What makes real estate a worthy investment?

“Land is a man’s treasure”. For generations, land has always been regarded as a prized commodity, given its scarcity and possible benefits such as agriculture or for human activities. In certain communities around the world, land parcels distinguish and differentiate social classes or even as a medium of trade. The modern man today is familiar with the term ‘Real Estate Investment’, with promises of huge returns with low risk. But how many of us know what makes real estate so truly worth investing? In this article, let us provide you with an insight into the world of investments, and why real estate might just be your next venture!

As time fades, so do architectures and structures fail, but the land in which it is built remains unfazed. For this reason, owning a piece of real estate could literally be an investment that lasts through the generations. Especially in our tiny red dot where land is really an extreme scarcity seen in exorbitantly expensive housing prices, owning a piece of land can truly promise healthy investment returns and outlooks. Here are some reasons why foreign investors scramble to pour out large streams of investments into the domestic housing market!

Reason 1:  Rental Income

Did you know that the average home rental yield is about 3%? This means that a $750,000 1 Bedroom condominium could fetch you a monthly rental income of $1875. Renting out your home could prove to be a strong source of passive income, especially once your mortgage loan has been paid off, and you perpetually own the property without forking out any cash of your own. Here is a simple understanding of how rental incomes work! When you purchase an investment property, you would first pay for the downpayment (typically 5% – 25% in cash) whilst taking a bank loan for the remaining sum. Upon obtaining the home and renting it out, you generally profit when the monthly rental income – monthly mortgage repayment amount = greater than $0 (to include inflation). Do note that other costs like maintenance fees, mortgage insurance, property taxes, realtor fees etc. need to be factored into the equation to accurately depict the returns on your investment. A healthy level of Returns on Investment is recommended to be anything above 4.5% for residential property investments locally.

Renting in Singapore is a common and popular form of investment because homes are a necessity in Singapore, and limited land parcels drive up demand, which makes real estate investment a favourite amongst seasoned investors. While this appears to paint a great picture, it is predicated upon several factors such as location, taxation and even the consistency and reliability of your tenants. Certain locations in Singapore such as the ones closer to the CBD would fetch higher investment returns given its popularity. Investors are also to note the various taxations they are liable for, which in Singapore includes the ABSD. Lastly, rental requires tenants. A savvy real estate investor would ensure that tenants are selected carefully to ensure that the rental journey is not jeopardised, with most requiring minimum lease periods of about 6 months. This is because an empty apartment is a major setback to investors because it means a loss of opportunity!

Another reason why Singapore is popular amongst Real Estate Investors is due to the absence of Capital Tax Gains. In certain countries such as the US and New Zealand, Capital Tax Gains are implemented– taxation on profits earned from the sale of properties. This allows investors to retain a larger portion of their profits!

Reason 2: Stable legal and political scene

In Singapore, the legal system revolving around land and Real Estate dates back to the reception of the English Law, in which all land transactions are made in writing to document validity. The legitimacy and power of the legal systems governing land greatly boost the confidence of investors. Apart from this, the Singapore government has always played an active role in the market, examples such as the introduction of cooling measures (Total Debt Servicing Ratio, Additional Buyer Stamp Duty etc) have prevented the formation of a property bubble by ensuring a relatively consistent property market.

Given Singapore’s diplomatic nature and amicable standing in the world, our foreign ties serve us well to ensure longevity and give foreign investors confidence and certainty.

Reason 3: Real Estate Investors have better control

Unlike other investment modes such as stocks, bonds and shares which are highly volatile given its dependence on market sentiments and world events, real estate is considered to be a steady and reliable investment. This is especially appealing to investors who are risk-adverse! Real estate investment, if done right, promises ROIs of about 6-8%, which is a sufficient hedge against inflationary pressures (2%). This allows investors to enjoy not only capital preservation but capital appreciation too.

Apart from these 3 main reasons, one other lesser-known benefit of investing in Real Estate is that it could actually help you save! By paying for a home, you are required to take a portion of your wealth and ‘freeze’ it. This could be good especially if you are cash wealthy and may not have the best financial saving habits!

Real Estate investment is like a waltz – if done right could be a pleasant and successful one, bringing you financial gain. However, if mismanaged, could lead to the opposite, especially if the property was purchased on a loan. Nonetheless, we hope that this article has given you an insight into what an investor sees when investing in the domestic market, and hopefully, you could be one too!

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