Yesterday's Straits Times carried this story in the My Money section about how a secordary school teacher ended up with 3 investment properties (see story below). He sold his freehold terrace house (fully paid?) in April 2009 for $965K, used the money to buy a terrace house for $1.43M and a penthouse for $1.18M. In Jan this year, he bought another terrace house for $1.14M. His investments are sitting on nice capital gains and he's getting good rental yield. He did well...in fact his gains in these investments have probably surpassed what he earned as a teacher for the past 15 years.
What the teacher did is no different from what hedge fund managers do, REITs do and shipping tycoons do. The basic strategy is to borrow cheaply to buy higher yielding but riskier assets for both capital gains and recurring income. A hedge fund manager may leverage what investors give him by borrowing cheaply in Japan or US where interest rates have hit the floor then put the money in emerging markets e.g. Brazilian stocks or real estate. Its a no-brainer but they get paid millions when they make double digit returns from this strategy. A REITs manager specialising in Indonesia commercial property that yield 12% can borrow money at 4% - so he goes out to borrow at 4% then use this money to buy Indonesian shopping centers and earns a net of 8%. See making money is not so difficult right? ....In fact it looks so easy it makes a morkery of hard work, instead of teaching his students maths and science, the teacher should be teaching Robert Kiyosaki's Guide to Financial Freedom.....why not?
In 2001, I was in California for a business trip. Unable to sleep due to jet lag, I decided to watch a bit of TV. Late night TV in Calfornia was mostly advertising - infomercials. A number of these infomercials were about financial freedom through real estate investing - buy the DVDs (for USD$100?) to learn about the secret of real estate investing and make millions. The secret strategy in those expensive DVDs is probably no different from what our secondary school teacher did in Singapore - borrow cheaply to buy then rent out.....become a millionaire when you sell later at a higher price. For the next 5 years (2001-2005), this strategy created hundreds of thousands of millionaires when the US had the biggest housing boom in its history. The problem with simple strategies is that almost everyone and anyone can do it ...when everyone does the same thing, that is when it goes wrong and the destructive force on the way down creates 10 times more paupers than the millionaires it created on the way up.
The surest way to make money....sell blue sky and hot air to the gullible:
Last year I wrote about investing during recessions[Link] - most of the time it pays to the contrarian and apply good strategies when nobody is interested in doing so. It is necessary and healthy to have some level of speculation in the markets. However, when everyone thinks they can become real estate tycoons, that is when it gets dangerous. Teachers should concentrate on teaching, engineers should concentrate on building new gadgets and doctors should concentrate on their patients. When we have these wild swings in asset prices, the people that get rewarded the most are the people who can speculate well...not the people who produce useful goods and services for our society.
There are many pitfalls with the "borrow cheap to invest strategy" - interest rates can surge within a short time, asset prices can fall sharply and catch you off-guard, rental yields can fall killing your cashflow and so on. Instead of financial freedom, you can end up shackled by debts and financial troubles that keep you awake at night.
[Full Story in the Straits Times : Link]
Q: What property do you own?
I got married in 1996 and bought my first home, a three-room HDB flat at Rochor Centre for $250,000. It made sense as it was very near my parents' flat and they helped to take care of my son.
I 'lost' $50,000 when I sold my flat in 2002 for $200,000. But I took the opportunity to upgrade and bought a one-storey, 2,000 sq ft freehold terrace house in Sembawang Hills estate at a low price of $820,000.
In April last year, I applied what I learnt about property investments and leveraging and sold my terrace house for $965,000 to free up cash.
I then bought three houses. One was a 21/2-storey, 2,900 sq ft corner terrace in Sembawang Hills estate, bought in April for $1.43 million. The current market value is about $2.2 million.
I bought, also last year, in September, a 2,662 sq ft penthouse unit at Nuovo in Yio Chu Kang for $1.18 million. It is being rented out at $4,600 monthly.
Finally, in January this year, I bought a three-storey, 3,200 sq ft terrace house at Century Woods in Marsiling for $1.14 million. It is next to the Singapore American School and should fetch a rental of at least $5,500 when construction is completed.
I made sure that my home loans are on fixed rates and my investment properties must be able to attract tenants easily, to generate a positive cash flow. This simply means that the rental income that I get is more than enough to pay the bank loan so there is sufficient buffer.