A Simple Guide When Buying Properties

For most people, buying a property is a major milestone in their lives, as it’s one of the most significant decisions they’ll make. It can be both exciting and overwhelming, especially when you're a first-time buyer who's looking for a place to call your own or an investor who's wanting to grow your wealth.

As a wealth coach, I'm often asked what my guidelines are when it comes to purchasing a property. After all, it’s a long-term financial commitment. The choices we make will have a huge impact on our finances.

With this, I’ll be sharing my personal guide before I buy any property in either Singapore or the Philippines. And my goal for you is that, by using this, you’ll get clarity and direction when it comes to purchasing properties of your own.

Now, let’s discuss these guidelines.

1. You can sell the property at a higher price.

Generally, I ask myself, “If I buy this property at this price, can I sell it to the next buyer at a higher price? And can the next buyer also do that?” If the answer is yes, then that’s a good start.

The rationale behind this is that we’ll want to buy properties knowing we can sell it to another buyer, and that buyer can make money as well. Because if they cannot make a profit, then your next potential buyer will be limited as the market depth will be shallow. Even if you’re planning to hold onto the property for the long-term, it’s still better to keep this in mind to identify its value.

Pricing is crucial when it comes to real estate. It has to be at an amount where there are still many potential buyers, either in your own network of family and friends or from your trusted broker’s network.

This is the same with renting the property out. It’s important to understand at what price your potential target market is able to rent or buy your property because if it’s unaffordable to the next buyer or renter, you will be stuck with the property you bought.

2. Identify if it’s for your own stay or for an investment looking for a rental yield.

The answer to this is your primary objective. The criteria for buying properties for your own compared to the criteria for buying properties as an investment are usually different. That’s why it’s important to identify this before including any secondary objectives. Knowing this can avoid confusion and potential conflict of interest on which features you’d want.

Having a clear criteria based on those objectives will help you filter out what you really need. Sellers have many bells and whistles that are all extremely attractive, and it’s easy to get distracted with the features you may not actually need. To the point that you may end up buying the “nice to have” instead of the “need to have”, which we’d definitely want to avoid.

As we’ve mentioned this, let’s cover two major differences using myself as an example.

A. If I'm buying a house for my own stay, what I do is I usually let my wife choose everything she wants. Aside from the fact that she has more specific preferences, the property should be something that she will be happy to live in regardless if we sell it or not.

For anyone, factor in your lifestyle and identify the features you’d want. When you have partners, the lifestyles of both parties should be factored in. But in case another person has a stronger preference, don’t forget to strike a balance between the two of you.

Remember, the money part is important, but the happiness part is equally important. You can only skew a little more to one side depending on whether it’s for your own stay or for investment purposes.

B. If I'm buying for an investment objective, then I will start calculating the yield and potential capital gain. I treat the potential capital gain as a bonus since nobody really knows what numbers the next buyer is willing to buy. It is more speculative in nature, unless you have concrete, unbiased data you can collect and rely on to make decisions.

If I calculate the yield, I will calculate it in this manner:

Let’s say the rental is PHP50,000 a month and the property is worth PHP10,000,000.

PHP50,000 x 12 months = PHP600,000
(PHP600,000 / PHP10,000,000) x 100% = 6% Annual Yield

Since I have now computed the annual yield, I will check if I have other instruments generating the same 6% or higher. Generally, I’ll compare it with dividends or other recurring income sources as a benchmark to understand if my money will be working hard or not.

Compute the net yield by subtracting the mortgage and other expenses from the rental fees. Rental yields in Singapore based on the market value of property are usually at a maximum of 3 to 4%, while in the Philippines they range from 5 to 6%.

In any case, as property values go up, the yield vs. market value typically drops, but is hopefully compensated by the property's appreciation.

3. Understand how much of your net worth will be allocated to the property.

Factor in the full amount and not just the deposit. The reason is that it’ll be fully paid if you have a mortgage. Buying property usually takes up a huge chunk of one’s net worth and cash flow.

Typically, I put a maximum cap of 30 to 40% of my net worth into property. Anything above these numbers will mean you run the risk of being too illiquid and may potentially be forced into selling at prices you don’t want. Don’t forget to factor in that most properties will take months or even years to sell.

In case you’re a big fan of properties or there are businesses included, the maximum cap can be 50 to 60% combined. Most people exceed this number, but it’s better to follow this guideline so you don’t fall into the illiquidity trap.

4. Consider property management.

If you’re buying to invest for rental yields, it’s important to get a good agent that will help you with the rentals if you don’t have the time and expertise to do it yourself. The property management fees vary so make sure you factor that into your calculation.

For developers who don’t have a strong track record, ready-for-occupancy (RFO) units are preferred over pre-selling properties. It’s less risk and guesswork.

Meanwhile, if it’s just a vacant lot, you need to factor in the potential future costs of building on it. Otherwise, it’ll be a “dead asset”, not generating any income. It’ll become a speculative play that prices are going higher and you can find a next buyer.

So before buying, you need to ask yourself if you’re (1) looking for a potential capital gain and willing to wait and market it yourself later; (2) willing to put in the time, money, and effort to make the property attractive to renters or buyers; and (3) considering other costs and risks such as tenant vacancy and other fees.

Overall, buying a property is a big step, whether for personal use or investment. Understanding this guide is key to making informed decisions.

Remember, have a clear objective in mind and know the things to consider. Your property purchase should align with your financial and life goals. So take your time, do your research, and trust in the knowledge you’ve gained here. You’re now better equipped to embark on this journey with confidence!