Understanding Real Estate Investing

2 January 2018

The goal in real estate investment is simple. It’s to get your money to work hard today so that it will increase and you will achieve a gain in the future. For this investment to make sense, the amount of profit that you realise needs to be more than your costs: some of which include the risks you take, taxes (in Singapore, this includes Buyer’s Stamp Duty, Additional Buyer’s Stamp Duty, Seller’s Stamp Duty, Property Tax, etc.), other fees such as maintenance, utilities fees and insurance.

On a conceptual level, investing in real estate is akin to playing a game of Monopoly. In order to achieve gains, you purchase properties (and different forms of property will give you different gains), avoid losing your money and bankruptcy, and in the process, collect rent from tenants so that you can generate rental yield, giving you more funds to invest in more properties.

4 Ways To Make Money from Real Estate Investment

Here are the few main ways to generate returns

  1. Revenue generated from the operations of the real estate
    • This is relatively straightforward. By this, the easiest example is to see how a hotel operates. The hotel acquires a piece of land, and through its daily operations, it generates revenue from its customers, who occupy its premises and, thus enhancing the value of its location and the property itself.
  2. Appreciation in the value of your real estate
    • There are many factors that can influence the price and value of the property that you invest in. For example when there are amenities such as shopping malls that are built around your property it increases human traffic and football and thus becomes more attractive as it has the potential to generate more revenue. Or, you invest funds for renovations and upgrades, enhancing the value of the property to potential buyers and tenants.
  3. Rental Income
    • This refers to renting out your property to tenants who will then be in a position to provide you with a steady stream of rental income. Such income can be collected regardless of whether you own a residential, commercial or industrial property.
  4. Secondary real estate revenue
    • An advantage of owning a physical premise is that besides renting it out to tenants, the space within the property can also be monetised by introducing businesses such as vending machines, laundry services, security services, to pay a rent to occupy certain parts of the property and run their business to generate income. This allows you to collect money from yet another group of customers

How to Purchase Properties for Investment Purposes

For most investors, the cost of acquiring a property is beyond reach, and thus it is almost always necessary to make use of leverage and take out a mortgage loan. Even if an investor had a large amount of cash, it isn’t always wise to lock up all the funds into a property right from the start and reduce the liquid cash available for other forms of investments. Although paying a mortgage loans means that you have to pay the interest, this allows you to leverage on what is known as “other people’s money” to fund the property purchase, and keep your own funds in liquid cash for other, more lucrative investments.

That said, taking out a loan for a property purchase is not without its risks – the borrower is at risk of fluctuating interest rates that are dependent on a performing or underperforming market. Fortunately, interest rates in Singapore have been low and remained low over the past few years, aided by interest rates by the Fed.

If you hold an investment property under your own name and there are lawsuits that arise from circumstances such as debt, defaulting on payment, etc, your personal assets could be at risk. For that reason, consider purchasing a investment property under a legal entity such as a limited liability company or limited partnership. This way, if anything detrimental happens, your personal assets are protected. For more information on the various legal entity types in Singapore, refer to the ACRA website for business structures.

When you are ready to start investing, you should visit websites to read reviews of properties in Singapore, look at nice homes in urban Singapore, or consider luxury properties in Singapore.

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