This post contains my personal notes from the book: The Ultimate Guide to Real Estate Investment in Singapore by Ismail Gafoor.
My Story… And Yours: How ordinary people like you and I can make real estate investments work for us.
Ismail Gafoor was born in a poor family. His father emigrated from India. As a child, he used to work hard at odd-jobs while studying. When he was around 20, he heard that some one had sold his house for a profit of $250000 dollars. He decided that he wanted to own three properties: there was no logic to this decision. He signed on as a pensionable officer in the army, which guaranteed him a one million dollar pension when he retired at 45. However he left the security of the job and ventured into property investment.
He first bought a three room HDB resale flat. Then bought his first private apartment in 1987 for $95000. He sold it for $133000 in 1990. They then bought their inter-terrace house for $610000. They sold it for $735000 in 1992. The value of the inter terrace house in 1996, if they had not sold was $1.6 million. Once they had sold, they bought a semi-detached house for $525000 and a studio apartment for $390000. They rented the house and lived in the studio apartment. Then he made many property transactions and now owns Costa Rhu condo, an apartment, a bungalow with swimming pool at District 15, a private property in Kuala lumpur and lives in a semi-detached house at District 11. The value of all the properties is greater than $10 million and he gets a rental income of $20000 per month.( as of 2010)
His view is that one should acquire the necessary knowledge and gain a foothold in the property market as soon as you can.
How the rich become wealthy: How the rich do it and why their method works.
The richest people in Singapore, and throughout the world are in some way involved in real estate investment. Millionaires become millionaires NOT by saving pennies, BUT BY INVESTING IN REAL ESTATE.
The fundamental characteristics of real estate is that it lasts long and there is rising cost of materials, labour and land. The other thing is there is leverage or debt because you borrow money to pay the house and hence this leverage, if properly done, will lead to high returns over the very long run.
Although some can reap astounding returns, if you invest in a good property, you can expect it to rise four to five fold over the next fifty years giving a compounded interest of 3% per annum. But the actual return will be higher because of the leverage.
Finding the first pot of gold in real estate investment: Three keys to unlocking the chests of treasure hidden within bricks and mortar
1. Start early- for a longer investment time horizon. The advantages of starting early are that you can take a longer loan and therefore have a lower monthly instalment. You also have less commitments and obligations when you are young. It may always seem that houses are expensive and therefore you want to wait. But if you are in it for the long-run, the factors that you should consider are:
- Ability to afford the house
- The bank’s willingness to extend a loan
- Your long-term view on holding on to the property, instead of short-term speculation
When you have a long-term view, you are more able to ride out the boom/bust cycles that typify any investment instrument; and in addition, it gives you the chance to recover from any investment mistakes you might make so that you are still on course to achieving your goals.
2. Don’t wait to save enough for your dream home- that never really happens. Your first aim should be to get a foothold( no matter how small) in the real estate arena. Once you buy a house, your property will keep pace with the market( regardless of whether it is going up or down. You should make sure you have the capacity to hold out during the down market and increasing interest rates. You should continue to save for your next investment.Then you will definitely be able to make a capital gain and accumulate wealth that can be reinvested in better properties in the long run. It really pays to invest early and NOT wait till you have saved enough for your dream home, which may NEVER happen in the first place.
3. Plan ahead, prioritise- your lifestyle determines how rich you will get. Life style is a choice. It is upto you to decide what you want. If we do not squander away our precious earnings in partying and other luxuries we can definitely save money and make a substantial investment in your future.
Ismail divides life into 4 stages:
- Formative and foundation years: Studying: 0-20 years. Have fun 33% of the time
- Establishing a career and starting a family: Investing: 20-40 years. Have fun 33% of the time
- Wealth creation and sharing the joy with loved ones:Enjoying: 40-60 years. Have fun 66% of the time
- Living life to the fullest with financial independence: Reaping: 60-80 years: Have fun 100% of the time.
Even if you have missed some stages, you can start afresh. Age is just a number. You just have to work harder. Have fun at the right time, and in the right doses and you will succeed.
Own it right: Getting your property investment right the very first time
- Make a down-payment of 20%-30% and see if the rental can cover the monthly repayments on the mortgage.
- From an investment perspective, it is wiser to own a reasonably sized property that meets the needs of your family and to own a second property that can generate an income to help you with your monthly commitments. Owning one big property will not allow you to generate income and will also hinder you if you want to sell to get cash at the right time as you will not have a roof over your head if you sell your only property.
- Owning two small properties is better than owning one large one.
- Use leverage wisely, making sure you will be able to make the monthly payments irrespective of where the interest rates go.
- Make sure the rent from the property will pay the mortgage payments. Look at the rental yield of the property to make sure that this will hold true irrespective of where the interest rates go.
- Singaporeans and PRs should always try to buy if they can. Foreigners buying depend on their individual situation.
- A commercial property usually has a higher rental yield but the prices and rental fluctuate a lot with the underlying economy. Residential properties are less volatile and therefore are preferred for most investors.
The Millionaire Real Estate Investor Mindset: Key considerations for successful real estate purchase
- Buy at fair market price: You should make sure that you are buying the property as if you were investing. You should see the rental yield and the potential for capital gain. In case of private property make sure you are not paying above the market valuation. A reasonably good price is 15 times the annual rent. In case of HDB properties, one should not pay cash-over-valuation above the median.
