Let me share learning of new skills in the knowledge Economy in year 2023. In today 2023, it has been easier than ever with platforms like Youtube where you can learn and pick up skills. I've been following YouTube content creators and gain alot of insights + habits from their channel. Ever since the pandemic in year 2020 in Singapore, i've been so engrossed in how to reach F.I.R.E and what are the ways to achieve.
Real ESTATE
From there i've learn about Real Estate that you can put certain a fraction of the house price down and rent the house out to a tenant and build up your equity over time. With a fixed mortage of 30 years, you get a bang out of the fixed interest rate back then as interest rates were low. As long as you can rent it out, and you are getting positive cash flow. What do i mean by positive cash flow.
Example :
House price for 2 bedder in Singapore in year 2020 : SGD $650k
Downpayment : SGD $130k
Interest Rate (2020) : 1.5% for 30 years for $520k
Monthly payment : $1794.63 round off to $1800
if you can rent it out at $2.5k per month. Assuming 10 months as you may need to advertise for rentee after 1 year lease. (Note : Singapore minimum is 1 year lease. Airbnb is not allowed for duration less than 1 year)
Cash flow per year : $25k - $21.6k = $3.4k (Worse case is to rent out at $2.25k whereby cash flow per year is zero) Your gain will be equity in your asset. As your tenant is building up your equity for you.
Per year equity build up is roughly $14k. Assuming you got cash flow of $3.4k + equity of $14k. You can get $17.4k returns in 1 year. Rate of return is rounded up to 13.4%
Fast forward to 2023, depending on locations, renter has gone up to $3.4k - $7.2k. What cause the rent to go up? A couple of reasons, Covid19 infection has more or less stabilize in the world. People are longing to travel as back then in 2020 - 2022, there were shut downs in factories, people stayed at home and countries restrict people to travel. Many jobs were cut. Right now, internationally except for the Ukraine and Russia war, all the other countries have opened up and international travel and business has resume. Economy has gotten better except for inflation.
If based on current average rent rates of $5k per month. Using 10 months out of 12 months as reference. Cash flow per year : $50k - $21.6k = $28.4k. Assuming cash flow of $28.4k + equity of $14k. You can get $42.4k returns for year of 2023. Rate of return is rounded up to 32.7%.
2020 rate of return : 13.4%
2021 rate of return : 13.4%
2022 rate of return : 13.4%
2023 rate of return : 32.7%
2024 rate of return : 32.7% (assuming all else same for 2023 pending any black swan event)
In a matter of less than 5 years, you will get $130k investment back in cash flow + equity. And the asset you own is worth $0.8m - $1.2m based on location.
Calculating the net gain in asset in equity :
Price of house : $1,000k - loan of house Remaining $450k = $550k
Total Gain with cash flow - initial investiment
$550k + $67k - $130k = $487k
Total percentage gain over less than 5 years : 377 % rounded up.
Of course this is base on today 2023 and the opportunity taken back in year 2020. The reverse also hold through if you cannot get renter and also the equity you build up over the years may drop significantly if housing suffer a slump or a crash. All investments will carry risk. Need to understand and cover your down side.
So how do people cover the down side, drop rent is one of the way. From $2.5k drop to $2k per month. Cash flow becomes -$1.6k which can be easily covered if you are working. Once housing recovers, you can increase your rents back. Get more people to rent, if there are 5 people to rent for the 2 room condo, you can still get the $2.5k per month. Potentially i see there is more advantage than disadvantage using Real Estate to build up wealth. Even forbes showed most of the top billionaires built up their wealth through Real Estate.
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