Monday, April 1, 2013

How to Measure Your Property’s Actual Investment Returns

I recently came across two investors who made money in property investing in the property boom during the last three years (i.e. from mid-2009 to end 2012), albeit in very different ways. I have taken the liberty to simplify and change some numbers as well as ignore all expenses so that we can compare apples with apples. Also, I used residential properties for this article as it’s very much a familiar arena to most readers.
Calculating your investment returns
There are many different ways to calculate a property investment returns but the Internal Rate of Return (I.R.R) is by far one of the most accurate methods of calculating the cumulative property investment returns over a specific holding period.
Inexperienced property investors and home owners who only look at capital gains as a measure of investment success are always surprised by the difference between the earnings that they expected to realise from a property investment and the actual investment return.
Capital Gains or Growth do not equal investment returns due to many variables like financing, nature of loan amortization and many other costs involved in the entire property transaction process.
How IRR Works
Because a dollar in hand today is preferable to one a year or five years from now, Internal Rate of Return reveals in mathematical terms what a real estate investor’s initial cash investment from Day 1 will yield based on today’s dollars, not tomorrow’s dollars.
Here are the details of the example we will be using: Both properties are located within a 5 minute walk to MRT station and are near the city.
Note: A financial calculator or Excel is needed for I.R.R calculations (a basic tool for all true blue investors).
Investor A:
Purchased a newly launched 916 square feet condo in a mature estate.
Purchase Price (2009): S$930,000
Down-Payment: S$180,000 (20%)
Loan Amount: S$744,000
Upon completion and T.O.P in 2012, he received offers for S$1.2 million.
Equity = S$1,200,000 – S$744,000 = S$456,000
Gross Profits = S$1,200,000 – S$930,000 = S$270,000
I.R.R = 36% per year
Investor B:
Purchased an old 16 year-old 936 square feet apartment in a growth location.
Purchase Price (2009): S$520,000
Down-Payment: S$104,000 (20%)
Loan Amount: S$416,000
Rental Income (3 years): S$2,400 per month
He received offers for S$800,000 in late 2012.
Equity = S$800,000 – S$416,000 = S$384,000
Gross Profits = S$800,000 – S$520,000 = S$280,000
I.R.R = 78% per year
Here are some questions to ponder:
1. Who is the smarter or luckier investor in this case?
2. If you were presented with both investment options, which would you go for and why?
My analysis of the two investments
  1. Investor B had similar gross dollar profits with Investor A (S$280 thousand as compared with S$270 thousand) but his actual return on cash invested is two times greater than investor A!
  2. Investor B has a lower down-payment (S$104K for B compare to S$180K for A), but B’s actual return on cash invested is two times greater than A.
  3. The returns are higher for B, in terms of cash invested now (down-payment), rental yield now, probably higher returns in future than A’s since B’s property is also located in the growth corridors of Singapore, while A’s property is already in a matured estate.
  4. Similarly, there are higher chances of rental increments due to a growth location and possibly a bigger and more stable tenant base for B, and lower vacancy rates.
  5. Investors A’s property is a new property bought directly from a developer, while B’s property is an older re-sale property from an individual seller. One of the arguments I stand firm on is that the higher profits that A should have gotten, have already been discounted into the developer’s profit margins and expensive marketing costs.
  6. Investor A’s Day 1 initial cash has zero returns for 3 years until property completion. Investor A is waiting for his returns to materialise 3 years later, while Investor B’s cash is already working hard for him through a strong rental cash flow from DAY 1.
 My recommendations of which investment to choose
Choose investment B, if your strategy is to hold for rental as well as property value gain. This property will probably give you a good rental over the years as it appreciates in value. I would highly recommend this low-risk strategy to the average investor with limited cash resources and who seeks safety.
Choose investment A if your strategy is to buy and sell. Reinvest the money again in a similar way but good profits will only come during a booming economy. And of course, if you sell high, you buy high too. This strategy is speculative and only suitable for an investor with ‘fun’ money.
My concluding thoughts
  • Why plant a seedling if you can plant a tree today? Investor B is already making money from Day 1. Yes!  You can have your cake and eat it too.
  • If I were given 10 such opportunities, I would invest 10 times in the B type of investment scenario. Better rental yield, better capital appreciation, better long term potential, less risk, less dependence on the economy ( good or bad, I still get rental income regardless of property value)
  • For A, maybe unless you want to use it for your own use or as a gift for loved ones.
  • Investor A has an easier no-brainer task – SELL, pocket the profit and look for more deals like this. He thinks making money in property can be as easy as this and will most likely try to replicate the same strategy again. But tomorrow is not today… crazy economies like today don’t always happen.
  • Buying an older re-sale property (Investor B) can have much higher actual returns than simply buying an off-the-plan property (Investor A).
  • B’s property does require a lot more leg work and sweat before the sweetness… but that’s the whole point of it – ‘FUN’!  Its ‘fun’ that makes it all worthwhile for a true blue investor who loves and knows investing!
Simply taking Rental Yield alone as a benchmark for analysing investment properties is like taking a bow and arrow to a real gun fight! Understanding and knowing how to calculate Internal Rate of Return (I.R.R) in any of your investments is a crucial skill of an investor.  Measuring your property investment’s actual returns through I.R.R will help you become a more savvy and educated investor in today’s more volatile times.
By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor.

