Not long ago, I was marketing a unit located near the Redhill MRT station at S$800,000 and I had received many calls from interested direct buyers. As an avid property investor myself, I am always interested to know the intention behind any property purchase and when asked, most buyers tell me that they are just selecting a property to purchase for their own long-term stay and want to make it more convenient for their family. As a result, many who stay in the far east or far west of Singapore, for example, Tampines or Jurong, wish to relocate nearer to town so many places will become more accessible.

What intrigues yet unsettles me is the type of mind set that most potential buyers I come across adopt when purchasing or intending to purchase a property. In my opinion, while long-term stay and convenience is an important reason to look for a property, any property, it is just as essential to go into the property hunt with an investor’s mind set. Don’t forget that a house is a great asset in your life and for the amount of money you’re putting in the house (Colossal!), you have to ensure that its value will serve you well in the future.

The first question you should always ask yourself is how much you think you can sell the unit you’re looking to buy for in the next 5 years. With regards to the Redhill unit that I was marketing, most of the buyers told me they imagined they could let it go for about S$100,000 – S$200,000 more from the current asking (S$800,000). Optimism! That’s always good. However, when I ventured to ask further about how certain they were that in 5 years, that asking price would be achievable, most of them took a (mostly figurative and more than a few literal) step back and replied they didn’t know.

I’m using this Redhill instance as an example but this happens too many times across various types of units and it is a crucial oversight that shouldn’t even take place. Merely hoping to have a good price appreciation for the unit they bought or are even just intending to buy will more often than not, only end up in smoke. This is not the correct way to buy a property; in fact, it’s really pretty dangerous to leave it up to chance like that. Never pursue a property purchase in that way, not for a unit of your own stay and especially not for the intention of investment.

Whenever I look to buy a property, before anything else, there are two most important things to check and they are:

1) Potential Upside

What you can do to gauge the current and future value of a particular unit is to survey similar types of properties and units around the area and investigate what the recent transactions for those units are.

Here’s a real example, I did a research on City Gate Residences.

The unit that I was looking at was a 2-room dual key type with an asking price of S$1.3 million. Doing a background search, I searched for the transaction prices that had been confirmed for similar units in the area.

(a) I found that SouthBank had last transacted a 2-room unit for S$1.4 million and before that, there were transactions at S$1.56 million and S$1.75 million respectively.

(b) In another development within the area, similar 2-room units in Citylights had also last transacted S$1.39 million, S$1.4 million and S$1.43 million respectively.

With those kinds of figures, it can be easily deduced that our 2-room unit in City Gate Residences should be selling at S$1.4 million in the future.

Thus, it will be reasonable to get a transaction price around the same price as other similar units in the two different developments (in the area) and enjoy the additional S$100,000 of appreciation on the unit 5 years later. Furthermore, in the case that the units are appreciated further, our unit will follow suit too. And this is a good method of gauging our capital appreciation!

The second thing I look at is the,

2) Potential Risk

Contrary to popular belief, the scariest thing that can happen when buying a property is not the price drop. Instead, it’s the ability to rent the unit out.

Here’s where you have to look at the risk of your investment. In 2008, when prices were dropping like flies, the only thing giving many investors the confidence to hold on to their properties was their monthly rental income. Rental income allowed them to continue their mortgage instalments and that’s why it’s even more critical than the price of your unit.

This is how we can calculate the risk, using the same City Gate Residences unit as an example.

Remember that the unit is a 2 bedroom dual key, which means that you can rent out the unit as 2 separate units. Looking at the location, City Gate Residences is only one station away from Suntec City and Marina Square area. This is our targeted tenant pool.

Again, looking at similar units from other developments:

At SouthBank, a 1-room unit is renting at S$3,000 to S$3,800.

Likewise, at Citylights, a 1-room unit is renting at S$3,100 to S$3,800.

Now, assuming that we rent out our 2-room dual key unit at a normal 1-room unit for S$2,800, the other unit can be rented out at S$2,000. Collectively, this will yield us S$4,800 monthly rental income.

Our monthly instalment should be below S$4,000 if we manage to obtain an 80% loan across 30 years. Assuming that our monthly instalment reaches S$4,000, this will still bring us S$800 every month. Of course, we must also consider our interest rate and in the event that it increases.

This is where I do a stress test with an increased interest rate of 3.5% for the instalments. Keeping in mind that I still have the additional S$800 yield as a buffer, our increased instalment due to the interest rate is still less than S$4,700. Therefore, the monthly collective rental is still enough to cover the monthly instalment on the unit.

This is how I calculate our potential risk.

With these two factors, I am able to see my potential upside – what I have to gain by buying the unit. At the same time, I am also able to calculate my potential risk on the unit and evaluate if it is within my means. These two factors alone already provide me with a clearer perspective than most prospective buyers in the current market and it’s a rather disconcerting thought to have. Imagine buying a laptop or a phone, because there are many of different brands and specifications, many will look around and compare prices and plans and specifications before finally deciding on one that suits them best. And this is because you want something that is value for money and aligned with your lifestyle and purpose.

Buying a property is not so different yet much more important because it is an asset. It is something that has the potential to become much more valuable in time. It is not a means to an end, and one should not think of it simply as a place you are going to sleep for the rest of your life and raise your family. Hence, I want to reiterate that properties should not be bought blindly. If you’re not sure how to gauge the current and future value of any unit you’re looking to buy or have already bought and are seeking advice, feel free to drop me an email at gary@secondpropertyinvestors.com or contact me here and I will try to address your concerns.