Category: rEstate

cur_payout + NAV_protection #w1r2

Posted on by tiger40490

After the 2021 new year, I told Tanko about my 2 “high bars” (later becoming acid tests[1]) to pre-qualify[3] an investment asset

  • 1) criteria: Does it generate steady nonwork payout rate around 5% as current income? I have a blogpost on 6% being the highest realistic return over long-term, but that’s a Return rate. A Payout rate of 6%/year is harder.
  • 2) criteria: Does it show decent prospect of principal preservation over a 10Y horizon, worst case 20Y to recover? This is a personal view and conviction, because most of my chosen assets (except stocks) are actually illiquid , with no real time mark-to-market. In the short term, the liquid value could drop and I would endure.
  • .. Resist the temptation of windfall. Maintain a healthy detachment.

Note I spend quite a lot of time clarifying my principles 1) to give my “advisors” a less ambiguous description of my investment principles and 2) to help myself catch my own inconsistencies, irrationality, prejudices, illogical thinking…

[1] After I acquire the asset, I would use my 2 criteria as acid tests. BGC fails AcidTest1
[3] obviously I have other due diligence checks such as currency risk, affordability, concentration risk, liquidity

— [s=my soft spot].. In short, I look for the “killer combo” of steady passive income + confidence for long-term capital protection/preservation … A high bar. Any asset that qualify are rare gems.

This is my irrational soft spot, where I demand neither HIGH income or FULL protection.

— pre-qualified assets
Note — Like my healthy_longevity focus, any useful criteria need to prove its enduring strength and resilience against popular, mainstream herd-mentality. Therefore, it’s important to examine how my criteria disqualify some popular asset classes.

  1. CPFLife (not now) investing close to payout age
  2. SEA rental properties bought without mortgage
  3. [s] A subset of A-list and B/C-list div stocks, with DYOC above 5%. Note most big banks, big oil, big tobacco stocks hit 4%+
  4. [s] Energy12 + some (not all) of Jill’s HY/PE
  5. — also-rans and disqualified:
  6. Most Singapore Reits? no protection of principal. Low hope of steady appreciation. They are more like stocks than real estate.
  7. most mutual funds? lower current income than div stocks, and no long-term principal protection
  8. U.S. rental properties? Usually not passive
  9. China and SG properties? paltry current income
  10. BGC? lower income than khm + currency risk as a risk to of principal

— khm rEstate as case study
When I assess the Flatiron vs the Peak#4 opportunities, I realize that among all assets, these commercial rEstate appeal to ME (not sure about other investors). Do I romanticize the 10Y GRR? Possibly, so I caution myself about 1) credit risk 2) market risk 3) what after 10Y

Shop units (offices, hotels..) are the first asset class to meet the above criteria. Now I feel dividend cash-cow stocks are somewhat similar. To understand this asset class, we must compare it to those hot tech stocks:

  • dividend stocks are usually less glamorous partly because they don’t show fast or windfall appreciation
  • my favorite dividend stocks are usually household names, just as the tech stocks.
  • Unlike commercial properties, dividend stocks do fluctuate in valuation. This means buying at low price is more “possible” than in real estates
  • credit risk is higher with properties because dividend aristocrats are known to keep paying.

residential prop: a few pros and cons

Posted on by tiger40490
  • 🙂 faster to sell because more investors are familiar with the asset class
  • 🙂 faster appreciation due to hot money, _but_ less stable
  • 🙁 More of a commodity, not as precious as prime location shop units.
  • 🙁 NRY lower than commercial (at the same popularity/scarcity level), despite what marketers say.
  • 🙁 higher risk of buying overpriced

precious@@ shops,offices,condo

Posted on by tiger40490
  • shops are precious only in prime retail locations. Consider shops in industrial parks 🙁
  • shops are not “usable as office” therefore more precious than office. Even a prime location shop is not on par with a grade-A office.
  • Office units are precious only in prime commercial locations. Consider offices in Orchard … less precious.
  • Residential can be precious in elite locations such as top school districts.

