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A Tale of 2 Investors

Taking a break in between work to discuss what is a common question today.

Whether to buy a property today or to wait further, consider this simple situation between 2 friends.

Tim buys a $1m property today. John feels that the market will correct further and waits out.

3 years later, the market has fallen by another 10%. John buys the property at $900K. Who has done better?

What happened for John:

Pros: John buys 3 years later at $900K.

ABSD could be revised.

Cons: Loan tenure shortened by 3 years. MMI has increased.

If market had rebounded during the 3 years, John misses out and loses more years waiting for the next correction. In the mean time, he gets older and loan tenure gets even shorter.

What happened for Tim:

Tim buys at $1m today.

Rental yield of 4.2% (Achievable in OCR/RCR projects or even CCR projects like The Sail).

3 years of rental income – $126K

Less est. interest: $26K

Market falls 10%. Valuation: $900K + Rent $100K.

Nett Equity: $1M.

Tim ends up in the same position as John but has the added advantages of:

– A potential capital gain if market rebounds within the 3 years.

– Lower MMI as a result of his longer tenure. Positive cashflow after paying mortgage, interests, maintenance fees etc.

– With the equity in his property, he has the option to gear up today to invest in more properties or markets.

Who then has made a better decision? Which would you choose?

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