Do Properties Make the “Perfect” Investment?

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Other than “Do properties make the “Perfect” investment?” I am also often asked: “Is Real Estate the “perfect” investment vehicle to get wealthy?” Unfortunately in the investment world, there is NO SUCH THING as the “perfect” investment. Every investment product will have its plus and minus points. This article will cover the merits and demerits of properties as an investment vehicle. We will also compare properties with other investments products.?

The following are the various attributes to consider when evaluating any type of investment:

1. Returns: The Expected Returns must be powerful i.e. greater than 15-20% p.a. Since most properties yield an average Rental Yield of 4-7% p.a. (depending on property type, location, etc) + Capital Appreciation of 5-10% p.a. (depending on economic growth, inflow of foreign investment, etc), Properties are considered to be Moderately Powerful.
The returns are usually more than enough to keep up with and even outperform your family’s “unofficial” inflation rate of 6-10% p.a. Hence, properties are an excellent long term investment for keeping up and even out-performing inflation.

2. Stability in Both the Market Value and the Annual Returns. Properties are considered to be extremely stable and hence safe. They are less risky investments as the Volatility or Price Fluctuations are extremely low. On the other hand, it’s fairly common to see prices of even blue-chip property stocks fluctuate between +/- 20% in any given year.

3. Liquidity: How Fast Can You Convert to Cash either by Selling or Refinancing. Unfortunately, properties fare very badly in this regard. Properties take time to sell and convert to cash. The earliest, if you are lucky, is approximately 1 month to sell and another 3 months to get paid. Leasehold properties in undesirable locations may easily take 6 months to sell and another 9 to 18 months for the transaction to be completed.
However, if your property is fully paid-up or if you have built up sufficient equity by reducing your outstanding loan, you will have the option of revaluing and refinancing the property. It will take approximately 2 to 3 weeks to refinance a property with the same bank. If you are refinancing with another bank, it will take a few months for the paperwork to be completed.

4. Leverage: Does the investment offer you the opportunity to borrow money + does it give you the flexibility to choose your borrowing level? In properties, you can choose to borrow anywhere from Zero to as high as 100% of the purchase price whereas for Futures or Options contracts, the gearing levels are fixed as the contracts are standardized.
No other investment has this unique benefit. In some instances, it’s even possible to borrow 100% of the purchase price if you are familiar with creative financing techniques. The advantage of borrowing money for property investments is that your loan is gradually being reduced thanks in part to your hard-working tenants and your asset is appreciating over time thanks to inflation.

5. Expenses or Costs at the point ofa) Entry or Purchaseandb) Exit Point or Sale of the investment.
Properties are costly investments, both at the entry and exit points. During purchase, there are legal fees, stamp duties, mortgage insurance to cover the loan amount and several other costs involved. During exit, there may be property agent’s fees payable, legal fees to redeem your outstanding loan and other costs.
While the above may not seem to be a complete list of attributes to consider when evaluating any type of investment, but they are a few of the main attributes to consider when choosing an investment type to invest.
Cheers!
Milan Doshi