Friday, March 29, 2013

The 5 Cs aren’t enough; Singaporeans need the 6th C

In February, I wrote about the new 5 Cs that will actually make us happy Singaporeans:

 http://sg.news.yahoo.com/blogs/singaporescene/5-cs-aren-t-enough-singaporeans-6th-c-045321605.html
  • Compare less
  • Cherish what you have
  • Choose your attitude
  • Complain less
  • Change your circumstances and yourself
I'm pleasantly surprised to see that the article has received more than 400 comments and has been shared 8,200 times on Facebook!
Clearly, the “5 Cs” is something that’s close to Singaporeans’ hearts.
The 6th C that I missed out: Compliment others
Soon after the article was published, I had a conversation with my cousin.
He said, “Daniel, you missed out one ‘C’. We should compliment others more. That’s something we don’t do enough of in Singapore.”
I spent the next few days reflecting on what my cousin had said.
My cousin was right: It’s not part of Singaporean culture to compliment others.
(In this article, I’m referring to genuine compliments, not false praise that you might give your boss or teacher if you’re trying to get into his or her good books.)
When was the last time you heard someone say…
  • “You gave such a well-organized and persuasive presentation just now”
  • “Your report was both informative and clearly written”
  • “You facilitated the discussion skillfully”
  • “You led your project team effectively”
  • “The meal you cooked was delicious”
  • “Good effort”
  • “I’m proud of you”?
Why we don’t compliment others
I’m not saying that we never, ever speak kind words to our friends, colleagues or family members.
I’m just saying that we ought to do it more often if we want to build a happier Singapore.
Here are some possible reasons why we don’t make many positive remarks:
  • We tend to focus on the negative
  • We’re quick to criticize
  • We’re competitive people who find it unnatural to acknowledge it when others perform better than us
  • We like to complain
  • We don’t make an intentional effort to take notice of others’ admirable qualities
  • When things go well, we assume that that’s the expected result anyway, so there’s no need to pay a compliment
Benefits of giving compliments
No matter what the reasons are that we don’t give more compliments, we all like receiving them.
As someone who does a lot of speaking and writing, I’ll admit that sincere compliments make my day!
We can make someone else’s day by paying him or her a compliment.
Moreover, giving compliments has many benefits.
It boosts your mood, improves communication with the other party, and gets you into the habit of looking for the good in others.
It helps you to get beyond yourself and focus on other people. It increases your awareness that life isn’t mainly about you. It makes you a more generous person.
It reminds you that kindness is of vital importance, despite the fact that we can easily get caught up with our individual pursuit of success.
Most of all, it makes our society happier, gentler and more appreciative.
What you can do today
I hope you’re convinced that the 6th C is something that all of us should aspire towards.
The best thing is that it’s completely free! (And if there’s something that we Singaporeans like—myself included—it’s free stuff.)
So…
If you enjoy your next meal, tell the chef (who might even be your parent, spouse or domestic helper).
If someone helps you, write a thank-you note.
If your colleague does a solid job with a sales presentation, send a congratulatory email.
If you’re grateful for a friendship, send a text message and tell that person so.
When we combine the new 5 Cs with this 6th C, we’ll be well on our way to finding the happiness and fulfillment that we’re looking for as a society.
One day a time, one compliment at a time.

