How To Use Real Estate To Build Wealth Generating Machine

My breath gets deeper and deeper by the minute. It’s about 4pm. Looking at the clock, and then back to my computer, waiting to send my official resignation letter …

Do you pride yourself as a hardworking person? Always wanting to do and achieve more?

Yet, it just seems like, you are not moving any further …

I felt that way about 3 years into my first job after I graduated.

I have a great and loving family. But growing up has been tough, financially.

Still remember occasions such as having our electricity and water cut off due to missed payments, and HDB officers banging at our door chasing for overdue mortgage payment while me and my sisters went hiding in the rooms pretending that no one is around.

All these external factors must have created the motivation in me to work hard in order strive and achieve more than we had in the younger days.

So I studied and worked really hard. Days and night. Seven days a week. And I became pretty good academically.

Eventually I graduated from National University of Singapore, and I got a considerably good job at a MNC.

It’s a great company with awesome colleagues. However, it just felt like something was missing.

Long story short, I submitted my resignation letter after 3 years in the company. With the thoughts that I could help others in their real estate investment endeavours while I learn and build my educational research business at the side, becoming a real estate consultant became a natural progression.

So there I am starting from ground zero …

Again, I poured myself into researching and real estate industry, understanding everything I could about property investing, and how I can help others with this newly gained knowledge.

Along the way, I realised that I should put what I learned into practice.

3 months after I left the corporate world, I got my first property with my partner, in a turbulent and uncertain time.

Why? Because I have acquired the knowledge to make that BIG decision. I am confident because the math explains itself.

We bought a 2bedroom private property at $800,000. Took a $600,000 loan.

We structured with a 90/10 tenancy-in-common split in ownership. Reason being that we can decouple (sell the shares from 1 to the other) so that one of us continue to own this first property where we will continue to stay in, while the other will purchase another property for investment (in about 3 – 5 years time) and rent it out. Such arrangement will help to save on cost and avoid having to pay the hefty Additional Buyer Stamp Duty (ABSD) – 12% of Singaporeans who want to own 2nd property.

We decided to go for private property because going for HDB BTO will delay our investment plan by at least 5 – 7 years. This will have implication on the long term Return On Investment (ROI) – will share with you in other post.

Assume that we will purchase the 2nd property of the same value, $800,000. The loan of $600,000 at an interest rate of 1.3% and loan tenure of 30year, the mortgage will work out to be about $2000/month.

Coincidentally, with a market rental yield of 3%, we will expect a rental of about $2000/month as well, so this can be used to help us pay for the mortgage every month.

However, note that out of the $2000, there is an interest and principal component respectively. Interest for the first month works out to be about $650, while the principal works out to be $1350. However, the interest component will decrease along with time, while the principal component will increase with time.

This means that $650 will be used to pay the bank and is never coming back. The $1350 is paid as principal, so once we sell of the property in the future, we will get back this as our equity in the property.

For simplicity, assume our profit is a consistent amount of $1350, it will work out to be $113,400 in 7 years time, because of the additional investment horizon compared to the route if we have gotten a HDB BTO instead.

Ultimately, assume a 1% capital appreciation per year (note the property market will follow Singapore’s economy which is generally about 2 – 3% long term average), we will expect the property price to reach about $1million.

This means that we’d expect 2 properties worth $1million each that’s fully paid. Meaning when you retire, you will have an asset worth at least $2million, and there’s many ways you can go about managing it.

At the very least, you can use it to fully payoff a $400,000 HDB to stay for retirement, use the remaining $1.6million to invest in stable asset class, such as REITs generating a 5% dividend yield. This should comfortably give you a passive income of $6600 every month, while retaining your total asset value of $2million.

This is just the tip of the iceberg. There’s many ways to go about maximising the returns from your real estate investment which we will share more in future posts.

But for now, I hope it has given you a better idea of how you can potentially setup your real estate portfolio right as a couple in Singapore’s context today.

As always, feed your mind, change your life!

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