5 Financial Planning Blind Spots in Property Investment
A Straits Times report on 1st July titled “Home sellers stung by stamp duties” generated interests from clients who have started asking me if the “time is ripe” to invest in properties. My usual reply has always been “Well, your guess is as good as mine” for the obvious reason that there is no way of knowing for sure. It is one of those matters that we put in the box labeled “Unknowable-Think at your own risk”.
However, not knowing if now is the right time to invest in a property does not mean we cannot consider investing in one. One of my colleague wrote an article sometime back on “Should I pay off my home loan?” and in the article he mentioned “7 Red Flags” to consider in budgeting for the purchase of a property. It’s worthwhile reviewing these “7 Red Flags” as you decide on a budget before you begin your search.
As a property investor, you should also consider the following 5 common “blind spots” in calculating the net yield on your property investment:
1) Agent Fees – A necessary fee to ensure a continuous stream of tenant and rental
2) Maintenance Fees – The costs necessary in ensuring the property is attractive to current and potential tenants
3) Property Tax – The tax that comes with being a property owner
4) Income Tax on rental income – The additional rental income forms part of your taxable income
5) Interest payable on mortgage – The cost of borrowing if you are financing the investment with a mortgage loan
These are especially important to consider if the purpose of investing in a property is to generate a stream of investment income. You should never make the mistake that just because the monthly rental of say $2,000 monthly is able to cover the mortgage loan repayment of $2,000 monthly, the property is a good investment as it’s “self-completing”.
As a financial planner, I do realize that I have to play the role of “enthusiasm dampener” from time to time with clients as it’s so easy to get caught up in the excitement of investing in a property. From the Straits Times report, there is a table of the top 25 transactions ranked by loss over the past few years. Most of these properties were sold within 3 years of purchase which suggests that while the buyer had the means to purchase, he or she could not afford to hold. Therein lies the difference between buying a property and owning a property.
At the end of the day, a property investment should be a happy event that adds value and diversification to your financial portfolio. Make sure you set things up for success and if in doubt, remember that your GEN Planner is a phone call away!
P.S. We have an affordability exercise we use to bring clients through a process to evaluate how ready they are to buy a property. Make sure you ask your GEN Planner for it.
Article by Lee Meng, FChFP