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Here’s Why Overpaying For Your A Home As An “Investment” Is A Terrible Idea

With high returns come high risks.


Singaporeans love properties.

This love affair with property was probably ingrained in Singaporeans when many middle-class homeowners of the Pioneer and Merdeka generations have grown their “pots of gold” by buying properties.

Years later, even though economic conditions and government policies might have changed, this love affair with property seems to still be stronger than ever.

Visit condominium showrooms every time there is a sales launch – cooling measures or not. Amid a sluggish equities market, the Singapore Real Estate Investment Trust (S-REIT) sector is a bright spot and a hub for the region.

Read Also: Why Your Parents May Love Property Investments, And Why It May Not Work For You

This perception that Singapore properties make great investments has led younger Singaporeans to be willing to pay more for their first home that they plan to (or are able to), because they expect to be able to flip it for a handsome profit in a few years time.

While this practice is prevalent, here are good reasons why you shouldn’t rush to overpay for the property you plan to live in.

Read Also: Planning To Buy A Property In 2020? Here Are 5 Trends You Should Look Out For

Property Investing Actually Violates Many Investing Fundamentals

Diversification is one of the basic tenets of investing, where you never want to place all your eggs in one basket. In the case of the stock market, we shouldn’t build our entire portfolio entirely on one single stock. Instead, we can buy stocks of different companies or sectors, invest in a mutual fund or Exchange Traded Fund, or even buy multiple asset classes.

Treating your first property purely as an investment goes against every rule of diversification, since your property would take up the lion’s share as a proportion of all your assets, which opens you up to concentration risk.

When you are buying a property, you can’t avoid timing the market. There is no way to dollar-cost-average into your property to mitigate the risk of entering the market at a bad time.

Liquidity is another metric that investors value, since it allows you to sell your asset whenever you want at a reasonable spread. Owning a property is highly illiquid, since it would take time (and money) to sell it. And if you need to offload it in a hurry, you are at the mercy of the property market, or the availability (or lack thereof) of buyers who agree to deal at your price.

Read Also: 5 Ways To Calculate The Returns On Your Investment Property

Your Personal Needs And Preferences Might Differ From Investment Norms

Speak to any property agent and they’ll tell you factors that boost a property’s value in general: high floor, proximity to the town centre, surrounding amenities, and demographic of the neighbourhood, and certain ‘sweet spot’ property sizes.

However, what is valuable for you as a homeowner might be very different. You might value things like distance from your parents, or you may prefer a quieter estate, or like to have more living space.

Deciding to make your home an investment property would require you to sacrifice what you really need and want for a home, and instead buy a unit that is more optimal for capital appreciation or ability to command higher rental prices.

Read Also: Property Needs For Every Life Stage In Singapore: Getting Married, Lifestyle Upgrade, Retirement Planning

Taxes On Rental Income, Sale Of Property And Other Costs

We’re all aware of how our investing costs eat into our returns, and fortunately in Singapore, we don’t have to worry about capital gains taxes on our stock investment returns.

However, in the case of owning properties, there are taxes to be paid on our rental income, as well as Sellers’s Stamp Duty, if you sell your property within 4 years of acquisition.

In addition to paying taxes on rental income and/or sale of your property, you also need to consider the additional costs you’ll be incurring on your investment property. These include money you need to set aside to maintain the property in keeping with the tenancy agreement you sign with your renter, as well as renovation work to spruce up the place before you sell.

Read Also: Dream Of Buying An Investment Property? Here Are 10 Overlooked Costs That You Need To Add Into Your Calculations

You’re At The Mercy Of Changing Policies And Economic Conditions

The government has been proactive in monitoring the property market, and isn’t shy in exercising its various tools, such as cooling measures, re-zoning of land, and sale of land parcels. Another way your property investment can be affected by government policies include tightening (or loosening) of foreign labour in Singapore.

You also need to ensure you don’t overextend your finances as an investment, and work out worse-case scenarios where you lose your job for a period of time, or if you are unable to find a tenant for your property, as well as what happens if interest rates continue to rise.

Government policies and Singapore’s economy – which no one can predict with absolute certainty – can have a large impact on your property value and returns, as well as have the potential to cause you financial losses if you’re not careful.

Read Also: What The Latest Round Of Cooling Measures For Singapore’s Property Market Means For Investors

There Are Other Ways To Gain Exposure To The Property Market

Living in a private property is a dream for many Singaporeans, though some would just see it as a way to grow their wealth.

If you want to enjoy exposure to the property market or rental income from properties, there are alternatives to buying a physical property, such as to invest in publicly-listed property developers, REITs or REIT ETFs.

Whether you’re investing in property or other sectors, be sure to not ignore sound investing principles, and avoid hearsay and speculation from people who might be as clueless as you are about what tomorrow brings.

But if you do plan to purchase a property to live in or as an investment, you can speak to our friends at Redbrick who can advise you on your property financing options and the best loan rates in town.

Read Also: Affected By Property Cooling Measures? Here Are 4 Ways You Can Invest Your Money Instead

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