Experience testifies to the low-risk nature of property investments. However, you shouldn’t naively interpret the words “low risk” to mean “no risk worth noticing.”
Tens of thousands of home buyers and property investors, often speculators, have lost vast sums of money in real estate. And these same people will continue to lose vast sums in the future too.
Why do they lose? Let’s take a look at some of the most common reasons:
Ignorance. They fail to gain detailed knowledge about the markets where they are investing. In other words, they do not consider the laws of supply and demand.
Unjustified optimism. They blindly assume that the near future will mirror the immediate past. They take on more mortgage debt (or accept higher interest rates) than they can realistically pay.
Gullibility. They foolishly believe the infomercial gurus who preach “No cash, no credit? No problem!”
Unwillingness to work the numbers. They fail to anticipate the maintenance and renovation dollars that must be invested to sustain and enhance a property’s value.
Personal lack of discipline. They destructively spend and borrow to support a conspicuous lifestyle they cannot legitimately afford.
In other words . . .
People who suffer losses in property don’t lose money because property investing entails high risk. They lose money because they fail to learn and apply the principles of property investment analysis and personal financial management.
So please ignore the advice of anyone who claims that owning property itself will make you rich. Place the focus and responsibility for success on yourself.
Repeat these words: “If I educate myself, if I discipline my spending and borrowing, if I learn the art and science of investing wisely, then through property I can build as much wealth as I want or need.”
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November 9th, 2007
Posted by
Coldie |
Investments, Real Estate |
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One of the best ways to get started with building your own personal wealth-building system is by investing in real estate. Becoming a real estate investor is a daunting task, but one that will, if operated efficiently, pay dividends forever.
How does one start with the business of real estate investing? Let’s look at plans to get started buying and selling real estate property:
Plug into your local real estate investors association. Most medium to large communities have a real estate club where other real estate investors attend regular meetings. These are other investors with the same goals and dreams as you.
People gathered together with the like minds creates a social atmosphere that motivates new investors to take action. Club members share ideas with other members, discussing what works and what does not work in real estate investing.
Before actually buying any investment properties, beginning real estate investors should begin to put their organizations together by outlining a specific business plan. The plan should go over every step in the purchase of a property, from the marketing strategies on through the sale or leasing of a property.
In the beginning it is important to decide what types of properties to focus on. If you wish to buy rental properties, then focus on those. If flipping houses is in your plans, then concentrate on those types of properties. This is important because it allows the new investor to become a specialist within that area. Becoming a specialist leads to fewer costly mistakes.
Begin to get together a group of contractors and sub-contractors who you can trust to work within your new system and according to your business plans and your budget.
If you will be working with “fixer-upper” houses, line up a plumber and an a electrician, as well as heating and air-conditioning experts. Better yet, find a reliable “handyman” who is capable of doing many of the jobs needed in fixing up houses.
Find a real estate agent that understands property investors and their needs and is willing to work with you on a continuing basis. An agent gives you access to property information, including the Multiple Listing Service. An agent who understands real estate investing can also find you good deals within your specific market.
Time is always a key factor in real estate investing, so always look to ways “turn” a property in the least amount of time. A property that remains unsold or not rented is eating up profits every day it in your possession. Learn to cut the losses on properties that fail to meet their profit potential.
Every beginning real estate investor will make mistakes that cut into potential profits. It is imperative to recognize these mistakes and correct them before they can cripple the business.
In the end, the investor who runs their business in the most efficient ways will profit, succeed, and grow in real estate investing.
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August 26th, 2007
Posted by
Coldie |
Investments, Leverage, Personal Finance, Real Estate, Wealth Creation |
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The legal process of buying a house may seem hopelessly confusing, and one might be tempted to leave everything to his or her lawyer. However, in current property frenzy, where haste is preferred to caution, there is a danger that key information could be overlooked. So having some knowledge of potential pitfalls yourself would help in preventing a potential legal headache. What are some of things to look out for?
