Monday, 22 July 2013

b.Capital - Investment Style

The last past is here:   Capital - Generations Game 

A friend once asked me that not every one is interested in land, some might prefer the more modest property investment. But, she saw problem in property investing. For each property, marked at say, $100, the place could usually be fairly rented at say, $5 per year (or 5%) or $0.42 per month ($5/12). With this gross rental, it will take approximately 20 years ($5 x 20 = $100) to recover the investment. This is a very long time. But, compared to bank deposit rate (at 1-2%). This is still superior. And compared to stocks & shares (15% returns), it is slightly inferior. But, stocks & shares have higher risk. The good news is property investment does bring about capital appreciation which she felt that is a good compensation. So in order to bridge this low returns, one usually tries to gear the investment by borrowing from the bank. Say, based on 10% down-payment and if there is a capital appreciation of 5% that year, one would have gained 50% investment return! Wrong! Wrong! Wrong! Many people has forgotten that borrowing incurs cost. That interest cost could be as high as 6-8%. Based on the borrowing of 90%, the net interest cost could be anything from 5.4%-7.2% (90%x6%, 90%x8%) which is way above that of the 5% appreciation. There is therefore a net loss of 0.4%-2.2%, even with 5% capital appreciation. What if there is no capital appreciation for some years?  The longer one borrows, the more negativity one gets. so how?

I smiled. Once you borrow from the bank, you would be doomed. I have been there, done that. There was no happiness. There is no quarrel. See the car that the banker drives and the car that the borrower drives would tell you its true story. If all are earning normal profits, there should be no difference in being a banker or a borrower, all are earning fair value, the fact is the banker drives a much better car implies that there is trickery up the banker's sleeve. So it is a zero-sum game, the winner is the banker and the loser, the borrower. So don't borrow, regardless. You will see the wisdom many years down the road.

But faced with the grim prospect of buying a property cash and renting it out to try to recover its capital is real long and painful, there must be a better legal way.

If you must invest in boring property such as houses and buildings, then you must exercise cunning. Most residential properties have terrible tenant records, i.e., the tenant will not pay on time, the tenant is very well-protected by the authorities, the owner can't evict the tenant without an eviction order, which can take up to 3 months to get. There are hearings and complaints from the tenant to slow the eviction process down. By the time the property is vacated, i.e., rental-free for 6 months, you may find cement powder poured down the sewerage before they leave. The repair bill (or rebuilding cost) is going to be extremely high.

You have no choice and must therefore employ cunning, if you must buy a residential property, find out if you could rent it out to businesses like the old-folks homes, child-care centres, corner grocery stores, churches, display houses and etc. The key is you will receive a much higher return for your property and hence, it is now worth its while to purchase. Having a business residing in the residential property provides stability in rental income and general state of repair. These businesses hope to gain in the long haul and so is less likely to play tricks. For other property types, you will have to think further.

There is however one more joke. The capital appreciation is not real. Why? Well, if you were to sell the property, can you buy back the same property with less cash. The answer is a big fat NO. So what have you gained? Nothing. The so-called capital is nothing more than the state's printing press having gone on overdrive to print more coloured papers in exchange for your real estate. Paper money is not real estate, it is just a medium of exchange for goods and services. It has no intrinsic value. By the time you wish to sell, your plate of chicken rice would have been $50 per pop.

So even with boring residential property investment, you have to employ cunning to win the race. Anyway, I rather prefer not to. Learn to put the land on duty, that's what my partner-in-crime used to say.


  1. Hi Luca, are there any public keys on examples of getting a higher yield than properties from land?

    Since most of us have experience buying a property (some even losing money despite that), and very little or zero experience buying land of other genre in Singapore, the possibility of losing money due to the lack of foresight, inexperience or just plain stupidity is high. Where can we start to learn? Surely not by making mistakes? Cost of mistakes of such level is too high for avarage people to learn from because it will us back for years or even decades.

    Is there any difference buying land vs property by borrowing or both are equally bad? If so, how does buying land whenever a man can with his extra cashflow (in an earlier post) work? Or is there a form of buying land by installments that is only for private eyes to view?

    not that I haven't been racking my brain, I assure you if I am clever enough, I would be writing these myself already

  2. (Comment reposted wo the link) You are in Australia. There are millions of golden opportunities in Australia. You need to patiently seek them out. You need to re-read most of what I have written. There are enough nuggets for your consumption. Although this is only a public key to my heir(s), there are still good values to pick.

    I just give you an example to start you off:

    This is the internet. I can't speak more. Else too many people get the wind of it and we will be out-maneuvered.

    Too many lazy chinamen around. They are smart but lazy.

    Please acknowledge that you have read this reply, I will delete the link after you.

  3. Now that I have calmed your mind. It is time for you to put your nose back to the grindstone and start to generate excess cashflow.

    Try not to share that information as there are just so few of us truly working hard and turning the wheel of fortune.

    When you engage life, you are engaged in life-and-death battles. Never for once, release that alertness, they are never your friends. I was conned too many times by my own so-called countrymen.

  4. I have a few questions on my mind about the management of acquired land, since they are always going to be far into the regional areas. Unfortunately the biggest cashflow is from employment and from my little understanding, we will probably not get any yield unless work is done on the land. Correct me if I am wrong. Is there a way out of this catch22 situation? I'm prepared to read up a lot if you can point me to any resources please

  5. Sigh ... You asked too many questions and think too little. Be still and listen to your own heart. The heart will guide you. Your destiny is in your own hands. If I teach you, you will become a zombie with no ambition and direction.

    Maybe you should be like me join a yoga class and develop that inner eye.

    As it is, you have already 入魔, you now worship money as your only purpose in life. You will not be successful if you follow this path. Please be warned!

    Maybe my next essay might help you in developing your destiny.

  6. Respecfully disagree Luca. I am very sure I don't worship money. Trust me, I know myself. There is something else I seek, else I wouldn't leave Singapore, if money was my only pursuit. My heart said I should be reading more, so I am here for now and it wasn't wrong. I learnt plenty and even got a few generous tips. Believe me, i am asking for directions because i am lost, not for you to take me there. I will walk my path myself and i know where i want to go

  7. Sir,

    I am convinced that you have indeed found your way. I am happy for you. It is not easy to find a way, but you did. Nice.