Flying back from Jakarta in the evening, I managed to get a few hours of sleep before boarding the early morning flight to Perth for a week-long family trip.
The first part of the vacation was a farm stay in the countryside. After we checked in and made our way to our rented cottage, I could finally rest my body and soul.
I looked outside the windows and found myself being surrounded by cows, sheep, emus and chickens. While I was watching the farm animals, they were also staring at an exhausted ‘animal’ lying on the couch.
The next morning this exhausted animal was almost fully recharged and followed the family to feed the ‘far more energetic’ farm animals.
During the sheep feeding session, a confused sheep suddenly tried to ‘kiss’ the chest of my younger daughter. Apparently, it had mistaken the logo on her jacket as the dried leaves because they were the same color.
I suddenly recalled a similar incident during a school outing to a goat farm in Singapore. We were feeding the goats when one of them wanted to ‘eat’ my child’s windbreaker too. The kindergarten teacher immediately pulled the cloth out of the goat’s mouth.
That left me wonder: Can the sheep really tell if a wolf in sheep’s clothing is in the herd?
Four questions to judge good or bad investments
Similarly, can property buyers tell a good buy from a lousy investment when approached by the marketers?
If they can, why are there so many regrets buying the wrong properties and so many complaints investing in the doomed crowdfunding projects? (If you miss it, read my recent posts “4 things buyers wish they knew before buying a property” and “Can’t answer these 5 questions? Stay clear of crowdfunding”.)
How many of them are like the innocent sheep that can’t tell the differences between the grass and a piece of cloth and choke after eating the wrong thing?
How many of them see all projects or units marketed by developers or agents as good property investment regardless of the quality, location, pricing and return?
The SMART Expo will be back in Singapore again over the weekend. After speaking in three consecutive expos, I am not invited this time.
I am not surprised.
I did manage to draw a crowd every time. But it was awkward for a speaker like me who talked about risks of buying overseas properties and reasons of avoiding unprofitable investments when the sponsors had paid thousands to market overseas projects and alternative investments there.
Just in case any blog reader asks me the ‘is it a good investment’ question after visiting the expo, here are the four questions to ask yourself. And pardon me to repeat myself again.
1. Who are the other buyers?
Are they sophisticated buyers or just laymen of the market? Are they savvy investors or just an average joe like you?
2. Can you trust them?
How much do you know about the developer/marketer? Can you trust that it will complete the project on time and with acceptable quality? Will it run away when the market tanks?
3. Why are the locals not buying?
Why is the attractive investment not being snapped up by the locals? Why the developer/marketer has to spend so much time, money and efforts to go overseas, repackage and market to you?
4. Where is the secondary market?
Is there a resale market and a ready pool of buyers for these type of investment projects? Can you easily find anyone to buy from you or sell it back to the marketer next time?
Two ways tell a good bargain from a bad deal
It is not uncommon to see some buyers boasting that they just bought a good property or a gem with high potential – while it is very obvious that they are getting the short end of the stick.
There are two simple ways to immediately tell the good deal from a bad one:
1. Above or below valuation
You can always check valuation online (URA or SRX) from the last few transactions of similar properties.
That’s why you can never enjoy good value-for-money if you buy brand new units in uncompleted projects directly from developers when you are asked to pay ‘future prices’ much higher than similar properties nearby.
For a more thorough research, I would recommend checking past transactions all the way back from the last property down cycle.
2. Positive or negative return
There are different methods to calculate the return of a property. A simple way is to calculate the cash-on-cash return for the first year.
Cash-on-cash return = 1st year cash flow – Total cash investment
1st year cash flow = (monthly rent – loan repayment – management fee – property tax – insurance) x 12
Total cash investment = downpayment + stamp duties + legal fee + renovation + miscellaneous expenses
Remember what I said in my book No B.S. Guide to Property Investment?
