In this third episode, Andrew talked about his view on property investment – what separates the professional from the layman, what he will do when opportunity comes knocking and why he would never invest in the insanity of Singapore property bubble now (no offence, Singaporeans!).
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[spoiler]CF: Andrew, what is your personal view on other investment options, apart from index funds, which you are an advocate of? Things like rental properties, real estate investment funds?
Andrew Hallam: Yea, I think rental properties can be great. But what I find to be really interesting though is…generally speaking, [inaudible] the really great real estate investors in what they do..and then there are the layman. And what the layman actually does..is that…there are actually quite different in terms of what they actually look for and how they value things in property. Typically, what professional real estate investors will do is, they will look at the yield on the property. So they will say, okay, I just purchased this place and it’s whatever, five hundred thousand ringgits..what is the annual rental income that I can receive from that property ..so what is my actual yield on that as a percentage. So, it’s a simple point…let’s assume something that is ..[inaudible]….for simplicity sake..let’s say a hundred thousand ringgits..and you have a hundred thousand ringgit of property and you are getting rental of seven thousand ringgits a year. There is a yield of, before taxes and expenses….there is a yield of 7 percent. This figure is pretty average…it’s pretty reasonable if you are looking at around 7 percent yield on real estate property. This is what the big developers are really looking for, and one of the reason why …really rich people don’t run around and buy single family homes. They might buy apartment blocks, commercial building because in that case they only have one roof to maintain and they got multiple sources of revenue from the tenants. What is really important for them, is because they don’t look at it and say, “I think that that property will be worth 2 million ringgit in 5 or 6 years time”. Often they will look at it and say, “How much revenue can be generated from that property?” and when it comes to property investing, that’s how sophisticated real estate investors invest. What the layman, and how the layman actually invests, a regular person, is, they often look at what they think that property will be worth one day down the road and they like to buy, when it has recently become much more expensive. I give you a really interesting case here in Singapore, where there is this huge real estate bubble. I am now sitting right now in a place, which, thankfully my employer actually pays the rent here. I am sitting in a place that rents right now for 3,700 Singapore Dollars a month. However, this place is worth, a market value of, 1.8 million. Now, to purchase a place for 1.8 million and to get revenue of what amount to, say, 45,000 dollars a year is INSANE! The yield, is probably less than 1 percent. It makes no logical sense whatsoever, so I think what people need to do when they buy property is not to necessarily think of the property as an appreciating asset but as a revenue generator. And the appreciation becomes the icing on the cake. It’s not the cake, but the icing on the cake.
CF: Do you see yourself diversifying into properties anytime soon?
Andrew Hallam: If the yields were attractive enough, and to be really honest, for me, certainly NOT in Singapore. Right now it is absolute insanity. There is really no sense whatsoever. But I’ll tell you this, if I live…and my family is based in the United States right now – houses in so many of the US states are going so cheaply and rental yields, are well into double digits in many US states currently. I just actually read a blog by a woman called Paula Payne(?)…she’s a journalist ..I was reading her blog last night. And it’s a funny thing, … the Chinese symbol for danger and opportunity is more or less the same, is it not?
CF: <Laughs>. Yes Yes
Andrew Hallam: And you have this danger with the housing market crash in the United States. And then this woman Paula who just picked up a house, in the US, for 20 thousand dollars. 20 thousand dollars for a 3 bedroom home . She figured she need about 10 thousand dollars to actually get it back up to speed. But it’s an unbelievable thing. For 30 thousand dollars she’s gonna be able to buy this house. And rental revenue is going to be, giving her sort of a double digit yield. It’s fabulous. If that were my hometown – absolutely!. I will taking up duplexes, quads, not single family homes, not if I could help it. I’ll be going for buildings with multiple sources of revenue – absolutely. Given the right circumstances, yea, I am a little bit like a vulture… I’m always watching ..always looking. If I get that kind of opportunity, I’ll be definitely jump at that.
CF: Not a few units but maybe a few blocks yea.
Andrew Hallam: Yea. That’s it.[/spoiler]
Stay tuned for the next episode, where Andrew reminisced his fateful friendship with a neighbourhood mechanic, who became his financial mentor 20 years ago, and how, by just by meeting one man changes his life forever.
If you miss the first and second part, check out the link below.