How to make sure your real estate investment is worth it?

Introduction

Whether a property is an asset or a liability is highly subjective and depends on factors including but not limited to property type, location, terms of financing, and your personal goals. Traditionally, real estate has been a preferred way of investment because, at a psychological level, property creates more positive value. It is a tangible asset that you can see and touch. Thus, it has more emotional weight than other financial instruments such as equity or bonds.?

However, with the property market becoming expensive and inflation rising, it is important to answer whether your investment in real estate grows your wealth or eats it. The?2023 Urban Land Institute’s (ULI) Asia Pacific Home Attainability Index report?reveals that Singapore has surpassed Hong Kong as the most expensive country in the Asia Pacific. The median price of Singapore’s private homes stood at US$1.2 million in 2022. Likewise, among the eight cities studied in India, Mumbai has the highest median home price per square meter of US$3,383, with Delhi NCR trailing behind at US$1,358. Nevertheless, this market trend should not deter you from making real estate investments. All you need is to be aware and apply the following best practices to maximize your property investments.

1.???Consider a reasonable debt-to-income ratio when buying a property.?

Owning a home is the most basic need, which gives you a sense of security and protects you from the aggressive rental markets. However, you don’t want to end up in a financial predicament where you are in a cycle of negative cash outflow for months. Before you fall in love with your dream home, assess how much you can afford in terms of downpayment and EMIs.?A good financial hygiene practice is caping your debt-to-income (DTI) ratio at 45%.?If your monthly income is SG$ 10,000, you shouldn’t be paying more than $4,500 in servicing debt. Remember, emergencies can knock on your door anytime!?

2.???Build a financial asset that can reduce the burden of upfront payments.

Having said the above, the reality is that you don’t want to settle for anything less than your dream home, which often costs beyond budget. This is why buying the first home is usually financially draining, leaving people cash-poor. But how about creating an asset beforehand that can pay for your downpayment? Of course, this requires some foresight and financial discipline to set aside a regular monthly amount.?To make the homeownership process less financially stressful, structure a portfolio of equity and fixed income with a time horizon of 5-8 years which can cover a DTI ratio of at least 60%.?

3.???The rental yield should ideally beat inflation for it to make investment-worthy

Undoubtedly, property is a great option to create passive income. However, only a few people do math beyond the upfront monthly rental payment. Calculate the rental yield before you invest heavily in buying that second property. As per Global Property Guide 2022-Q3, India’s residential yield varied significantly across cities, ranging between 2-7%. In comparison, the rental yield in Singapore stood between 2-5%.?The average headline inflation for the last ten years for India and Singapore has been 6% and 2%, respectively. This means the chances of your rental income beating inflation are higher in Singapore.?The bottom line is don’t end up with multiple properties adding zero value to your investment portfolio; rather, buy real estate that justifies the cost of borrowing and high upfront costs.?

4.???Consider building a maintenance or renovation fund for your property portfolio

Owning multiple properties is a matter of pride and achievement for some people. However, having a property portfolio comes with its challenges. All properties require regular maintenance and renovations to keep up with wear and tear. But the common tendency of property owners is to evade expenses on property not used for their consumption. Remember, a run-down space will lose rental opportunities and deteriorate in future value. Therefore, if you desire to own a property portfolio, complement it with a holistic property management strategy to avoid any loss of its intrinsic value.?Firstly, set aside some money in a short-term maintenance fund that can take care of small ad-hoc expenses. Second, build a medium-term fund to support you with bigger renovation expenses.?The best thing is you can easily service these funds via rental income without contributing extra from your pocket.

In the end

Investing in real estate should not be an emotional decision; rather, make it a thoroughly researched and well-informed decision. Your decision should be based on your personal goals. Understand the market you are investing in and consult a professional if you need more clarity on building assets to offset the financial stress of a property purchase. Today’s decisions can make your next property investment a real asset or just a liability!

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