Amongst the various strategies in Real Estate, many people have found that investing in rental properties gives them a consistent income and allows them to reach a state of financial freedom.
What if we told you that this method of investment is an inefficient method that doesn’t help you maximise the use of your capital?
“But all my friends doing rental properties seem to be earning a lot of money leh? Are you sure that renting is inefficient?”
Indeed, while many people do get a substantial amount of money from renting properties out, the amount of money that they could be getting can be potentially more. When we are talking about growing your wealth exponentially, rental properties definitely don’t do your money justice.
When people talk about rental income, it is easy to focus on the large monthly paychecks that one receives without needing to do any work.
If you’re renting out a HDB flat, a 4 or 5 room flat can easily fetch you a monthly income of about $2000.
A condo might fetch you a monthly rental income of up to $6000 depending on the location and size of the condo.
That sounds really good on the surface.
But then if you want to become wealthy and receive a 5 digit monthly passive income (say $10,000 monthly), you will have to own more than 1 property.
Because of the regulations in place, you cannot own more than 1 HDB. As such, your second property would have to be a private property. That means you will have to amass more capital. With condominiums costing upwards of 1 million and higher (you’re looking at a good one that can net you $5000 rental income monthly), That works out to be about $2 million in capital!
And we haven’t even taken into account the cost of taking a bank loan and the taxes that you have to pay for these properties.
Plus, the belief that “rental property investment doesn’t require much work” is a myth. Unless you’re willing to fork out even more money for renovations and repair, you’ll have to spend time and effort into doing up the property yourself before you can rent it out.
Additionally, you can’t just randomly buy a cheap property on the market and hope that you can rent it out. You will have to do extensive research and calculations to try to sort out good investments from bad ones.
If you really want to build your wealth based on rental property investment alone, you’ll spend way too much time saving up in order to even reach a point where your investment gives you a decent return.
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But Rental Does Have its Benefits
Yes, while rental property investment takes too much time for you to build your wealth, they are still good investments that can give you a steady stream of income.
In fact, if you have read our previous article “Why You Can Consider Buying an Older Property (Apart from its Old-Time Charm)”, you would have learnt that rental property goes a long way to help you achieve financial freedom.
In addition, even in bad times during economic downturn, rental properties will still be able to net you some income as it is less dependent on the economy (as compared to some other forms of investments). That’s why, rental properties are a good supplement to your passive income portfolio.
The Fastest Wealth-Generating Methods
When we look at individuals with high net worths, it becomes apparent that there are a few common approaches that these individuals take in order to build their initial wealth. For one, they are all successful in their careers.
- Own a (or a few) successful business or start-up receive a large paycheck (that might come with stock options)
- Work in a job that pays commission (sales, insurance etc) and do it well.
This is the primary method of building wealth. How much you manage to save here will determine how big your war chest is when you enter the investing game. This is where you will most often apply the virtues of prudence and cultivate good money management habits.
The Fastest Wealth-Generating Investment
“So what then? Will I never be able to become wealthy?”
Of course, growing your wealth isn’t limited to business owners and individuals with managerial roles. Good investments can also help you become wealthy.
To build your wealth, invest in properties for the reason of capital appreciation.
“Huh? Isn’t it the same? We’ll still be buying properties?”
Of course, while you’ll still be investing in properties, investing for capital appreciation requires you to set your goals differently.
Instead of buying a property with the aim of renting it out forever, investing for capital appreciation means that you buy a property with the aim of selling the unit at its peak price. For a new launch condo for example, this would be just after you have completed your MOP period.
Here’s how it goes:
You’ll start by looking around the market for attractive new developments that you can invest in. After finding a suitable property, you’ll purchase the property and keep it for the next 5 years or until it reaches MOP.
During this time, you’ll be free to either stay in this property or rent it out for a stable income (that can also help offset some of your housing loan).
After the property has reached MOP, you’ll aim to sell the property as soon as possible and enjoy the profits earned from the property price appreciation. With the amount received from the sale, you’ll be able to repeat this process for another property.
As long as you maintain this 5-6 year cycle constantly, you’ll be able to build your wealth with only 1 initial injection of capital (the first amount of money paid for your first property). With the rental income earned through the 5 years, you’ll be able to offset the various taxes and still be able to enjoy a constant stream of income.
Instead of relying on rental property investments, making the leap and focus on investing in properties for capital appreciation. This will be the best way for you to build your wealth quickly and steadily.
Many people do not realise that they have already fulfilled all the necessary criteria to make their next Property investment move. As a result, their money sit idly when it could be working hard for them. In the short term, the consequence may not seem like much but over time, compounded yearly, you may lose up to 6 digits of potential earning and more.
For this reason, I have created a Smart Financial quiz as a simple way to help you to determine if you are ready for an investment move. This quiz is completely free and the questions are easy to answer. Find this quiz here.
See you on the other side!