If you were to run a search on properties for sale on www.propertyguru.com.sg, you would see more than 100,000 residential properties listed at any given time. And we have yet to include commercial properties as well.
While every salesperson you meet will be telling you that his or her property is probably the best investment decision you will ever make, not all are considered investment grade property.
Yes. Every property out there can be rented out for income. Every property that you purchase may eventually give you ROI on your capital. But that does not automatically qualify it to be an ‘A Grade Investment’.
How Does A Property Investment Make Money For You?
There are primarily 3 ways whereby a property generates returns for you.
1. Capital Gains – something which happens as the value of your property grows over time
2. Rental Income – income generated from renting out the property to tenants
3. Manufactured Gains – through value adding to a piece of property and then selling it off for a premium (eg. Redevelopment of old buildings, construction of dwellings on a piece of vacant land)
There is no one best strategy to making money from property investment. It all depends on your financial capacity, risk appetite as well as the financial goals you are seeking to achieve. For some, they would need to accumulate wealth and grow their asset base. For some, they may have reached a stage whereby they wish to retire on the cash flow their assets can generate.
How Do You Identify An Investment Grade Property?
An investment grade property should:-
1. Appeal to affluent end users – the keyword here is end users. There are only so many investors available in the market. And at some point, when you decide to exit your investment, you would like to know that your property appeals to both end-users as well as investors.
During a market cycle upswing, there will be developers who will build properties specifically for the investors market. (Think shoe-box apartments).
Investors are sucked in mostly due to the very affordable quantum. Most of the time, these are sold to wannabe investors and the worst part is these properties are aplenty and are sold at a premium. In time to come, these buyers will realise that they are stuck with a bad investment that they have problem offloading.
Being able to appeal to affluent buyers also means you can target this group of people who can afford and will pay a premium for their choice of lifestyle.
2. Be in the right location – location, location, location. Need I say more? An in-demand property will be in a location that has easy access to amenities as well as good transportation infrastructures. That is why properties near MRT always are in such strong demand from tenants.
A property that is located in a region whereby it is undergoing major transformation will also see capital growth in time to come.
3. Be bought below its intrinsic value – Always do your due diligence before you commit to a purchase. You ought to be aware of the price trends of the properties in the area.
A property purchased below its intrinsic value allows you an error of margin. A right property bought at a wrong price could mean that you will see no gains even after years.
4. Be scarce or unique – it is always a plus if the development has something unique or special to offer. There’s a Chinese saying that translates: “Things come at a premium when it’s rare”.
It could be that the development enjoys breathtaking sea view or it could be designed by a world renowned architect & interior designer or it could also be a rare integrated project that has a shopping mall below and is directly connected to a MRT station.
There is no single best approach to buying the right investment grade property. But bearing in mind the 4 points mention above will greatly reduce your downside should you be caught in the next market downturn.
This is an opinion piece by Kevin Yeo.
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