially in the situation when there is little overlap in the two price ranges, as shown in the following illustration.
Finally, when both parties have come to an agreed price, what is left is the long list of paperwork as follows, which I will not go into detail;
Option to purchase (and 1% option fee payment)
Check property has no outstanding tax and payment
Sales and Purchase Agreement
Apply for Certificate of Titles
All in all, your property purchase journey is strongly dependent on how early you take the first step, how well you understand your intention and the factors affecting your decision and finally whether you have gathered sufficient professional armor before going in to close the deal.
To protect citizen who are truly home owners (to be).
ABSD – Additional Buy Stamp Duty
To reduce the increased demand of investors globally
To discourage locals from buying more than one property
SSD – Seller Stamp Duty
To reduce speculators and short term property flippers
To prevent property market bubble
TDSR – Total Debt Servicing Ratio
To disallow individuals to overleverage on loans of all kinds
LTV – Loan-to-Value
To disallow overleveraging property purchase (lesson learnt from subprime crisis in 2008)
Are you affected by the cooling measures?
Being ‘fresh’ in the property arena, you certainly have the upper hand when there is an excess supply of properties in the market and being pretty much immune to cooling measures. In such situation, buyers who are citizens have to get prepared and seize the opportunity when a good deal arises. The first task is to do a loan assessment with the bank or HDB to have a gauge on the property price tag that is within your means. A quicker way to get an estimate is to use this tool.
Next step is to understand your eligibility and the reason for this purchase. Is it to stay in or to rent out? This will kick start a series of decisions as such location of property, timing of purchase, interior design and furnishing etc. Unless you have the time, it is recommended to consult a professional on this.
If your last property purchase was before 14th Jan 2011, you would have equal (or more) advantage than the first timers. Just few days back, a five-room DBSS unit at City View @ Boon Keng set a record selling price at $1.028 million. With a decent sum from the sale proceeds; upgraders can then look for bigger, more central location home or even an upgrade from public to private housings, depending on individual’s long term plan.
Even though you may have some experience from the last property purchase(s), the numerous policy changes from 2010 to 2013 will probably make your new purchase much more complicated and engaging a professional will certainly provide you a more accurate assessment. One noteworthy policy change is the TDSR that pulled the brake of property price hike in Q4 2013.
Landlord Wanna Be
Since your last property purchase, you may have accumulated cash and liquid assets that are sufficient to buy a second property without selling the current property. Together with various influence from the media and people around, you are eager to jump onto the bandwagon of landlords and possibly start a passive income flow. Unfortunately, you are 4 years too late from the start of the ABSD and 2 years behind from the start of TDSR. Yes, if you are feeling the crunch, this is what the cooling measures are put in place for. It is just the way it is.
Such measures are well-analyzed to make landlord wanna be realize that the previously attractive investment are now having a much smaller Rate of Returns and eventually force them to take a step back to reconsider other alternatives to spend their spare cash.
Most of us do not belong to this category where an additional 10% ABSD is still not a turn off. Nevertheless, most wise investors with the end goal of profits should find very little worthy property investment left as well.
If you are a first timer or an upgrader, good for you! The ball is in your court now! Unless you have a rich uncle that can sponsor you one as a gift let us get back to the proper, less risky and wiser approach.
Understand which stage of buying process are you at now?
Research and do lots of homework. Remember the days where you spent so much time deciding on which car, watch or phone to buy? You can easily do a proportional increase to get the time needed for this property purchase, based on dollar value alone.
Find a good professional for advice. Be it property agents, bankers or lawyers.
And finally, make sure you have fun in this process
Neither this process nor the property price retracement will be a short or simple one, just keep calm and ultimately buy a Home!