- Buy within your means: Have 6 months of savings as emergency back-up. Make sure your monthly mortgage payment does not exceed 40% of your income.
- Buy with a long-term perspective: Make sure you are investing for atleast 10 years( in my opinion)
- Buy where rental demands are strong: Buy properties near commercial hubs and MRT/LRT stations
- Buy properties that yield positive cash-flow: This means that the monthly rent you can get exceeds the monthly mortgage payment. Look at the HDB and URA websites to get details regarding the rent you are likely to get.
- Buy after you have done your homework: Look at the websites of URA and HDB for recently transacted prices. Look around few properties in the area before you make an offer. Take the help of your banker or agent.
- Start low with your offer: Sellers want to sell at the highest price. Buyers want to buy at the lowest price. But both have to be realistic, otherwise the deal will not go through. Offer a price 10% below value and do not buy above value.
- Know the per square feet price: Sometimes smaller houses are sold at higher per square feet price although the total price is lesser than a bigger unit. For example if the cost per square feet is $800 for a 1300 sq ft. house, then small houses of 500 sq ft can sometimes be priced at $1100 per square feet. This is a lot more and one should not purchase such a property. However smaller houses can sometimes be priced 10%-20% above the sq.ft cost for a bigger house and this may sometimes be okay.
- Evaluate the locality of the purchase: A good purchase would mean buying a piece of real estate within 10 minutes walk to the MRT. Also look for good schools and shopping malls nearby
- Check the master plan: Areas in the master plan which are going to grow will do better than matured areas. Areas near new MRT lines will also do very well.
- If it is a landed property, check the state of the property, foundation and renovations involved: Renovation and alteration costs 1/3rd of demolition and re-building. Take the help of architects and contractors to assess the potential of the house for you.
- Leasehold or freehold: A freehold is better than leasehold. But lease holds are okay if the location and amenities are good. Do not buy a leasehold property with less than 60 years remaining on the lease.
Taking Stock: And getting ready for the big return
We all have to remember the salient points about real estate investment:
- Real estate investment is a must for everyone.
- You should know your budget beforehand and aim to have 6 months of cash reserves.
- Plan your move early
- Have a long-term perspective:5-10 years at the very minimum
Flipping: Real estate game of chance
Flipping is buying and selling properties in a short amount of time to make a quick buck. This is not advisable for almost all people and you need a lot of cash reserves, a good market and luck to come out ahead in this game.
Understanding real estate opportunities: Singapore real estate regions and districts
The reasons for investing in Singapore real estate are: stable government and robust forward planning, foreign interest in Singapore real estate, a continued demand for housing, a strong economy, low interest rates and availability of cheap financing, a reliable long-term investment that keeps up with inflation and government interventions and measures to prevent bubbles.
Singapore is divided into 5 regions, 28 districts and 3 core regions. Understand the future developments catered in the Master Plan while making investments.
Understanding the seller: and knowing what he wants
The main reason for selling a property is to make a profit. Other reasons are change in lifestyle and commitments, distress situation, migration plans, loss of jobs, retrenchment, and business failure, demise of loved ones in the house, bad “feng shui”, feuding neighbours, negative image in the neighbourhood, divorce and to unlock the value of a property in order to reinvest in another opportunity.
To understand the motivation of the seller do the following:
- Check the seller’s bankruptcy and litigation status
- Google all media for all available information on the house, especially with a recent unwarranted death in the family( like suicide/murder)
- Evaluate the asking price to see whether it is comparable to recent transactions or is unrealistically high
- Evaluate the sellers’ willingness to negotiate
- Speak to seller regarding his intentions, past history and if necessary deaths, suicides, loan sharks and business failures
- Speak to the agent to see how long the property has been in the market. If it is 6 months or more, there is resistance on the part of the seller. Properties which are just listed are listed at an unrealistically high price and if you wait for some time, they will become realistic.
- Speak to the neighbours.
- In a up market make an offer of 10% below current market price
- In a down market make an offer of 20% below current market price.
How low is fair to offer: Paying the right amount
- Know the current value based on the average of 2-3 values if they is not more than 5% difference between the various values.
- Look at the transacted prices of recent properties.
- Decide on your final price.
- Decide on your initial offer: 5-10% below the asking price.
- Move upwards but never more than your target price.
- If it does not work out, then find another deal. Know when to stop and feel good about it. As a savvy buyer, you are not going to pay for a property way above its fair price.
Buying foreclosure and auction properties: seeing hope when others have lost theirs
- You can get excited and emotion can overcome logic sometimes in auctions. Be careful.
- Visit auction houses beforehand
- Visit the property
- Do your sums and decide on the maximum price.
Landed properties: The goldmine of property investment
Landed properties are costly and difficult for most people to buy. They can be cheaper than a similar sized condo. But one needs to invest with a very long-term perspective to make money from them.
Addition and alteration properties: Offer 15% below value.
Foreigners have to get approval from the Singapore land authority before buying landed properties.
When buying a condo, things to consider are:
- Small, medium or large-sized condo.
- Resale or new condo. If old condo make sure at least 70 years of lease remaining.
- Central region versus the rest of Singapore
You also have to be aware of the steps in the house buying process and how much you pay at each step, how to finance your investment and how much commission you pay( for HDB, buyer has to pay 1%, for condo, buyer no need to pay)