4 Pillars Of Property Benefits That Make It So Attractive To Own One

By on July 19, 2013

On the surface, capital gains from appreciation alone is reason enough to get involved in a booming property market. But whether you are aware of it, there are a few more good reasons to own investment properties that you might implicitly understand. Here is a look under the surface.

Increase in price. Before we go on with this point, be reminded that increases in your property value is just a paper gain. You do not make a profit as long as you do not sell your property. Even if you take up an equity loan on an increased valuation of your house, you are getting into debt and not exactly making a profit.

Property appreciation occours due to 2 primary macroeconomic factors. Increase in the money supply and increase in demand. You can now see why properties are shooting through the roof. When the supply of money increases faster than real output, inflation comes about. Freakishly low mortgage rates also make money needed to buy property readily available. A lot of debt has been accumulated in home loans. And an increasing population on limited land will eat up mortgage money to buy properties.

It has now become the norm whereby owning properties are preferred to renting one in Singapore. Every young family will have HDB in their thoughts even before they get married. Older families look to upgrade to bigger homes or have their sights set on private property. Home owners who have fully paid for their homes now look to buy more properties for investment rather than stay immobile.

A property pays for itself with rental income. There is no need to hire a genius from Harvard to work out that rental income can cover mortgage payments with leftover profit. The real estate jargon is called positive cash flow. But we are not in a class here so there is no need to use sophisticated language. Al though there is always the possibility that rental will not be able to fully cover all expenses, more often than not, it will be more than enough. If not, just raise rental. A lot of tenants get a housing allowance after all that is more than enough to meet your rental demands.

"Depreciation?! I'll have more of that!"

“Depreciation?! I’ll have more of that!”

Depreciation. What? Earlier I mentioned that appreciation is a benefit. Now depreciation is a benefit as well? Well depreciation is an accounting principle. It can be logged as an expense in your profit and loss statement. How it works is like this. Suppose you have a $1m property with a 50 year lease. So taking a straight line approach, your property will depreciate in value by $20,000 each year. At the end of the year, you can clock that depreciation into your profit and loss statement as an expense. On the one hand, you did not really spent that money. So it translate to extra cash flow for your operations. On the other hand you will also pay a lower tax. Teenage students study accounting will already know this principle. But for those who did not take up accounting lessons will find this as a breakthrough concept. Depreciation gained wide-spread understanding through Robert Kiyosaki’s best selling book “Rich Dad Poor Dad”. If you have multiple properties and a very low profit, you could just find that your tax liability is zero when depreciation is factored in. Businessmen know these like the back of their hands. Different territories will have different account practices. You should check with your accountant to find out how depreciation applies to you.

Wealth accumulation. In stable markets, an average Joe can amass great wealth through properties. The definition of wealth can be subjective from individual to individual. Singapore has the highest percentage of household millionaires than anywhere in the world. And I would suspect that home ownership has a huge part to play for this proud statistic. Public housing have sold for over one million dollars in the open market. And there are many similar property types to the ones that sold at such astronomical prices. Just that owners have not made them available.

So there you are. The 4 pillars that make property investing so attractive to those with spare cash to spend. A lot of people do not think about all 4 of them but implicitly knows that they exists. You don’t think about where the electrical wiring for the lights run. The main thing is that flipping the switch will turn on the lights.



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