REIT/dividend stock^shop unit

Posted on by tiger40490

Bearing in mind our need for income (more important than windfall appreciation), let’s pit the best property (shops with rental guarantee) against best dividend stocks (REITs). Below are my personal biases, without any real evidence.

  • liquidity — stocks win. We can sell and buy them easily.
  • quantum — stocks win. We can trade with $100.
  • legwork — (active management) REITs beat most properties except properties with guaranteed rental.
  • credit risk of the promised dividend — stocks win. Investors don’t need to worry about missing rental receivables.
  • transaction cost — stocks are very efficient. Property sales requires commission, legal fees, taxes, etc. These transaction costs need to be included as purchase price.
  • currency risk –stocks win if they are in the investor’s home currency. A lot of rental properties involve currency conversion, but some shop units (Cambodia for example) are priced in USD
  • regime risk — stocks win, as most stocks are in developed countries.
  • legal risks — stocks win since they are supposed to be less affected by local legal issues. In the case of my shop units, the lease agreement (companion to the purchase agreement) is a 17-page legal document with lots of fine prints … presenting legal risks to the investor.
  • repairs — REITs win as the maintenance responsibilities are taken care of. If a shop unit is new and well managed by a local agent, then repairs are taken care of too.
  • ^^^^^^ All these factors make listed securities appear easy, familiar, approved / regulated / legalized … safe-looking
  • —Now the strengths of rental property
  • #3 current income — shop unit wins with guaranteed rental. A residential rental property also generates typically higher income than the average stock, though some dividend stocks can generate 10%+ possibly unsustainable.
  • #2 stability of income — shop unit wins IMHO. A shop in a good location will not stay vacant. In general, properties (not stocks) give me confidence to invest 6-digit sums to generate substantial income for retirement. No stock can guarantee any dividend.
  • #1 principal protection — shop units show more rock-solid strength, esp. when endorsed by Shangrila and CapitalLand.
  • #4 appreciation — shop units show more potential, largely because of very limited mind-share .. exotic alternative investment. The lesser known, the more potential for appreciation. See also owning property^REIT

Personal experiences:

  1. rental property — I collected some guaranteed rent from Cambodia. My own HDB home was rented out for a few years. More importantly, I myself lived in my own HDB home for years, saving thousands of rental dollars every month
  2. high-dividend mutual funds — I invested for many years since 2012. Rather poor performance, probably 2-3% yield only.
  3. REIT or high-div stocks — no experience

Based on my experiences and analysis,

  • my property assets will be my core portfolio, generating income that I need here and now. I’m less worried about cash flow in the distant future.
  • I will buy some REITs and high-dividend stocks primarily for the income. Any appreciation would be bonus. Budget = 2k, rising to 100k, paying out a consistent $500/M. I would need to use SGD.

However, property rental income still feels superior because “NAV fluctuation” is unknown and therefore a non-issue so the asset is a cash cow. In contrast, stocks show visible fluctuation so we question whether the dividend is paid from NAV. With the high-dividend unit trusts, a lot of times dividends are indeed paid out from NAV. I hope with blue-chip stocks I can rest assured that dividend comes from operating profit.

##eg@higher-return lower-risk

Posted on by tiger40490

Contrary to conventional wisdom, I have come across a tiny number of assets featuring higher return, lower risk than the standard assets, but not obvious so insight or due diligence are required.

