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6-7 figure profits - really???

TL;DR: Leverage, in recovery or an expansion stage of a real estate cycle, or in a bullish environment, with lower interest rates.

Here's how:

• Leverage

• Timing, positive rate of return spotting overvalued and undervalued properties

• Take action

Profits, actual capital gain and return on equity

Besides comparing entry and exit price, or return on initial capital deployed, accounting for accumulated principal and interest would give us a better picture of actual returns and return on equity.

Equity = Assets - Liabilities, where Equity refers to the asset owner's value.

Homeowner's accumulate equity when their mortgage is paid, through the accumulated principal component of a mortgage.

Loss in equity happens when the Asset's value is less than the Liabilities. This happens when there is a drop in the value of the asset or an increased in liabilities.

Hence, the entry and exit price, together with potential growth (capital gain %) and interest rates are important factors during a purchase of a property.

Leverage

By borrowing to grow your assets, we are using leverage when we buy a property with a mortgage. Leverage comes with risk, returns and losses can be magnified.

Leverage impacts liabilities, and the impact increases with higher leverage (borrowed amount). Hence, reviewing our mortgage interest rate regularly can bring us savings, further reduce our liabilities and increase gains.

Timing, positive rate of return spotting overvalued and undervalued properties

Timing

Timing the market perfectly is almost impossible. Furthermore, property transaction is rather illiquid, high transaction cost and longer transaction time. Reducing risk by of dollar cost averaging is quite a stretch for most. This leaves us with investing immediately, bad timing or not buying at all (keeping cash).

Interestingly the Schwab Centre for Financial Research showed that even bad timing is better off than keeping cash, among dollar cost averaging, investing immediately and having perfect timing scenarios in investing styles.

Essentially, property prices and markets move up in the long run. Waiting for the "best time" have its cost as well.

Positive rate of return

In a recovery and expanding stages of a real estate cycle, demand exceeds supply, hence driving up prices. A bullish market environment (good economic sentiment) also increases buyers confidence, and this drives up prices as well. In such situations, growth rates increase, typically above interest rate, giving us a positive return.

Considering stages of the real estate cycle and macro economic environment together with price information of the property (and project/development) and other micro factors relating to the property would give us important insights to the potential growth (capital gain %).

Moreover, real estate hedges against inflation as home prices rise over time and lowers the loan to value of any mortgage debt acting as a natural discount. Whereas holding cash may diminish its value over time. Schroders illustrated that in the worst case scenario where inflation were to average 5% a year over a 10-year period, your $100 would be worth just %55. A report by DBS back in May 2018 projected that new private homes are to cost up to S$2,900 psf on average by 2030 and average $PSF of new launch projects have been going up, supported by rising household income and increasing household net worth.

Spotting overvalued and undervalued properties

In a perfect market where there is no asymmetrical information, price information might indicate where trend is heading which would be useful to plan entry and exit price points. Together with micro factors relating to the property from URA master plan, developments in the vicinity, to unit type, features, layout, etc.

SEE below also on overvalued or undervalued

Take action

Careful evaluation of your exposure to property (asset portfolio allocation), goals and risk tolerance. Next, talk to people, research and read up on read estate market and regulations.

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