Whatttt… Why is my home not an asset?
Regardless of what other people may say, a home is never meant to be an asset. It is a place where we house our aspirations, our hopes and our future.
A home requires a lot of our love and care, and there are monthly mortgages, maintenance cost and bills to be paid. And after all that, it does not give back any income.
An asset is means to put money back into your pocket. So how can one consider a home an asset?
I am sure you know of homeowners who have already made a bit of money by selling their home.
I can also tell you that there are a fair share of homeowners who lose money after selling their homes.
So what can we do as a homeowner to minimise our losses before buying a home?
Think like an investor
Thinking like an investor does not mean treating your home like an asset. Thinking like an investor means to be aware of the factors that can contribute to loss.
4 mindsets of an investor:
1. Buy to stay forever
When asked about how long he will hold the stocks in his portfolio, Warren Buffet, the great American investor, replied “Forever!”
This way of thinking should also be applied when buying property.
It does not mean that you should stay there forever. It means that you need to choose a property that you would be comfortable to stay in forever.
Everyone has their preferences on the ideal location of their home. But whether it’s near to work or near to your parents, a long-term mindset means to put yourself first.
Pick a place that you will be comfortable living in forever before trying to pick the property that you “think” will have more demand.
This way, you will have a higher holding power as not selling does not adversely affect you or your family.
2. Ability to hold for long-term
An investor usually holds assets for long-term, unlike a speculator who hopes for a quick gain. An investor knows that the true market price will be reflected only after a few years.
Additionally, there are regulations that prevent market speculations and property bubble in Singapore.
For private properties, you will incur an unnecessary tax called Seller’s Stamp duty. Seller’s stamp duty will be levied to property sellers who sell before the 3 years period.
For HDB sellers, the minimum occupation period of 5 years is mandatory. Those with valid reasons can apply for exceptions from HDB.
Hence, homeowners must be prepared to stay in the area for at least 3 years.
Having an emergency fund will ensure that you will not sell the property prematurely. Selling your home at time of distress will deflate your true property price, thus, rob you from your potential earnings.
Thus it is important to have an emergency fund of at least 6 months.
3. Follow the best practices
To succeed in life, work or business, we know that we have to follow the steps of a professional.
Same too in the property market. So who or what should we follow?
We can follow the management of Real Estate Investment Trust (REITs).
They are in the business of real estate and they would know how to invest and pick quality properties. REITs, as of today, can take a loan of up to 45% of the asset price, while maintaining a buffer of 5%.
This means that REITs can only borrow up to 40%. In Singapore, REITs on average, borrow only 35% of the 45% allowed.
To put it in layman’s perspective, for a half-million dollar property, an average REITs will only borrow $175,000. But, an individual property buyer like you and me, can borrow up to 90%, which is $450,000!!!
However, unlike us, REITs are managed by full time professionals. And, I’m only scratching the surface on this comparison.
Individuals should do their research on REITs and understand their management practices. Mirroring the best practices can minimise your property loss.
Have at least 25% for the down payment for your property purchase to ensure that you are not saddled with the monthly mortgage payment.
4. Satisfying the Stakeholders
Successful investors do not only look at financial figures. They will judge the business based on the character and the quality of the people running the business.
Likewise, we too need to ask, who are the stakeholders in this “investment”?
We need to understand the dynamics of our own family living in our home.
Every family has a different milestone. Couples will need to weigh their own needs and also their parents and/or children. Neighbours, friends and support groups also play an important role in this decision.
Profit may seem to be the most important aspect of any financial decision, however, it may be short-lived if you make a move solely on profit. The key decision makers have to take a step back and look at the bigger picture, not just the financial figures.
Contingency plans must be arranged if you decide to move.
This plan has always been overlooked by property buyers and can cost a lot of strain and misunderstanding in the relationship(s).
A home is definitely not an asset
There are a lot of costs associated with owning a home. A home should not be a financial nightmare, which keeps us awake all night.
With careful planning and having an investor mindset, one can live in a house where everyone is happy and thriving.
Feel free to contact me if you wish to discuss more.