SIX RULES IN PROPERTY INVESTMENT - Rule No 2

Rule No. 2: Identifying Investor’s Objectives, Goals and Personal Constraints

Before embarking on property investment or development, a prudent investor needs to identify clearly the objectives of the investment. Investing without identifying the investor’s own objectives, goals and strengths or weaknesses can be factors that work against the investor. Effective strategies can only be advocated if the investment objectives are clear.

Investing in real estate can satisfy one, all, or any combination of the following objectives:-

Objectives

Security of Income - Most types of real estate investments such as office, shop, retail and even vacant land are able to provide a regular source of income in the form of rent through the leasing out the property. As rents are generally contractually fixed for a term of years, such as three years with an option to renew at the prevailing market rent for another three years, there is a certain degree of security of income at least during the term of the lease.

Security of Capital - Property offers one of the safest forms of investment in terms of security of capital as it is durable, has a long economic life, and for some types of properties, is relatively scarce. Moreover, whilst a building may be destroyed by fire, the land on which it stands is indestructible and generally appreciates in value over time.

Hedge against inflation – Real estate investment is widely perceived to be a good hedge against inflation. Real estate offers an investor protection against loss of purchasing power resulting from rising prices of goods and services to the degree that the investor’s equity increases in value at a rate at least equal to or greater than inflation. Investors from all industries acquire property to hedge against inflation of their individual/company’s assets, For example, developers purchase land to keep as land bank, fund managers acquire asset such as hotels,and office blocks, manufacturers acquire industrial properties, etc.

Means of Building an estate (wealth creation) – For an investor, building up an estate or property investment portfolio may be a means to become wealthy. Once an investor’s equity has increased through capital appreciation and repayment of the loan taken, the original property can be refinanced to free cash that can be used to buy a second property, or the increased equity in the original property may be used as a collateral or security for a loan to buy a second property. By refinancing a property investment and reinvesting these funds in more properties periodically, an investor can accumulate a large property portfolio over time.

Pride of ownership – The personal satisfaction derived from an investment is especially important in real property. For many investors, property ownership retains a mystical quality, with a value that defies measurement. Owning a private resident unit in a prime district, for instance, is generally regarded as a status symbol.

Diversification – Diversification in finance involves spreading one’s investments into many types, including stocks, mutual funds, real estate, bonds, and cash. Investors diversify investments such as from stocks which is highly volatile to property in order to reduce the risks of the portfolio.

Basic Needs – Many properties are acquired for the investor’s own use and enjoyment. In this case, the owner will derive satisfaction and benefit through using the property. The owner will save on the rental payments he or she would otherwise have to make on a comparable property. In addition, the owner/investor will benefit from the possible capital appreciation of the property.

Type of Property
Besides clearly identifying the investment objectives, investor also should identify the type of property to invest. Various types of real estate such as apartment, shop, office, factory, land, hotel, retail, casino, resort, infrastructure, and even the cemetery are offered for investment. Each type of real estate has its own characteristics and features.

Holding Period
There are two board categories of the holding period: -
- Long term
- Flip

Long-term means holding the property for years. Most investors or developers do that.to retain the property for future value enhancement or other objectives as mentioned earlier.

Flipping means selling the property as soon as possible after the investor has acquired it. In some cases, the investor can even sell it before he or she buys it, or sell it simultaneously at the time of purchase.

Holding the property on a long term basis will incur substantial holding costs such as quit rent, assessment, maintenance charges, insurance fees, etc. When flipping the property, substantial taxes such as Real Property Gain Tax will be charged.

Time Available
Investing in real estate is a time consuming activity. Different strategies require different amounts of time or the commitment of the investor for a certain number of hours in a week.

Cash Available
As mentioned earlier, property requires a high level of capital commitment. Besides the capital involved, investors should also analyse the holdings costs, transaction costs and maintenance costs.