Is my property an asset or a liability?

“The poor and the middle-class work for money. The rich have money work for them.” – Robert T. Kiyosaki, Rich Dad, Poor Dad

Robert T. Kiyosaki, in his book Rich Dad, Poor Dad, emphasized the importance of owning more assets than liabilities, if one should truly aspire for financial independence (or getting out of the “Rat Race”, as Kiyosaki likes to say).

In Rich Dad, Poor Dad, property (or more specifically, a housing mortgage) is classified as a liability for the homeowner, because mortgage payments reduce his cashflow. However, many financial advisors and real estate professionals will tell you that property is an asset, because of the future capital gain that homeowners can obtain from the sale of their property. So which is it? Is it an asset, an instrument that aids one in achieving the elusive status of being financially “free”, or a liability, an obstacle that ties one down in the “Rat Race”?

Property as a liability

Put simply, a property should be seen as a liability if you live in it. Although it is true that property is capable of generating a stable, passive income, this is not an option for owner-occupiers. In fact, instead of income, the mortgage represents a significant cost for homeowners, which will tie you down to your 9 to 6 job for a long, long time in order to consistently service the mortgage. This is the reason why Kiyosaki regards property purchase as a liability.

While it is true that you are able to sell your house for capital gain, the reality of this is not always so straightforward. Financial considerations should not and will not be the only factor that motivates decisions. Selling your house will mean uprooting yourself from a familiar neighbourhood, which may be especially difficult in old age (older folks tend to prefer the comfort of familiarity and are less receptive to change).

The process of the sale can also be troublesome because you will need to go through the trouble of finding a suitable buyer and also deal with the headaches of moving house. Additionally, especially for HDB owners, you will likely need to downgrade in order to enjoy the capital gain of your HDB. Remember: although the value of your HDB flat has risen, this is also true for all other properties. A retired couple seeking to unlock the value of their HDB flat must, therefore, choose one of three options. They can either apply for their second Build-to-Order (BTO) flat, apply for a 2-room Flexi Flat or purchase a smaller resale flat.

For the first option, seniors will most likely have to make do with BTOs in non-mature estates, unless they are very lucky. Since first-time HDB buyers will get the priority, seniors will unlikely be able to get a unit in more popular estates like Bidadari or Kallang. Not everybody will be comfortable moving from a mature estate with an ideal location, like Toa Payoh, to a BTO in an up-and-coming place like Tengah. For the second and third options, they would mean having to live in a significantly smaller flat. While some old folks prefer this because their children might have moved out and therefore do not need as much space (also, a smaller flat means less tiring to clean), others may not like this downgrade.

Property as an asset

However, this does not mean that properties can only be seen as liabilities. In fact, properties are fantastic investment assets to have, especially for Singaporeans with no interest in the stock market. The key thing here, however, is that these properties must generate rental income, which will convert the property from a liability into an asset.

This is because the rental income will be able to cover the mortgage payments, and any excess rental earnings will represent a positive cash flow for the property investor. To achieve this, rental income must be maximized while mortgage cost must be minimized.

What does this mean for property buyers?

There are a million things to consider when you make your first housing purchase, and no matter how careful you are, you will always feel like there is something you did not think of or have not considered. However, the important thing to remember is that if you are purchasing this property as a home, financial gain should be the least important factor in determining whether or not to buy. This means that home-seekers should consider older resale flats also and not just BTOs, even if resale flats have shorter leases. Resale flats are commonly found in mature estates, with better amenities and more convenient locations.

Additionally, resale properties offer home-seekers a greater variety of choice in terms of location, whereby home-seekers can choose particular locations because it is near their parents (resale flat buyers can enjoy government grants if they choose to live near their parents) or because it is near certain good schools that they want to enrol their children in. Home-seekers should not disregard resale flats simply because these flats have potentially lower future values due to decaying leases, but rather consider which property (whether it be BTO or resale) is most ideal for their everyday lives.

As for property investors, the important thing to remember is that the property investment is only an asset if it generates positive cash flow. If rental income is much less than the monthly mortgage payments, the property investor will have to fork out an additional sum to cover the shortfall. Similar to an owner-occupier, this will mean that the property investor is tied down to his job in order to service the mortgage. Of course, if the investor is unable to continue servicing the mortgage, he can simply sell off the property. However, property transactions are considered illiquid, and a buyer may not be so easily found. This may result in heavy losses for the investor.

Therefore, it is essential to have a good property agent that can consistently rope in tenants at a good rental rate. Equally important, a mortgage advisor that will be able to keep mortgage costs down, maximizing profit from the rental income.

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