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How To Assess Property Investments Quickly By Grading
Financial products like bonds, derivatives and stocks have gradings. These gradings help investors and fund managers make investment decisions quickly. When you have hit that point where you identify yourself as a property investor, quickly putting properties and locations into categories will help you quickly judge if something is worth your time to investigate further. Imagine putting aside half your weekend looking into a potential buy and finding out later that the numbers do not add up at all. It will be like driving up the North South Highway all the way to Genting and realising that the casino you agreed to meet up with friends is at Sentosa!
You can eliminate these risks by systematically putting a first line of screening for properties in your investment radar. Only those that can get pass this screen test will be worth your time. Now what you include in your criteria depends on your personal preferences. But here is a way on guiding you to set up your own initial investment screen filters.
The overall objective on property investments is to generate strong cash flows with good returns on investment (ROI). To maximize ROI, either one or both these things has to happen.
1) Price per square foot is low
2) Rental rate is high
The factors that overwhelmingly influence these 2 things are
1) Type of property
2) Area location
It does not exactly require a Masters degree to figure this out. But bear in mind that we are talking about initial screening. The famous nasi lemak stall nearby is not even a factor. This is the first stage of pushing a potential property investment through your process of assessment. Just like interviews, usually Human Resource will conduct an initial interview to learn whether you are a good fit to the organisation. After which a second interview will be conducted where the line manager will test you on the nitty-gritty of the job scope.
As the pool of prospective properties to buy is very big initially and get much smaller as you apply more and more investment filter onto the pool, this methodology will immediately slash a huge chunk of undesirable investment properties from your pool. Giving you a more focused approach and save you a boatload of time detailing your property shortlist.
The first step is to put every property on your shortlist into a category. For simplicity, using alphabets is quick and direct. Using a 4 letter approach, group them into grade A, B, C, D. Of course this is not a game and your should not just put any apartment into any group as you like. For example, there are 7 types of landed properties in Singapore. Good class bungalows, detached houses, semi-detached houses, terrace houses, linked houses, town houses and cluster houses. Depending on your personal grading criteria, group them in the property category. Here are the parameters of each grade. You are free to set up your own criteria grade.
Grade A. Luxury apartments with stylish interior design. This can include landed properties and luxury apartments. Priced at $2500psf and above. Bear in mind that we are talking about investment properties with good rental yield. Whether it if freehold or leasehold is not a big consideration as you can charge the same rental whether it is either of them. But with the foresight of property value, we will set grade A properties at 10 years old or less. These are the type of properties that you can reasonably expect high flying young professionals to live in. The properties will also have facilities like gyms, swimming pools, tennis courts, barbecue pits, function rooms, spa, and so on.
Grade B. Properties up to 20 years old. They can get good rental but does not come close to the rentals that you can get for grade A properties. These include condominiums located in the outskirts of the city. Properties even further from the city can also be included but their strong value is more attributed to being next to an MRT station. Priced below $2500psf.
Grade C. Properties more than 20 years old. You can tell that is an old apartment just by looking at the exterior of the building. The architecture will also tell you immediately that it was build in a different property era. It could be under conservation and needs retrofitting. Also priced below $2500psf. More likely around $850psf to $1500psf.
Grade D. Everything else.
Grading area locations
Just like grading property types, now it’s time to grade area locations. The good thing about this part is that URA has done the work for us. They have grouped areas into CCR, RCR, OCR. Meaning core central region, rest of central region and outside central region respectively. Bear in mind that district 1 and 4 which includes Sentosa and Marina Bay is not in CCR. And it is only logical to include them into the CCR for the purpose of working this system.
So grade A will be CCR, grade B will be RCR, and grade C is OCR. This is a very broad categorization.
To be that little more detailed, grouping districts into ABC will provide more flexibility. For example, districts 1, 4, 6, 7, 8, 9, 10, 11 can be your grade A, and so on. You have to work out how you value these area locations to categorize them accordingly.
Putting it together – Top property, top area = AA
When you have decided how to define property types and areas to put them into your gradings, it is time to put everything together. By this time, you should be able to know which grade any property and area belong to just by taking a quick look on your personal cheat sheet. Then you will be able to grade the investment potential as AA, AB, or BA, etc. The first alphabet describing the property grade and second alphabet describing area grade.
The next step is to ask yourself what kind of approach you want to take in property investments. If you want to go high end property and area, you will want to look for AAs only. If you are looking for mid end properties in top areas, you will be looking for BAs. Because we don’t exactly buy properties each month but get spammed with tens of potential buys each week, this quick way to screen potential property buys is going to save you a lot of time.
My personal approach is to look into properties one grade or two lower than the area grade. This means that I will only spend time on properties that get past my screen filter with the first alphabet on a lower grade than the second alphabet. For example, BA, CA, DB, etc. Hope this article helps you become more efficient in assessing investment properties.