What to look in the title
Assuming you have already decided on the property, two main things to look out for are who owns the property and the ‘qualities’ of the property. according to Mr Andrew Chua, an advocator and solicitor from legal firm Andrew Chua & Co, whose practice includes property litigation and conveyancing.
The first thing to look at the full title search of the property. You could ask for it from the vendor’s housing agent or the owner. Alternatively, you can ask your lawyer to do a little search using the law firm’s facilities, if the owner does not produce it. From this, you can tell:
- The name of proprietor(s). If you are about to issue a cheque to buy the Option to Purchase, you will need to know that the cheque will be issued to the proprietor and not someone else.
- Property qulities - for example, whether it is freehold or leasehold, and how many years are remaining on the lease if it is the latter. Also, whether the land or floor area is as big as the agent or vendor told you.
What to look out for in the Option
Most decisions to buy a property result in the vendor selling to the buyer an option to purchase the property in question. The sum of money (usually 1 per cent of the purchase price) paid by the buyer to the vendor is commonly referred to as the option money. If you intend to pay the option money to the vendor, you should get a draft of Option to Purchase for your lawyer to look at it first.
Apart from the question of price, there are other important terms that you lawyer would look at in the draft Option. For example:
- Whether the terms of the option are usual - are there any unusual or unreasonable terms? So if the draft option (which is typically 1 per cent of purchase price) requires provides for a payment of say 2 per cent of the purchase price, the lawyer could bring this unusual stipulation to his client. Or if the draft Option requires completion in say 4 weeks (instead to the usual 8 to 12 weeks) the lawyer could request that the Option to be amended to a longer completion period to accommodate the processing of CPF and/or loan application, for example.
- Whether the property is sold with or without vacant possession, or subject to existing tenancy. If it is subject to an existing tenancy (i.e., if the property is being rented out), what are the terms of the tenancy? The lawyer could highlight to you if there is an “option to renew” clause in the tenancy agreement, and the terms of the renewal. There is also the question of rent to look at. These are some of the things a buyer needs take note of before he decides to buy the Option, or he might be saddled with the burden of the tenancy.
- The period for the exercising of the option, and the period of time to the completion of the sale and purchase agreement. Why is this information needed? The option period is usually two weeks from the date the option is granted. The buyer may need to take some form of financing or make arrangements to have monies available to pay the balance of the deposit to exercise the Option.
Will he be using his CPF monies or does he need to borrow from a bank?
In the case of banks, application must be made to the bank for financing. The bank would need some time to assess the application, do valuation of the property, and, if the loan is agreed to, they have to appoint lawyers to prepare the mortgage and other legal documents.
- Whether the balance of the deposit to be paid upon exercising of the option is to be released to the vendor; or whether the vendor’s solicitors should hold the monies as stakeholders pending completion. If the property is mortgaged, the lawyer could advise and request that the balance of the deposit should be paid to vendor’s solicitors as stakeholders.
“If the vendor refuses the prudent buyer’s lawyer would ask for evidence that the remaining (say 95 per cent of) the purchase price is more than enough to discharge the vendor’s mortgage on the property,” explained Mr Chua.
“If the property is mortgaged and if the outstanding balance owed to the bank is more than 95 per cent of the purchase price, the bank has the right to insist on full satisfaction of the outstanding loan before it agrees to discharge the mortgage. Thus in some cases, the deposit (less option money) is paid to the vendor’s solicitors who could use it to satisfy the outstanding loan,” he added.
- Whether the usual warranties are in the Option - that the title is to be properly deduced (traced, established), and that the property is subject to satisfactory replies to legal requisition, which is a set of inquiries to governmental departments. For example, the property should have been built according to government approvals - it must have the permission of the Urban Redevelopment Authority chief planner. If the property is adversly affected by the government’s plans to build roads or drains, is the buyer able to rescind the contract?
Exercise of option and Completion
Once the option is exercised, it becomes a sale and purchase agreement and both the seller and buyer are legally bound by the contract.