  • (As I told ZongYang) SPY compared to the majority of familiar stocks. SPY DYOC is about 1%. Somehow, a higher DYOC would feel safer.
  • S27 .. stocks are supposed to be higher risk than bonds but I feel my s27 is higher-reward-lower-risk than bonds or most long-term investments
  • high-dividend stable (not all blue-chip) stocks, with consistent track record… See solid div stocks=hard to miss@@. However, return and volatility is often lower than hot growth stocks.
  • [b] IPO stocks .. compared to other stocks
  • [b] my Cambodia shops — many risk factors at decision time, but lower risk in hind-sight
  • my hdb + PEK properties
  • [b=bargains]

rental restriction: key reason2favor commercial prop #Gina

Posted on by tiger40490

Hi Gina,

Today I had another nasty experience with overseas residential properties. The developer (Megaworld) just told the owners about some extra/new restrictions on rental, so owners must pay extra or find new tenants. I feel there are lots of restrictions on residential property rental. In contrast

  • If the residential property is managed by a big service company like BridgeClub or Ascott, ideally appointed by the developer, then those restrictions would be taken care of.
  • If the property is commercial such as hotel, office or shop, then the restrictions would be taken care of by design. Fewer surprises.
This is one more reason that I prefer commercial rather than residential. Other reasons:
  • commercial tenants are more long-term
  • /prolonged/persistent/ vacancy is less likely at commercial (esp. top quality) units than residential units.
  • Condo fees are charged even when unoccupied. In the same location, commercial units are more likely rented out. In the scenario that a commercial is rented out but a residential is vacant, then the condo fee would hurt.
I think many investors in the residential market are attracted by asset appreciation (or windfalls) but I don’t want to rely on the promise of appreciation. I have reason to believe that if rental yield is reasonable, then appreciation would be likely.

risk-averse property investors #Kun.h

Posted on by tiger40490

There’s a place for caution in the decision process of a big investor. Where is it?

Property investment is all about risk. If a guy (say Tom) doesn’t like property-related risks (currency, regime, liquidity, supply/demand ..), then he should stay away from property investments. Tom is not a serious investor. I feel most people I talk to are like this fictitious Tom. They keep thinking and reading and never acts because they are inherently uncomfortable with those risks.

If you are a serious investor, then you probably work on defining the acceptable levels of risks, and (optionally) defining the secondary risks you decide to leave out. If you don’t classify the risks as primary vs secondary, then you can get distracted and immobilized by 20+ risk factors.

Coming back to my opening question…. Caution needs to be balanced by optimism. Without optimism, the caution would crush us, always.

Some people don’t like the idea of optimism. In other words, they don’t believe there’s real prospect of realistic return more than 4% a year. They had better stay with insurance plans… risk averse.

(Optimism is bold. I see myself as a bold investor, not a reckless investor. I made a few big mistakes and now wiser.)

##Y rental yield varies so widely across countries

Posted on by tiger40490
  • National culture is one reason , like Chinese^American etc. Remember Damien of Macq, Pinsky of RTS.
  • I feel pTax and mortgage rate push up rental yield as they
    • affect supply side — suppressing rental home supplies
    • affect demand side — reducing viability of the “buying” option, therefore increasing the relative viability of “Renting” choice
  • inheritance tax law is another factor.
  • Aleris said traffic jam is another reason. BGC workers face huge daily commute if living outside.

over-concentration in properties@@ #Joshua@DBS

Posted on by tiger40490

I had several analysis of the downside. There are many types of risks.

Hi Joshua,

You are not the first one to point out my over-concentration on properties.

I tried diversifying, and took up high-risk alternative investments in U.S. oil fields, Brazil real estate and Singapore private equity.

I am already disillusioned with unit trusts, so I moved some small amount of money gradually out, to build up my own stock portfolio — tiny at the moment.

Not counting highly liquid cash-like instruments, Less than 1% of my net worth is in the traditional “safe” investments like insurance, unit trusts and safe bonds. Therefore, I should consider myself a risky investor. I have allocated my assets rather carefully, overweight on things important to me, such as elder shield, personal accidents,,.

When I have more fund, I plan to invest more into gold, stocks and… Yes more real estate, despite the concentration risk. Question is where

  • U.S. offers high rental yield and is my favorite
  • China rental yield is very low, but shops might be a good idea
  • Resorts in Thailand, Philippines prime locations.