Will property still be our pot of gold in Singapore? DBS researchers issued a report on why more property isn’t always better for our financial planning. Money Playschool went through the 56-page report to pick up the critical section to answer whether you should invest in a second property, and the factors you need to consider if you are doing property investment beyond your first home.
Investing in a second property less compelling
DBS researchers’ findings show that properties become less compelling as an asset class beyond one’s first home.
Across the asset classes studied, investing in a second property generates the lowest growth in invested capital.
TLDR: If you are looking to grow your nest egg for retirement, investing in an additional property may not be the wisest choice.
How does leverage impact my returns on second property investment?
“But you can leverage with property investment”, I hear you say? Well…
DBS researchers’ analysis assumes a 75% Loan-to-Value (LTV) for both private (first property) and HDB (first property). For a second property, the LTV ratio drops.
Lower LTVs would inevitably generate a lower multiple on invested capital (MOIC). MOIC refers to the cost of ownership and effects of leverage in this analysis. It is calculated by taking the ending investment value, divided by the initial cash outlay that is invested.
For example, private and HDB properties with an LTV of 45% would generate a mere MOIC of 2.09-2.52x and 2.21x, respectively, making properties the weakest performing asset out of all the asset classes in relative terms based on its findings.
Hence, returns from property investment may not be sufficient, especially at lower debt levels.
TLDR: Leverage has been factored in, and nope it isn’t helping you much in property investment beyond your first home.
Should I gear up to bump up my property returns?
The report rightly cautions homeowners when it comes to gearing up in a bid to bump up their property returns.
Additional leverage would undoubtedly expose homeowners to greater mortgage obligations and financing risks, which would place them under greater financial stress, especially when interest rates increase.
Investors should weigh the trade-offs between further potential upside versus any increased financial stressors that would come with greater leverage.
For investors who are seeking returns without the financial stressors that come with leverage, the findings show that other asset classes can also look attractive.
TLDR: Leverage is a double-edged sword. Factor in interest rates increase and financial stressors.
Factors to consider when investing in physical properties
Property assets are typically less liquid relative to other asset classes.
2. Property gains may be subjected to one-off costs
Property gains may be subjected to SSD when disposed within the holding period. Other financial assets are typically not subjected to oneoff costs on their capital gains.
3. Time and effort
Time and effort are usually needed to manage tenants, and operational and maintenance matters. Other asset classes such as REITs depend on professional management and can be a more passive form of real estate investing.
Some financial assets e.g., REITS and dividend-paying stocks also generate attractive yield levels for investors, which at times can be even more attractive than the rental yields generated from physical properties.
5. Greater diversification
The capital needed to invest in other financial assets is typically smaller, which enables the investor to pursue greater portfolio diversification.
Furthermore, some financial assets also provide direct exposure into diversified portfolios e.g., ETF indices provide diversification into a basket of securities, some REITs invest across a range of industrials, logistics and office space assets, and more.
Final note: Property prices tend to decline more sharply during economicdownturns, especially when residential unemployment rates exceed 4.0%.
The COVID-19 pandemic was the only exception, with the other four market downturns experiencing sharp declines in property prices.
It is during these economic downturns where liquidity matters the most.
This is the part where I tell you no financial advice is offered here. (Duh!) Speak with a qualified licensed financial adviser.
What you see here is based on the research and report by DBS. Visit their website for more research.
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