If there is a probability formula of finding a good deal, it may come one-third from the buyer’s insight, another one-third from the buyer’s discipline (hard work, patience, persistence, etc.), and the last one-third depending on market conditions and opportunities.
And of course, buying the right property at the right time makes all the difference here.
Let me share with you how to tell savvy investors from average ones in my next blog post. Until then, tell me how you know you’ve found a real property bargain or a fake one.
PS,
thanks for the informative post.
just curious, how do you determine a above/below valuation of overseas ptty?
reason i ask, is becoz most of time, the countries do not have a URA or SRX equivalent.?
I am sure that you can find it if you look for it. But this won’t be provided by the deveoper or its agent for obvious reason.
These days transaction data are all available online. For a start, check the online listings of similar properties in the same district can already give you a feel of the ongoing market prices.
How to tell whether you got a real bargain or not?
1. Do not buy during main launch.
Developers, beside having their own in-house marketing team, will also consult the appointed marketing agencies. It is so common to get multiple marketing agencies to market a project nowadays. They will consult the agencies’s senior staff or bosses to determine the best possible prices. See how they get the agencies’ people to give talks in showflats! It is only towards the tail end of projects that prices are softened after developers have gotten their profits. Patience is important and critical.
2. Do not get suck in by the hype.
These agencies and developers are very good in staging these psychological effects in showflats to hype up the atmosphere that it is so nervy not to commit quickly. If one is undecided, he or she is quarantined into a marked waiting area seeing the sales chart being filled up. It may look very messy but that is NOT important, but the hype is. The object is to ensure the whole place looks noisy, packed, disorderly, and ‘stampedous’ with no quarters given and units on sale are like ‘ lelong lelong’.
3. Do not follow the crowds.
Buy when there is no crowd when it is towards the end of sale, only a few units are available. This is where the developer is more flexible and not follow the pricelist. First, do your own due diligence from study of URA sale of the project or development esp its psf. Then make a fantastic offer that is way below all the sold psf. If the developer doesn’t accept, move a little upwards or be prepared to walk away. Do not be shy to give ‘ridiculous offer’. Do not allow the agents to say ‘no way’ but to tell him to convey it upwards. Just threaten the agent that you will go to another agency to try.
4. Best time is periods like now, where the overhangs of oversupply is there. Shop from Showflats to showflats.
5. From the main launch to the last unit, the best period is the last 10 percentage units left, developers have gotten their profits,
6. Bulk Purchase.
Property clubs with their members can be organized to do bulk purchase to slash prices for their members. They need not have to go through agents but deal directly with developers for more savings.
Hope it helps…
Regards,
Fred
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Hi Frederick, thanks for your input. I agree with all your points.
Just want to add that if you think there are good bargains from leftover units by developers, there are more in the resale market. Just need to be patient and keep looking for them.
Also like to share my old blog posts on “Top five gimmicks of new launch”:
https://propertysoul.com/2013/10/09/top-five-gimmicks-of-new-launch-part-i/
https://propertysoul.com/2013/10/17/top-five-gimmicks-of-new-launch-part-ii/
For overseas purchases..i think a point 5 would be currency restrictions ie capital controls and financing restrictions. I know of investors who are sitting on paper gains on their Manila condos, but cannot realise them as they cannot remit the Pesos back to Singapore as sgd. Those who bought Aussie properties before 2015 are now scrambling for financing now after the latest rule to stop lending to foreign buyers without local income, another case is UOB suspending gbp loans for London properties.
from what i understand, from speaking to the overseas banks,..if you can prove the incoming funds for the overseas purchase. and hence when u sell it, thereafter, you can send the money back. of coz there will be cost involved for sending back the monies.
Yes, fund remittance is another thing that investors need to deal with.
Same for Chinese Renminbi. There are restrictions on daily limit of money in and out of your account. Have to set a standing instruction for daily remittance of the fund.
