Why Invest in 2nd Property?
Our 1st property is usually for own occupation purpose, but why does many desire to invest in 2nd, 3rd or even more properties? Why is property investment the hot topic among the wealthy in all countries? Are endowment (savings) plans offered by insurance companies better or wiser to invest in properties? For passive income or retirement planning, Singapore property is one of the best investment instrument. The rich and wise tends to have a habit of buying properties with the money they earn. Depending on the rate of earnings, some buy it every year, some buy it once in a few years. Nevertheless, it is a very good mindset to cultivate; asset accumulation. In my opinion, while insurance is good to handle unexpected circumstances like hospitalisation, illness, professional mishaps, etc, the security it provides for retirement planning is still a far cry from property investment. We will discuss how 2nd property works for you.
Let’s say you buy 2-bedroom unit at V on Shenton, a condominium in Marina Bay district that has easy accessibility to several MRT stations, located right across Downtown OUE mall, for $2,000,000. Below is the computation of the cash upfront assuming a 50% loan quantum.
|Balance Downpayment & Cash Payment||=||$900,000|
|Stamp Duty (Buyer Stamp Duty+7%)||=||$194,600|
Assuming 50% financing through bank loan with a repayment tenure of 20 years at 3% p.a. interest rate, the monthly instalments will be at $5,546. The monthly maintenance fee is at $452. These add up to monthly expenses of $5,998. Since a 2-bedroom unit can achieve a rent of $6,000/mth, the rental pays for expenses. Conservatively forecasting a 10% increase in price after 10 years, selling it will give a cash proceeds of:
Resale Price $2,200,000 – Loan Redemptions $578,189 = Cash Proceeds $1,621,811
The difference of $427,211 equates to 35% returns on original cash investments, passively after 10 years. This is also equivalent to 3.1% CAGR, much higher than depositing the money in bank. Another perspective from retirement planning would be a passive income after 20 years, which is equivalent to:
Monthly rent $6,000 – Monthly Maintenance $452 = Passive Income $5,548
In our discussion, we used conservative numbers in rental and also resale price. You might want to run the numbers again based on reality numbers instead of conservative growth rate on rental and resale price. A $100 difference in monthly rental can have humongous effect on final returns. There were those years when the property market gives quick returns within short time frame. A piece of advice; The time has come and gone, don’t live in the past. Buying a second property is no longer for quick gains, but rather now is to take things back to basics; retirement planning. It is also wise to buy within means. Pushing things too extreme often bring about adverse effects. I regret not buying more when I have the means, and now I live in regrets, working much harder to reduce the cost of opportunities lost and in envy of friends who chose the path of delay gratification back then. Whenever my friends ask me how many properties is considered enough, I would say “1 for each of my kid, 1 for my family when my kids is with me, another 1 for ourselves (me and my wife) when our kids are grown up, and perhaps another 1 to finance our (me and my wife) travelling plans after retirement.” To build wealth, we need some sacrifices along the way and also good discipline. Sometimes when we made too many foolish decisions, the aftermath spills to our children too.
Keeping money in the bank exposes us to inflation losses due to the low interest rates. When our discretionary income reaches a certain level, we have to start using money to roll money. Buying property is one of the easiest method to achieve high returns. After all we only live once. How much we make out of it is up to us. Hope you find your way and success in wealth-building.