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Buying Property for Owner Occupancy vs Investment: How Strategies Should Differ

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Timothy Kua

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People buying property for owner occupancy versus investment are only superficially similar. It’s true that they both seek property at good prices. But beyond this general goal, the needs and desires of the two are very different. In this article, we look at the main difference between these two types of property buyers, and the strategies that best suit either. Know which camp you fall into, before buying the property:

 

The Two Types of Property Buyers

There in, in a general sense, two reasons people buy property: for owner occupancy or investment. For the purpose of this article, we will term people buying property for owner occupancy as “Home Owners” and those for investment as “Property Investors”.

Home Owners

These people buy property to live in it (and not to rent it out).

The main priority for home owners is that the property suit their lifestyle. Most intend to stay in their property for the long-term (more than 10 years), and their purchases are largely emotionally driven.

Property Investors

Property investors encompass a wide range buyers. But for this article, we are focusing on landlords, and property buyers intent on resale. Such property investors may not reside in the property they buy. If they do, it will not be for long as they usually intend to re-sell when prices peak in the short-term (less than 5 years).

Property investors are not (and should not be) emotionally driven. They are focused on profit and nothing else.

The following are a range of factors in which property investors and home owners should act differently:

 

1. Pricing (psf)

 

Run down old House
Property investors may actually have good reason to buy this. Home owners probably won’t.

 

Like it or not, emotions come strongly in play when buying property for either reason. Most people buying property for investment purposes often find themselves selecting the property as though they were going to be living in it. This is dangerous for property investors as their sole purpose for buying the property should be to get the highest return-on-investment possible.

So it doesn’t matter if you do not like the area, do not like the name of the condominium or do not like the way the unit looks. Remember, all these reasons are subjective and emotionally driven. If it’s situated at a location that you know has high rental demand, rental yield and going at a good price and a low enough psf, grab it even if it doesn’t come in the colour you like.

Home owners on the other hand, can allow themselves to be “distracted” by all these subjective emotional factors. Just do it within reason and not pay more than is really required to.

 

2. Choice of Home Loan Package

 

Smashed piggy bank
Think ahead. Most home loans jump in price after three years.

 

Because home owners intend to stay indefinitely, they need to plan far ahead when choosing loans. Rather than focus on the loan that’s cheapest for the short-term (first 3-5 years), they need to look at the “thereafter” cost of a loan. Here is an example:

Loan Package A has an interest rate of 1.5% for the first three years, and 1.7% thereafter.

Loan Package B has an interest rate of 1.2% for the first three years, and 1.9% thereafter.

While package B is cheaper initially, this is only true for a brief period. A home owner will be paying the loan for the next 25 to 30 years, and it would be shortsighted to focus on the “teaser” years. It will also not be wise to assume you can “refinance” after the first three years. Interest rates are set to rise and you do not want to be caught in a situation whereby three years from now, the next best loan you can refinance to starts at 1.8% (or anything higher than 1.7%).

Property investors, on the other hand, may intend to sell in as little as five years. They are less interested in “thereafter” costs, because the loan is off their hands once the property is sold. They might be better off with package B.

If you want to compare home loan packages for yourself, visit comparison sites like SmartLoans.sg. The site’s mortgage specialist can advise you further.

 

3. Interior Design Expenses

 

Renovation work
Home owners can be extravagant with renovations, but landlords had better think twice.

 

Home owners might spend spend lavish amounts on Interior Design. And why not?

After all, they will be living there for many years. It is quite meaningless to lecture a home owner on the dollar value of nice design. It would be like telling a person buying a Ferrari that he should buy a Toyota, because at the end of the day, both are still cars.

The purchase hence is about personal satisfaction, and does not have to be financially justified. After all, if you’re the one who is going to be living in it, you might as well be happy.

For property investors, Interior Design could be used to raise “rentability”. Good interior design can attract more tenants willing to pay higher rent. However, landlords must be able to justify the amount spent. For example:

Say a landlord’s condo can generate $4,500 a month in rent. By getting a designer to renovate the place, he is able to attract tenants who are willing to pay $5,000 a month – a $500 increase in rent.

But if the total cost of renovations is $50,000, it would take 100 months (over 8 years) to recover his capital expenditure alone ($50,000 divided by the additional $500 “profit”). During this time, the condo is not truly generating additional cash. It is just paying off the renovation loan.

 

4. Amenities

 

Private gym
Will every tenant be willing to pay for the amenities? Investors need to ask more questions, and do more research.

 

When buying property, prices are influenced by amenities (nearby schools, private pools, MRT stations, and so forth).

The home owner has an advantage. Because he buys the property for himself, the home owner knows exactly what he needs. He can get a lower price by avoiding properties with unwanted amenities.

For example, homes near MRT stations often cost cost more. But a home owner who drives has no need of this amenity, and hence no need to pay more for it. This might not be true for property investors.

Property investors must consider what amenities their future buyers or renters may need. Most investors must study historical trends in detail (for example, noting a 30% increase in rental when an MRT station opens nearby).

If you’re interested in such pointers, follow us on Facebook. We will update you with feedback from other investors.

 

5. Timing the Property Market

 

Calendar
Property investors need to time their investments with great precision. Home owners can be more relaxed.

 

Property investors need to keep a close eye on market movements. Contrary to a recently popular belief, there are bad times to buy property.

A good example are some East Coast condos (such as Changi Court and Changi Green). Investors who bought these properties in the mid-90’s only broke even in late 2009. The same thing happens to investors who buy at the peak of the property cycle: When prices drop, they have a long wait before seeing any return on investment.

For home owners, such speculation is less of a concern. Home owners are in it for the long haul. Even if they buy at a peak, most have no problems waiting another decade (or even until retirement!) to sell at the peak of the next cycle, or the one after.

Such home owners should focus on finding a place they are comfortable with, and ignore marketing patter about resale value. At 15 years or more, any such projections are more guesswork than fact.

 

Image Credits:
ssedro, taxbrackets.org, OlgerFallasPainting, miamism, williamcho

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Timothy Kua

I'm co-founder of MoneySmart.sg. I'm a business and technology enthusiast wanna-be. I also love money. In fact, I love money a little too much. Some say money is the root of all evil, but I say, it's the root of all wealth!