Your banker should be able to help you with this. A feasible way is to set up a local account with a foreign bank and use ‘global transfer’ to send and remit the sum of money. By doing so, you also avoid paying unnecessary service charge and enjoy better exchange rate.
Great informative article!
Hi I just stumbled on your post and the year is 2020 :). Gross rental yields in prime districts CCR are averaging 2-3%, which most certainly means negative cash-on-cash returns. In fact, most rents hardly cover the loan repayment.
I’m trying to make a case for investing in negative cash return. One observation is that the loan repayment has an interest and a principal component. So long as the rent is able to cover the interest portion and all the other expenses (property tax, maintenance fees, insurance etc), and still generate a surplus to help you partially pay down the principal portion, that should be good enough. How good depends on the extent of the surplus – I’m happy with > 50% of the principal portion.
In other words, if property investment is a forced savings plan, half of the piggy bank is funded by your tenant. What are your thoughts on this ?
I don’t see the logic of investing in anything for a negative cash return. For all the time and efforts spent, a property investment must generate a positive return higher than putting your money in a fixed deposit or your CPF ordinary account. Otherwise, it is called subsidizing your tenant to stay in your property and paying interest to the bank for something that you are not the one enjoying it. Then you might as well give your spare cash to charity.
If you have problems saving money and need a “forced saving plan”, you can apply for a regular saving or fixed deposit account with the bank. Your interest is guaranteed and your principal is protected. If you buy any property in this market, you really need to pray very hard that prices will go up. But there is a high chance that you will lose a big chunk of money when the market corrects itself. At the end, you are the one being punished after paying and giving business to the seller, the agent, the bank, the lawyer, the government and the MCST – and they don’t even have to thank you for taking all the downside of the whole ordeal.
Of course, positive cash return is the ideal situation. But I’ve also done my research on resale/new properties in the CCR – the rents simply CANNOT keep up with the loan repayment. The typical monthly difference is around $500 (e.g. rent $6,800 mortgage $7,300). Add in the monthly expenses and the shortfall balloons to around $1.5K – $2K.
I cannot explain why reality is so….
– Perhaps there are hidden gems (but it’s really, really difficult to find them now in CCR).
– Perhaps they are in OCR/RCR (but the capital appreciation/preservation is sketchy there)
– Or perhaps it’s a sign that properties are due for a correction to resolve the skew in the cash return.
I agree that buying any left behind or ‘unwanted’ unit will enjoy a better bargain for new development. But those units might have inferior facing, layout, floor level?
Not true. Developers have this strategy of save the best for last. The philosophy is: If those blocks with bad facing can sell, the better ones can definitely be sold. Unless you are talking about the last two units which may be in high quantum. And there are always returned units and subsale units in the market.
Thanks for your reply.
1) Sorry, I am in a learning stage and do not understand your explanation in last part ,’Unless u r talking …n high quantum.
…….returned and subsale units in the market’
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2) Do you believe if one’s has good budget, it will be more rewarding to invest in landed than Condo?
3) For Condo in Dist 9, 10 & 11 VS landed outside these 3 districts, if the price for both categories are around similar level, which would you choose & why?
4) You seem to have adopted ‘Robert Kyodaki’ style of viewing 100 units…. for the 1st property you have bought. No wonder you have mentioned in property investment, one needs to be ‘hardworking, patient, persevere’ Indeed, we needs these 3P to view 100 units. before we finalise a gem.
1) “Unless you are talking… high quantum” => last remaining few units to be sold by the developer, could be the bigger units, e.g. penthouse @ $10m left unsold
“returned unit’ => previous buyer had given a cheque to have the option to purchase (OTP) but did not follow through with the purchase in the end.
“subsale” unit => transaction of a unit between the original buyer and new buyer is called a sub-sale.
2) Assuming you are only looking for investment returns (and not for your own stay) it depends on the opportunity on each property, so there is no definitive answer. E.g. are you able to find a condo with higher potential return compared to say landed with lower potential return, or vice versa.