Sunday, 1 June 2014

p.A Property is a Property is a Property

The last part is here:   Return on Capital

Today I have a very puzzling request:   Why must we buy so old and therefore cheap properties and so far away as well? Why can't we be like everyone else? Buy a normal, nice and comfortable property and get a normal passive income to boot?

From the depth of it, this is a really nasty question. It is very, very, very difficult to answer. Even if there is an answer, it doesn't imply that it is a perfect answer. Even if it is a perfect answer, due to seasons of the market, one's decision may seemed right at the time of decision, it would go dead wrong if the market is somehow misread.

But, I am an old fool. I love challenging questions.

Lots of guys love to time the market. They time it left and they time it right. Most of the time, if they have the staying power, they are proud and successful. But, if they don't have any staying power, they are the most foolish. But, real market is not a game for fools, the cash outlay is huge and the punishment deadly.

Take a hypothetical case:
  • A normal property is costed at $300k and rentable at $1,200 per month, giving a Return-On-Investment (ROI) of 21 years or the classic 5% return. This property is almost brand-new (5-10 years) and located at some nice suburbs. Shopping is not too convenient but good enough. It is not near any famous eateries. Commuting to city centre is about 15-20 minutes. It is normally to collect about 10-20% of down-payment ($30,000-$60,000) to secure a bank loan of 80-90% stretched over 25-35 years. Over the tenure, one would need to pay (not including down-payment) about a total of $1,800 per month x 30 years x 12 months = $648,000 or 2.2 times the initial purchase price. Assuming the property is rented out, there would still be a short-fall of ($1,800 - $1,200) x 30 years x 12 months = $216,000 or 0.72 times the initial purchase price.
  • On the other hand, a nasty property is costed at $35k and rentable at $350 per month, giving a Return-On-Investment (ROI) of 8 years or 12% return. This property is very old (18-25 years) but located very near to city centre. Shopping is very convenient. It is near famous eateries. Commuting to city centre is about 5-10 minutes. It is normal to pay cash for the property. Based on the initial quantum of down-payment of the other property ($30,000-$60,000), one can collect about 1-2 of these nasty properties (2 nasties = 1 nice-ty in land size). Over the same tenure of 30 years, one would have collected a total of $350 per month x 30 years x 12 months = $126,000 or 3.6 times the initial purchase price. If buying only one initially ($35,000), then one would have collected 1 + 3.6 = 4.6 properties in total. If one were to buy 2 nasties initially, one would have collected 4.6 x 2 = 9.2 properties. Not forgetting, it also have a cascading effect, i.e., every 8 years, each nasty can give birth to another nasty collecting even more rental. Mind you, I don't even need to pay the extra $600 per month for the next 30 years. If that is included, I would have collected another 6.2 nasties on top of the 4.6-9.2. Given that 2 nasties = 1 nice-ty in land size, the potential is way too great to ignore. Also, if the plot ratio is increased due to congestion, these nasties are great cash pockets.
The above showed a very simplistic view of things. In short, the nasty investment is a superior choice.

Overall, I didn't take into account of possible downturn, or upturn, inflation of property prices and so on, just simply too many factors to think about. My primal instinct is that investing in nasties is the way to go. For a fraction of the price of a fresh property, I am able to buy something very near to town. The return would be way superior. I have a chance to own many more properties.

Lots of guys don't understand that the developers exact very heavy prices on building new properties for sale. To sweeten the deals, they have no choice but to have short skirts doing their sales. Whenever this happens, you know you are paying a premium for the things you are buying. These short skirts are not cheap to employ.

The stigma in investing in nasties is that it is not pretty. It is bad in reputation as compared to nice houses. Even living in one caused grief to woman folks. Most people like to classify these nasty dwellers as scum of the earth.

Not forgetting these niceties are nice only in boom times. In recessions, these niceties would have turned nasties too. I might then engage these niceties as if they are nasties. 

Only if my woman folks understand this simple investment principles, they would be richly rewarded 10 years down the road.

It is these troubled so-called "stigma" that is giving me so much joy. I do pray for my woman folks to understand and tolerate me for just 10 years. In the event I am rewarded with expanding business volumes in future, this waiting could be shortened greatly.

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