Completion is the term used when the buyer pays the vendor the balance of the purchase price in full, in exchange for the vendor’s delivery of the legal title (including the discharge of mortgage, if applicable) and transfer forms signed to the vendor. It is usually carried out 8 to 10 weeks after the exercise of the option. The period before completion enables the buyer’s lawyers to carry out searches on the vendor. These searches include bankruptcy, winding up, or judicial management searches. If the vendor is an idividual, a bankruptcy search will be made to determine that there is no trace of bankruptcy. A person who is bankrupt has no legal right to transfer his property.
Choosing a lawyer
It is important to know what to look out for in the legal process, but it is equally important to choose the right lawyer, Mr Chua advised that buyer should look for lawyers who are familiar with this area of the law.
You should also make an appointment to talk to and see if you are comfortable with the lawyer. “By talking to the lawyer, you should be able to tell if he knows what he is doing,” said Mr Chua. Both of you also need to be able to communicate well with each other, especially if you are a first-time home buyer.
Option to Purchase
The Option to Purchase is the right to first rejection. It is effectively a right granted by the vendor to the buyer only, to decide within the option period whether he or she wished to purchase the property on the terms of the option. Before you reject it, nobody has the right to buy the property. The option is usually sold at a price equivalent to one per cent of the purchase price.
Expiry date of the option. Every option has an expiry date - common practice is two weeks from the date of the option. If the buyer wants to buy the property, he has to exercise the option before the expiry date or his option money is forfeited. If he exercises the option, then the option money is the usual contract would be counted as part of the deposit.
Restriction of foreign ownership of land.
Under the Restriction Property Act, landed properties such as bungalows, semi-detached and terrace houses can only be purchased by Singaporeans. Non-citizens, including permanent residents, are not allowed to buy landed property unless they have the approval of the Land Dealings (Approval) Unit.
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August 19th, 2007
Posted by
Coldie |
Investments, Law, Leverage, Personal Finance, Real Estate, Wealth Creation |
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There are some definite steps that a prospective buyer can take to find the right property loan.
The economy is healthy, you have a stable job and a pay rise. Now, you want to buy a property. Well, this is the easy part. The not-so-easy part involves financing your purchase - first of all, how to find the right mortgage loan?
A mortgage loan is a loan that is secured against a property as a collateral, which means that if you cannot keep up with the loan repayments, you might end up losing your property. Hence, before taking up a loan, a question to ask yourself is: how much can I afford?
Singapore’s Association of Banks, which has published a guide on home loans for would-be home buyer, advocates that generally your total monthly long-term debt payments should be less than 35 per cent of your gross monthly income. Buying a home does not merely entail the servicing of a housing loan - one has to pay other regular fee such as fire and mortgage insurance, property tax and maintenance or conservancy fees, not forgetting your other bills and loan payments.
At the outset, you should also consider consider costs such as renovation fees, legal fees, stamp duty, as well as the houing agent’s commission, if necessary.
Home buyers are now allowed to borrow up to 90 per cent of a property’s purchase price, with 5 per cent of the down payment coming from the CPF account and the balance in cash.
However, remember that taking a larger loan means that you will have to pay more in total interest, and the interest rate itself may be higher. For example, the interest rates for 90 per cent or more financing are typically higher than rates for 80 per cent financing. Many prefer to take a smaller loan amount or one with shorter loan tenure to keep the total interest minimal. “Calculate the ratio of the total interest you will have to pay against the principal amount and you would be surprise!” said home owner Mr Vincent Ng.
Finding The Loan That Is Best For You
Ask the bank explain the features of different loan packages before choosing the one that meets your needs.
Fixed/Floating Rate
There are two main types of interest rates in the market - the fixed rate and the floating rate. With a fixed rate loan, the interest rate will remain the same for the first few years. This is desirable if the rate is low when you get the loan, or if you want more security. However, you may lose out if the market rates fall below your fixed interest rate.
