Property Investment 101: 5 ways to invest into properties
Diversification in investment is encouraged, property is compulsory
People say, “never put all your eggs into one basket” because the risks are very high that if the basket were to fall, all the eggs would be broken. It’s the same for investments. Diversification is necessary. My personal opinion is that dieversification is necessary but investment into property is compulsory. The last I remembered, not many people prefer to stay in a cave or under the bridge these days.
This is why there’s another saying among those who did not buy a property yet. They say, “renting is cheaper than paying monthly mortgage.” I say, renting is FOREVER. Paying for a monthly mortgage has a full stop at the end. What are some of the different property investment types then?
#1 Residential Property
Buying a place and stay is one of the best ways to start. While one property does not really classify as an investment but at the end of the 30 years period when one has completed paying for it, then the fully paid property becomes an asset which could be sold. Maybe it could be sold for a profit but at least it would be sold at a price plus all the inflation over the years. In other words, it’s a hedge against inflation.
This property type; Residential property could be for own stay or could be bought and then rented out. They include landed properties such as terrace houses, semi-detached and bungalows. Some other names include super-linked (bigger width terrace) or even townhouses. They come with a residential title. These properties come under the protection os the Housing Development Act (HDA). In other words, the developer has to complete them on time if we are buying from them directly.
Typical loan margin if it’s the first property is usually up to 90 percent and this allows the buyer to buy them easier compared to commercial properies. The property price appreciation would depend on the neighbourhood development. A more mature neighbourhood would usually appreciate faster because there’s a higher demand for them.
#2 – Commercial Property
Properties within this category would be the properties which are for commercial use. Some say it’s for business use. So, this is usually not for residential occupation. These include office buldings, factories, warehouses, shoplots and more. Usually, these units are rented out for business usage and may be leased out on a multi-year leasing. Not many businesses would want to just rent for a year and then be forced to move out.
Thus, when we bought the right commercial property, chances are the income will be stable. However, the typical margin of financing is between 70 – 80% and this would require a higher upfront capital from the buyer. The price for a commercial property is also typically higher than a residential property. This is also reason why most property investments do not start from commercial property.
#3 Real Estate Investment Trust (REIT)
If we do not know which property to choose, we do not have the time to do the viewing, we do not have time to handle issues with tenants and we just want something as easy as buying / selling shares in the stock market, we can also invest into REITs. It’s not time consuming at all and it’s very affordable to start anytime too. Read a more in-depth article about REITs here: 5 Advantages of investing into REITs
REITs are like buying shares but this is a share of the company which owns real estate properties and they would usually distribute dividends to their shareholders. The business model is to continue to manage these properties well so that the profits from these investments would continue and the companies could continue distribute the dividends on a continuous basis. They would also acquire new properties when there are opportunities and if these properties appreciate, then the income from the leasing would increase and the investors would get higher dividends.
Personal finance 101 advocates may usually skip property and they themselves would talk about everything else except for property investment. Just remember, saving money from lunches and dinners and buying cheaper handbags does not mean anything once we realise we have to continue paying rental forever even after our income has stopped. By the way, if we spend all the money we have, then at the end of the day, we would not even have any ‘eggs’ to eat.
My personal advice is to start with the property we would be staying. Buy one versus renting one. If we are staying with our parents, then do not waste the opportunity to invest into another property for rental income or even to invest the savings into REITs. Buying a property is also like a ‘forced savings.’ We may not see the fruits until the end but property is the best hedge against inflation. When prices of everything moves upwards, property prices would also follow. Happy investing.
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