In today’s post, Reverse Mortgage City will be sharing with you an important concept on property investing,
“Cheap is never the reason to buy. Value is.”
After reading this post, you will:
- learn how to measure in dollars, Potential Upside and Risks
- know the differences between 6 price factors
- apply the 8 Entry Price Checklist to a Bukit Batok New Launch, Le Quest
2 Buying Criteria (2BC)
Buying is the first step in creating a wealth accumulation plan in a property. When I buy, I go for properties with high potential upside and the least risk for me. I will not go for something I cannot be certain of, nor will I buy high. So having timely and accurate data is important.
To determine which unit is the right one for my property savings plan, I evaluate each one based on what I call the 2 Buying Criteria (2BC). The 2BC are: (1) Potential Upside and (2) Risks
In order for me to assess potential upside and risks, I need to have an objective, specific and measurable data. The 2 best tools to evaluate potential upside and risks are the price variable and rental yield.
Potential Upside & Price Factors
Previously, we gave you a brief overview of what Potential Upside is about, and here, I am going t to elaborate on the topic. Many people do not fully understand what Potential Upside means. Some people believe statements such as “In 10 years’ time, property prices will increase. So there is a lot of potentials if you buy now.” But what does that really mean? It does not tell us what the Potential Upside is.
To me, Potential Upside has a very precise meaning, It is a current assessment based on price. The concept of price plays an important role in assessing Potential Upside. Price has many components. It could be the asking price or the last transacted price, or the past peak price and so on. When we compare different price components between properties and/or units, we can draw different conclusions. For example, when an agent says the asking price is $500,000, what exactly does this mean? How does $500,000 compare with the asking prices of other units? How does $500,000 compare with the historic peak prices of units in that area? This is a strategy I use so I will have a stronger assessment. Potential Upside can be measured and expressed in dollars. This means that at the point you decide to buy, you have an idea of how much the Potential Upside is expressed in dollars. We can say that a unit has low Potential Upside if its asking price is $1,000 psf and the current transacted prices for units in that project is $700 psf. As a guiding principle, focus your search for properties that are below market price (BMP).
Risks & Rental Yield
Many people “hope” that their risks are minimised so that they can create wealth through their properties. Well, “hope” is not enough for me. It makes me feel nervous and worried.
Below is a great video indicate how to leverage on rental income to be financially free:
One way to minimise risk is to know what risks you are facing. There are specific ways to minimise risk when you buy properties, and the better way is to be able to measure it in terms of dollars and cents. So look at the numbers. Specifically, you can look at rental income vis-a-vis mortgage payments.
Check out official site of Le Quest: http://www.lequestnewcondo.sg/
Rental income potential against mortgage payments is an effective and specific way to measure risk. The main point is to establish whether you have a positive or negative mortgage situation. A positive mortgage situation means the rent you receive covers your mortgage and there is some extra leftover for a positive cash flow situation. A negative mortgage situation is an opposite. It is when the rent you receive is not sufficient to cover your mortgage. When using data, I base the rental income on current rent received by nearby units or projects.
When calculating the amount of mortgage to be paid, I put down the current rent, and then start adjusting it downwards to assess my risk tolerance. For example, if the current rent is $4,000, I will reduce it to $3000, and work out if at that reduced sum of $3,000, am I still in a positive cash flow situation? To work out my tolerance level for the worst case negative cash flow scenario, I will ask myself: “if I had to top up $500 in cash each month – will that be okay for me?” (And I will keep on adjusting until I find a number that is acceptable to me.)
Exercise: Measuring Risks
William purchased a unit that cost $1,000,000. As a first-time borrower, she was eligible for an 80% loan for 20 years. Her monthly mortgage payments worked out to $4,000 per month. The current rent for the property is $6,000 per month, which is secured for two years. What is her risk?
Purchase Price: $1,000,000
Loan Amount: $800,000
Monthly Mortgage: $4,000
Other charges (e.g. maintenance/conservancy, property taxes): $1,000
Rental income: $6,000 per month
Cash Flow per month: $1,000 per month
Cash Flow per year: $12,000 per year
From the calculations, we can conclude that for the next two years, with a guaranteed rental income of $6,000 per month, her risk will be $0.
To manage risk, I recommend buying based on current information, not information based on the future. It is not difficult to get hold of current rental prices. The Internet, for example, has made it easier to get current information about rental prices. In Singapore, there are many online resources that can provide you with indications of current asking rents.
Another way is to ask your property agent directly. Among my agents, for instance, we share customised and timely data on current rental and transaction prices. This wealth of information gives us a lot of certainty over how to measure risks. Register interest for Le Quest Condo Today.