Thursday, March 28, 2013

When relationships break down and break up is inevitable

Whether you’ve signed a lease together or it’s date number five, pulling the chord on a relationship can be a tricky, awkward and painful act.

But there are rules for navigating matters of the heart and a number of courtesies that can make the process more graceful and you more gracious. A look at how to call it off, regardless of what stage you’re at in coupledom.

Date number one

You went for coffee with your friend’s co-worker’s cousin’s sister that everyone thought you would be just perfect for – but there wasn’t even a hint of a spark between the two of you. If you know for certain you’re not interested, there’s no need to commit to a second date just to be nice and get her hopes up. Conversely, dropping off the face of the earth is a jerk move, especially if she shows interest you can’t reciprocate. At this point, an email or text explaining you had a lovely time but don’t see things progressing is acceptable. 

The “getting-serious” mark

The L-word has been dropped, you’ve met each other’s friends and there have been several serious talks about the future. But for whatever reason, it’s not working anymore. Ask Men points out that “if you have been dating someone long enough to tell other people that you are, in fact, dating, then you must sever ties face-to-face.” A digital break-up is only acceptable if you’ve known each other all of three hours. 

Very much together

Without getting into an exact number, there’s a certain point in serious relationships where lives become especially intertwined. When things reach a settled point, it can be exceptionally difficult to split up a long-term relationship. There’s a fine line between saying too much and saying too little. As Match.com points out, there needs to be reasons for the split. Laurie Puhn, author of Instant Persuasion: How to Change Your Words to Change Your Life, told the dating website that the reasons should focus on your general incompatibility without being too critical or specific. So don’t tell her “she’s no longer attractive to you, or you’re insanely attracted to her best friend. These kinds of reflections shouldn’t be shared.”

Friday, February 22, 2013

4 Tips for Mid Life Folks

4 Tips to Have Great Relationships in Your Mid-Life


 By Eileen Tan and Ui Wei Teck (guest contributors)

In the second phase of your life, you will start to have a lot of time for yourself. You have been working hard during your twenties and thirties with a stable job. You have been dedicated to raising a family with your partner, providing the best for your next generation and cultivating their values.
It is fulfilling to have good relationships with colleagues and friends, and especially so when you have a good relationship with your family. You may feel a sense of loss if you don’t manage this properly due to the drastic changes that take place when we enter our mid-life. In this article we will look at X ways you can continue to have great relationships with your friends and family in your forties and beyond.

1. Choose to forgive

It is not healthy to hold on to anger, so choose to forgive and forget, free yourself, learn to laugh at the situation and support one another. Don’t ask why this person you are angry with is not doing what you expect, but ask yourself what you can do for this person.

Many times, when I am upset with someone, asking myself this question of what can I do for him or her will change my mood almost instantly and make not only my day, but the day of the people around me better. Try this out! It is an instant healing process.
 
2. Be caring towards your family and friends
Build a little network with those you love and those who love you – such interactions will bring you joy. Listen to how they feel, and don’t be too quick to judge or expect others to change or be like you. Take the initiative to discuss things to iron out issues and resolve conflicts. Nothing is more important than maintaining a harmonious environment by showering our love and affection on the ones we love.

3. Let them know that you are watching out for them

One day when we leave this world, we will have no fear that we have not lived a good life. Happy people have no regrets. Death ends a life, but not a Relationship. Death cannot take away our memories with a person who has lived wisely and happily. In handling the loss of your loved one, it is perfectly okay to let go and be happy once again.

4. Prioritize family time

Having a strong family bond is more important than chasing after success and wealth. Cherish the time you have with your family, support each other with encouragement and celebrate regularly. Be committed to make each other’s lives pleasant and enjoyable.

With each of us putting in the effort to have a beautiful life for our family and those around us, wouldn’t the whole world be a better place to live in?

By Eileen Tan and Ui Wei Teck, authors of Enjoying Mid-Life Without Crisis