For floating rate loans, rates are periodically adjusted based on factors decided by the bank, or a market benchmark like the Singapore interbank offered rate (Sibor) or Singapore swap offer rate. These loans are more volatile - market rates could fluctuate or rise significantly in a relatively short period of time. However, some prefer loans that are pegged to Sibor or other benchmark rates as they are more transparent.
Another option is the hybrid or blended-rate loan, which is a mix of the two.
Banks are required to inform you 30 days in advance when they intend to change their terms and conditions, reference rates, fees or charges.
Effective interest rate
When you look at the interest rate, be sure to consider the effective interest rate (EIR) in annualised terms, which you will have to pay throughout the loan. The lower the EIR, the lower the total amount of interest you end up paying over the entire loan period. The EIR is usually higher than the rate advertised by banks, as the latter usually applies only for the first few years when promotional rates are charged.
Loan period and early repayment
Another aspect to be considered is the length of a loan period. The typical loan term is about 25 to 35 years, or before you reach the age of 65, whichever is earlier. Of course, the sooner you repay the loan, the less interest you incur. Some people, like those who are buying properties for investment purposes, may plan to sell their property soon. Hence, home buyers should find out how long the lock-in or loan commitment period is.
If you planning to repay the loan earlier, you might want to take up one that either has no lock-in period, or lower fees and penalties for full or partial repayment before the time set by the bank. Some loans allow you to change the monthly repayment amount - check if there are any fees charged when you do so.
Businessman Mr. Robert Ong chose a fixed-rate loan with no lock-in period as he had bought an old apartment for investment purposes and wanted to avoid any penalties for repaying the loan early. “Because of the booming market, if the opportunity arises or if the property is offered en bloc, I will sell,” he said. The extras like free fire insurance were the same, but the interest rate for the first three years is about 0.5 per cent higher, he added.
The extras
The bank may offer perks such as free fire insurance, free valuation or legal fee subsidies. You should check which extras are offered and how much subsidy is given before making your choice. However, do note that you may have to reimburse these extras should you pay off your loan before the lock-in period.
Refinancing options
You should also chech for better offers every few years, especially after the lock-in period. If you intend to refinance, check first if there are any fees or penalties involved in canceling your loan or switching to a better loan package - whether within the same bank (which is called conversion) or with another bank. If you want greater flexibility, you can obtain a loan with lower or no conversion fees. Be sure you understand the new package fully before committing to it.
Mr. Robert Ong’s brother, David, recently restructured his seven-year-old home loan with his existing foreign bank. He explained that he had enjoyed special rates for the first three years, which was raised to a “high rate” before the bank offered to restructure the loan to be in line with the rates offered by other banks.
“If I go to other banks, I will have to go through the legal process and valuation all over again, something which is not required if i stick to the same bank,” said David. Althrough other bank might provide legal subsidies, he added, it would still be cumbersome. He was charged an administrative fee of about $300 for the restructuring process.
Using CPF to pay off your loan
If you are taking a bank loan, the CPF withdrawal limit is currently 126 per cent of your home price valuation, and this limit will decrease to 120 per cent of the valuation from next year. If your total payment including interest is more than that, you will need to pay excess in cash.
Also note that when you grow older, a smaller percentage of your monthly CPF contribution will be allocated to the ordinary account, thus your ordinary account may not have enough to make the monthly mortgage payments.
A survery commissioned by life insurance company Manulife a few months ago indicated that as many Singaporeans were seriously underestimating their longevity after retirement, most were insufficiently prepared for the financial aspects of retired life. Some 81 per cent of respondents said they were concerned about rising healthcare costs, inflation and living expenses during retirement. Hence, it would be prudent to pay off your mortgage loan before retirement to ensure enough money is set aside for your golden years, whether in your CPF or savings account.
If you are still unsure about which mortgage loan to take after looking various features of different mortgage loans, it may be useful to approach a financial advisor or mortgage consultant.
When you have found the right mortgage loan and settled on it, be sure to keep up with payments promptly . . . otherwise, the bank is sure to charge overdue interest!
