Passive income through investment property purchase – is it for me?

Buying an investment property to get passive income continues to be one of Singapore’s favourite ways to invest

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An investment property should be about increasing your wealth, giving you a passive income and about securing your financial future.

There is however, a common misconception that property investing always delivers positive returns, while this is true most of the time it certainly isn’t an instant road to riches. You need to keep in mind that how effectively you manage your investment will determine whether or not the investment helps you reach your financial goals. The cost of owning an investment property can be surprisingly low after you take into account your rental income and the tax deductions you’ll be entitled to.

Left uninvested and at the current rate of 2% inflation in Singapore, your money will lose 25.99% of its value in 20 years. This means your S$100,000 today will only be worth S$74,008 in 2038. Everything is affected by inflation, including the cup of coffee you had today. With inflation, the same cup you had today will be quarter lesser in 20 years.

Inflation is the financial equivalent of high blood pressure. You don’t see it, you rarely feel it, but it will kill you if you let it. If we think back to past year even, the price of goods and services doesn’t seem to have changed that much.. We only identify with the danger of inflation when we look back at our previous lives as children.

So how best to beat inflation? Some say that besides diversifying your portfolio, an investment property is the best way to beat inflation and get a passive income.

Which passive income is the best?

Investing in real estate is usually all about capital growth, so choosing a property that is more likely to increase in value is the most important decision you will make, so buying at the right price is absolutely critical.

Unlike buying shares where the value of a company is transparent, real estate is more difficult to price, this however provides you with the opportunity to acquire an asset below its real market value if you are patient and knowledgeable. The key for you is to do your research, work out what everything is selling for in and around the area and then you’ll discover that soon you’ll become very good at working out what a property is worth – you’ll know a bargain when you see it.

Never consider purchasing real estate in an area that you are unfamiliar with. You probably aren’t aware but lenders and mortgage insurers have valuable data on different locations and property developments and you should try and access this information to assist you to avoid picking the wrong investment property. Whatever you do, never make a decision to buy an investment property based on getting a tax deduction – always focus on making the right investment choice.

Ensuring that you have a steady rental income stream is also vital because this cash flow will make the holding of the asset more affordable and provide passive income.

Different classes of property can outperform each other over time. Some areas offer higher rental yields, but it is important that you do your homework as often these properties provide lower capital growth opportunities.

Government data suggests that although a private property may dip sharply over certain years, observed over a longer 20-year-period, it always appreciates. So the lesson really is if you are a short term investor in Singapore’s residential properties, don’t overestimate the returns on this investment.

In fact, no investment property can guarantee a perpetual positive return. And there is always the probability that your rental returns cannot cover all expenses related to your investment – expenses like loan repayment, management fee, property tax and maintenance and repair cost.

There are many options when it comes to financing your investment property, so get sound advice in this area as it can make a big difference to your financial well-being. It is surprising how many people spend too much time researching mortgages in an attempt to save a few dollars a month, rather than spending that time on researching their local real estate market where much bigger gains can be had.

Interest on an investment property loan is generally tax deductible, but some borrowing costs are not immediately deductible and knowing the difference can count. Structuring your loan correctly is critical and this should be done with the help of a trusted financial advisor. I always avoid mixing up investment property loans with your home loan, they need to be separate so you can maximise your ongoing taxation benefits and reduce your accounting costs.

Whether you choose a fixed rate loan or a variable rate loan will depend on your circumstances, but consider both options carefully before you decide. Over time variable rates have proven to be cheaper, but selecting a fixed rate loan at the right time can really pay off. Remember that rate usually rise in line with property prices, so increasing interest rates are not always bad news for property investors as they have more than likely had a win on the capital gains front.

Leveraging equity in your home, or equity from another property investment, can be an effective way to buy an investment property. Equity is the amount of money in your home that you actually own. It can be calculated by working out the difference between what your property is worth and what you owe on the mortgage. For example, if your home is currently worth $2,000,000, and you have $1,500,000 remaining to pay off on the mortgage, you have $500,000 worth of equity. Also, using the equity in your existing home can allow you to borrow more money against your investment property, which will increase your tax deductions.

Mr Paul Ho, chief officer at iCompareLoan, said: “property investors seeking passive income must be aware that unlike shares or managed funds, you can’t just sell part of your investment property if you need money.”

Written by Ravi Chandran


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