INTRODUCTION
Many are excited about the prospect of picking up good deals. What are the financial factors one should consider before diving into purchasing property for own stay or investment?
WHY IS IT IMPORTANT TO ASK YOURSELVES QUESTIONS?
People are usually excited about bargain deals; I am no exception. Buy three get one free or even buy one get one free deal are always attractive, but I have always asked myself these questions when faced with good deals or even a fire sale:
- Do I need them?
- How often will I use them?
- Why do I buy them?
- How can I deploy my cash if I don’t buy them?
- If it is a substantial investment asset, will they be an asset to my loved ones should I pass on? Yes, you read it right, how my asset will be an asset instead of liability to them?
FIRST, UNDERSTAND REGULAR SAVINGS AND COMPOUNDING
I used to have a part-time housekeeper who will clean my house twice a week more than 10 years ago. It cost me between $350 and $400 a month then. One day, I asked myself why I could not do the housekeeping myself? I decided that I am good enough to sweep and mop the house, do my own laundry and had gotten my children to help washing the toilet etc……and save an average of $350 a month.
Just to illustrate, should I had invested the spare cash (which I had) in an instrument that gave me an annual compounded return of 5% over the last 10 years, it would yield me a lump sum of circa $54,000 today. Though $350 a month does not seem much, regular investment into a financial instrument can result in something impressive over a long period of time.
WHAT ABOUT PROPERTIES?
Why are you buying? For own stay or investment income and appreciation? Why that location and why that type of property class? If it is for investment, what is your investment horizon and exit strategy? How are your loved ones are going to deal with it when you are gone or incapacitated?
First, do the mathematics yourself. It does not matter if you are investing for an income or own stay. (I will focus more on investment property here) Make sure you include all the upfront cost of procuring the property such as legal fees, stamp duties, agency fees and the like. Also, remember to include property taxes, management and maintenance charges, income taxes on rental income and interest payments in your computation. Do get a responsible real estate professional and financial planner to help you if you are having difficulties with the numbers. I would suggest you make a comparison with other form of investment not just in terms of return and volatility but also liquidity and risk.
WHAT ARE THE “IFs” YOU HAVE TO CONSIDER?
As real estates are large in term of investment value and are most likely involve a mortgage. Your ability to manage the cash flow becomes extremely important as it will impact your long-term financial health.
- You must ask yourself what if monthly rental income net of tax and other expenses is less than your monthly mortgage payment? Are you still able to keep the property without falling into cash flow stress?
- As part of legacy planning, have you asked yourself how your loved ones are going to inherit your assets particularly your investment properties as they usually involve mortgages? It is important to pick up a term insurance that covers your outstanding loan. This is so because you would not want to leave behind unresolved debts behind for your loved ones who inherited your assets. Especially in case where you are incapacitated and are no longer able to manage all your financial affairs. This situation would be very challenging for your loved ones or care givers. You must have a robust legacy planning process established to deal with such big assets.
CONCLUSIONS
Finally, consider your own personal finances such as your cash flow, reserves for rainy day and other financial obligations. Real estate, as noted early, usually involves mortgages, and are not easily disposed of, have you considered doing a robust legacy planning where you do not leave behind a “toxic” asset for your loved ones?
So, ask yourself something brutally honest questions before diving into bargains or fire sales.
Disclaimer: All information are for informational purposes only and should not be relied upon as financial advice.