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August 11th, 2007
Posted by
Coldie |
Investments, Leverage, Personal Finance, Real Estate, Wealth Creation |
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Industrial-strength intelligence for entrepreneurs who need funding
If you think it’s hard to get a “yes” out of a venture capitalist, you should try to get a conclusive “no.” This is because there’s no upside to communicating a negative decision.
To foster greater understanding between entrepreneurs and venture capitalists, here is an exposé of the top lies of venture capitalists.
- “I liked your company, but my partners didn’t.” The sponsor is trying to get the entrepreneur to believe is that he’s the good guy, the smart guy, the guy who gets it while the “others” didn’t, so don’t blame him. This is a cop-out . . . a true believer would get it done.
- “If you get a lead investor, we will follow.” The venture capitalist is saying, “We don’t really believe, but if you can get another investor to lead, we’ll jump on the pile.” In other words, once the entrepreneur doesn’t need the money, the venture capitalist would be happy to give him some more. This is like saying, “Once you’ve stopped Larry Csonka cold, we’ll help you tackle him.” What entrepreneurs need to hear is, “If you can’t get a lead, we will invest.” That’s a believer.
- “Show us some traction, and we’ll invest.” This lie translates to “I don’t believe your story, but if you can prove it by achieving significant revenue, then you might convince me. However, I don’t want to tell you ‘no’ because I might be wrong and by golly you may sign up a Fortune 500 customer and then I’d look like a total orifice.”
- “We love to co-invest with other venture capitalists.” Like the sun rising and Canadians playing hockey, you can depend on the greed of venture capitalists. Greed translates to “If this is a good deal, I want it all.” What entrepreneurs want to hear is, “We don’t want any other investors.”
- “We’re investing in your team.” This is an incomplete statement. While it’s true that they are investing in the team, what the venture capitalist is really saying is, “We’re investing in your team as long as things are going well, but if they go bad we will fire you, because no one is indispensable.”
- “I have lots of bandwidth to dedicate to your company.” Maybe the venture capitalist is talking about the T3 line into his office, but he’s not talking about his personal calendar because he’s already on ten boards. Counting board meetings, an entrepreneur should assume that a venture capitalist will spend between five to ten hours a month on a company. That’s it. Deal with it. And make board meetings short!
- “This is a vanilla term sheet.*” There is no such thing as a vanilla term sheet. Do you think corporate finance attorneys are paid $400/hour to push out vanilla term sheets? If entrepreneurs insist on using a flavor of ice cream to describe term sheets, the only flavor that works is Rocky Road. This is why they need their own $400/hour attorney too - as opposed to Uncle Joe the divorce lawyer.
- “We can open up doors for you at our client companies.” This is a double whammy of lie. First, a venture capitalist can’t always open up doors at client companies. Frankly, he might be hated by the client company and the worst thing in the world may be a referral from him. Second, even if the venture capitalist can open the door, entrepreneurs can’t seriously expect another company to commit to their product - something that isn’t much more than a PowerPoint presentation.
- “We like early-stage investing.” Venture capitalists fantasize about putting $1 million into a $2 million pre-money company and ending up owning 33% of the next Google. That’s early stage investing. Do you know why we all know about Google’s amazing return on investment? The same reason we all know about Michael Jordan: Googles and Michael Jordans hardly ever happen. If they were common, no one would write about them. If you scratch beneath the surface, venture capitalists want to invest in proven teams (eg., the founders of Cisco) with proven technology (eg., the basis of a Nobel Prize) in a proven market (eg., eCommerce). We venture capitalists are remarkably risk-averse, considering it’s not even our money.
A term sheet is a letter of agreement between a venture capitalist and the company in which she or he is investing. To review a sample term sheet, click here.
July 11th, 2007
Posted by
Coldie |
Business, Entrepreneurship, Investments |
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Experience testifies to the low-risk nature of property investments. However, you shouldn’t naively interpret the words “low risk” to mean “no risk worth noticing.”
