Lessons to learn from property investors

Lessons to learn from property investors

What does it mean to be truly wealthy? Or at least to achieve financial freedom?

If you can succeed in building a steady stream of passive income, you will have financial freedom and it will lead to more freedom with regards to your lifestyle, your work and your time.

This in turn allows for individuals to amass and build wealth.

Although it’s not the only way to become wealthy, it is no secret that wealthy people often use property with a rental income as income generating assets.

Most billionaires in Singapore built their wealth through real estate. This investment strategy is available for investors like you and me too.

Here are lessons we can learn from those who have made their money through real estate:

You will not gain passive income through just trying to buy and sell properties.
Many people still cling to the misconception that property investment is about buying and selling at the right times. Of course, it is possible to make money this way, but it will not help you to build a passive income. Buying properties in key locations, like the upcoming Tengah project, will help you see capital gains in the future, but holding onto the property and renting it out will afford you monthly passive income that could also be channelled towards buying more properties.

The house that you live in is not an asset
An asset generates income, whereas a house you live in generates expenses, like mortgage payments, and therefore is a liability to you. The house price-to-income ratio in Singapore is 25, which means that you will probably have to work 25 years to pay off the mortgage. You can only see a property as an asset when it is rented out to generate income. So instead of waiting for your mortgage to be paid off in full, you should already be looking into buying your next property.

Broaden your horizons before putting all your eggs in one basket.
With the price-to-income ratio of 25, you might do much better with property in other regions. The ratio in the US is 2, 4 in Germany, 6 in UK and 7 in Japan. With a certain amount of capital, a rental property somewhere else might be paid much sooner than a rental property in Singapore – generating income for you.

Be careful with low rental yields
In Singapore, the rental yields are at a poor 2-3% level. It means that your rent will not be enough to cover the mortgage payment and it will take a very long time to repay the loan. Unless you buy properties in prime locations with higher rental yields, this is not a good way to make passive income.

Strive to make optimal use of leveraging.
Leverage means that you use only a small portion of your own capital to finance a property, but you reap the rewards on the full sum which are made up of other people’s money (loans). For example, if you pay $200,000 on a $1,000,000 property, and the rental yield is 3%, the rate of return is 15% ($30,000 on a $200,000 investment). It allows you to accumulate more assets than they would have been able to do with their own resources.

You need to buy the property at a very good (discount) price in order to achieve better returns.

If you can pay less for the property but still receive market-related rental income, the rate of return is much higher and you will make better profits from the property.

(By Lida Robinson)

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