Do Properties REALLY Make the “Perfect” Investment?

Do Properties REALLY Make the "Perfect" Investment?



The following are the various attributes to consider when evaluating any type of investment:

1.    Returns: The Expected Returns must be powerful i.e. greater than 15-20% p.a. Since most properties yield an average Rental Yield of 4-7% p.a. (depending on property type, location, etc) + Capital Appreciation of 5-10% p.a. (depending on economic growth, inflow of foreign investment, etc), Properties are considered to be Moderately Powerful.

The returns are usually more than enough to keep up with and even outperform your family's "unofficial" inflation rate of 6-10% p.a. Hence, properties are an excellent long term investment for keeping up and even out-performing inflation.

2.    Stability in Both the Market Value and the Annual Returns. Properties are considered to be extremely stable and hence safe. They are less risky investments as the Volatility or Price Fluctuations are extremely low. On the other hand, it's fairly common to see prices of even blue-chip property stocks fluctuate between +/- 20% in any given year.

3.    Liquidity: How Fast Can You Convert to Cash either by Selling or Refinancing. Unfortunately, properties fare very badly in this regard. Properties take time to sell and convert to cash. The earliest, if you are lucky, is approximately 1 month to sell and another 3 months to get paid. Leasehold properties in undesirable locations may easily take 6 months to sell and another 9 to 18 months for the transaction to be completed.

However, if your property is fully paid-up or if you have built up sufficient equity by reducing your outstanding loan, you will have the option of revaluing and refinancing the property. It will take approximately 2 to 3 weeks to refinance a property with the same bank. If you are refinancing with another bank, it will take a few months for the paperwork to be completed.


4.    Leverage: Does the investment offer you the opportunity to borrow money + does it give you the flexibility to choose your borrowing level? In properties, you can choose to borrow anywhere from Zero to as high as 100% of the purchase price whereas for Futures or Options contracts, the gearing levels are fixed as the contracts are standardized.

No other investment has this unique benefit. In some instances, it's even possible to borrow 100% of the purchase price if you are familiar with creative financing techniques. The advantage of borrowing money for property investments is that your loan is gradually being reduced thanks in part to your hard-working tenants and your asset is appreciating over time thanks to inflation.

5.    Expenses or Costs at the point of
a)    Entry or Purchase and
b)    Exit Point or Sale of the investment.

Properties are costly investments, both at the entry and exit points. During purchase, there are legal fees, stamp duties, mortgage insurance to cover the loan amount and several other costs involved. During exit, there may be property agent's fees payable, legal fees to redeem your outstanding loan and other costs.

While the above may not seem to be a complete list of attributes to consider when evaluating any type of investment, but they are a few of the main attributes to consider when choosing an investment type to invest.

6.    Capital Gain Taxes on the Disposal of the Investment. On 1 April 2007, the Real Property Gain Tax (RPGT) was abolished, hence properties are now on par with other investments with regards to this point.

7.    Annual Operating Costs such as Income Taxes, Other Expenses (e.g. Quit Rent, Assessments, etc), Interest Costs, Repairs, Management Fees, etc in up-keeping the investment. Properties fare badly in this regard.

8.    Time taken for transaction to be completed, at the point of purchase and sale. On average, it takes anywhere from 3 months at the earliest to even 12 months in some instances for the property transaction to be completed and for money to exchange hands. For portfolio investments, it usually takes only 3 working days for contract to be concluded.

9.    Stress or Headaches involved in maintaining and up-keeping your investments. With properties, you must be mentally prepared to deal with numerous problems with regards to property and tenant management issues.

10.    Maintenance of Proper Records for Bookkeeping purposes if there are tax issues involved. Due to the various fees and charges involved, and the tax implications of them, it's absolutely essential to maintain proper bookkeeping records. The more properties you have, the more time, effort and money you will have to spend to ensure your records are kept properly.

11.    One Time Effort Needed. Properties score a perfect 10 here. You only have to work once to acquire the property. Thereafter the property will continue working for you forever, as long as you keep it. On the other hand, portfolio investments requires regular monitoring as they are susceptible to any changes in the economic environment.

12.    Impact of Mistakes. Mistakes are bound to be made by everyone especially new investors. The impact of buying the wrong property type, in the wrong location, taking the 'wrong' type of loans or having a nightmare tenant is thousands of dollars and a few years of your life to undo the damage done. Hence it's extremely important to get it right the first time and every time in all aspects of property investments. Mistakes are extremely costly both in money and time costs.

13.    Market Efficiency: Are prices of the investment freely disseminated and known to everyone? Unlike mutual funds or stock prices, property prices are not freely available. To compound to the problem, valuation of properties is extremely subjective. The value of a property in the eyes of the seller, property negotiator, valuer, banker and buyer is different. This presents numerous challenges to novice investors as well as opportunities for savvy property investors who possess the knowledge of property values.

14.    Investment Horizon: Is there any minimum period the investment ought to be kept? Properties should ideally be kept for a minimum of 3 to 5 years as the entry and exit costs are extremely high and the returns are only moderately powerful. Property investments are usually not recommended for those who want to get rich fast or for those who need their funds back in less than 3 years. However on some occasions, it's possible to make money by using "flipping" strategies by buying below market and disposing above market.

15.    People Skills: Property investment is a people intensive business and you must be able to build rapport and get along well with real estate agents, sellers, tenants, lawyers, bankers, contractors, etc. Also you need to possess good negotiation skills and almost everything is negotiable. If you do not have these skills, you may not find real estate your investment "cup of tea".

 

Cheers!

Article attributed by Milan Doshi