Keep a sharp eye on cashflow when buying an investment property and it could turn into a cash cow later
IS this the right time to buy? That's the question we are often asked these days - obviously by people who have managed to sidestep the worst of the current crisis and have the spare cash to consider buying property.
Importance of location: Areas with potential for capital appreciation are those the government has earmarked for major projects and has undertaken to spend millions of dollars on infrastructure or developments, such as the Jurong Lake District (above) or One North
While Singapore has gone through recessions before, this time around the general feeling is that the downturn could last longer than usual. As such, nobody can accurately call the bottom of the property market or figure out when it will start to recover. This uncertainty increases the challenges for those who are trying to time the market. To help home buyers along, we highlight some factors they should consider as they go house hunting.
# Timing. Everyone wants to buy low and sell high but in reality, very few of us can catch the bottom or the peak of the market. Even the experts are not always successful! When buying for your own occupation, the timing of the purchase is not the single most important factor. Rather, it is finding a property that fits your needs, be it in terms of location or design. The current soft property market has presented many good buying opportunities because prices have fallen significantly.
No one can pin-point the day when property prices will hit bottom. Very often we realise that the market has bottomed only after we have passed that point.
Unlike other assets such as shares and gold, real estate is a heterogeneous product. No two properties are perfectly identical. If you find a property that you really like but delay the purchase in the hope that the price will fall further, you may discover that it is no longer available. For investors, now is the right time to start looking and to take advantage of negotiable deals.
# Location, present environment and future potential. Regardless of market conditions, location is still the most important factor when buying a property. All homebuyers should start looking out for property launches in their target area, as project launches in some locations are few and far between.
Property prices in certain locations may have upside potential if new projects or infrastructure are going to be developed in the vicinity. For example, if a major new university were to start operating in a certain location, there would be higher demand for leased accommodation in the surrounding area from students and foreign staff.
For investors looking for rental income and capital appreciation, it is important to study what potential a location offers. Carefully sieve for projects that are close to MRT stations as these properties would be the most rentable. One should also look at the potential of the location. Similarly, an up and coming business park will have the same impact.
Other areas with potential for capital appreciation are those districts where the government has drawn up big plans and has undertaken to spend millions of dollars on infrastructure or developments such as the Jurong Lake District or One North.
# Price. In a soft market, buyers have the upper hand and this is the best time to get a good deal. However, one still needs to do some homework to become familiar with prices in the surrounding area. Bankers these days tend to be conservative, so if they can give you a loan or valuation that matches your purchase price, you can be assured that the property is priced reasonably.
However, be careful not to over-stretch your budget. And make sure that your bank can provide you the financing before you pay a deposit or the option money.
# Cashflow. Planning your cashflow is critical as we do not know how long this recession will last. Using history as a guide, the last two downturns in 1986 and 1997 saw a recovery after two years of falling prices. Do not use all your cash upfront to pay for the property; instead, set aside enough cash or CPF funds to service the loan for the next two to three years. This is a defensive strategy that ensures your ability to service the loan even if you are unlucky enough to lose your job at some point.
In a situation where you have the funds but they are not immediately available (for example, enbloc sale proceeds have yet to be paid, a fixed deposit that has not matured), or you prefer to keep some cash for a rainy day, you can opt to buy a new property under the interest absorption scheme. Most developers are offering the scheme. It is similar to the now- defunct deferred payment scheme, where a buyer can defer paying the mortgage until the development is completed. This is especially useful if one is tight on cash and would need to sell the existing home to help pay for the new one.
# Time-frame. Speculative activity is definitely not advisable with so much market uncertainty. Instead, one should take a longer-term view as the market will ultimately recover. A five-to-seven-year investment time-frame will allow you to experience recovery in the property market and reap some handsome gains. One should also have a longer investment horizon so that in the event of limited capital appreciation, one can still rent out the property.
A down market offers the best opportunity to look for a good buy. Just be careful about cashflow. And when the economy recovers you are likely to find yourself sitting on a cash cow.
The writer is executive director (residential) at Knight Frank
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