DOMAIN, under The Peak magazine did an e-mail interview with me some time ago. The writer has asked a few good questions and published my reply in their magazine.
Here’s a quick note on The Peak magazine: – The magazine’s primary readers are HNWs and Ultra HNWs (High Net-Worth Individuals). They are very rich businessmen, CEOs of MNCs and the occasional rich socialites. Their investment strategies is completely different from the masses due to their “unlimited resources” and high society connections – It may not be wise to attempt to replicate their investment strategies if you’re an ordinary buyer or investor.
Here’s the re-post.
Interview Questions: -
Hi Gerald,
I’m a freelance writer, and am writing a feature article on investing in leisure apartments for DOMAIN, under The Peak magazine. I have some questions I hope you can help out with.
-What makes buying a second leisure apartment a good investment?
-How about the risks involved? What should one consider before taking the plunge?
-Would you agree that some considerations might include a)Financial feasibility, b)Tax implications, c)Current market situation, d)Housing rules, e)Rental rates, f)Debt to Net Worth ratio? Please comment and elaborate on each of these, or any other factors you might think of?
-What kind of rental yield should one ideally aim for?
-Any other tips for a homeowner on how to make their second property work harder for them?
My Reply: -
These are my answers from more than 14 years of real estate investment experience. I’m not a sales person or someone writing to sell some properties. I understand you’re speaking to other investment/experts too. I’m not sure what background they are from, so you’ve to be very careful if they are coming from a sales point of view or giving real advice.
My answers are based on experience and real investing experience from myself and other real investors.
I understand your audience have different investment objectives and of course, different size of ‘investment resources’.
I come from similar wealth backgrounds in the past so I’ve deep insights into how these HNW (High Net-Worth) and the ultra HNW think when buying real estate.
-What makes buying a second leisure apartment a good investment?
The question should be re-phrased as “Why is it not a good investment?”
1. Leisure apartment or overseas vacation homes are more of an exotic nature (entertainment) than a real investment.
In good times, they may do well (then again, any other types of properties also do well in good times). But in bad times, and especially bad times, they would be one of the first ‘assets’ investors dump, beside stocks and shares, due to its nature. (unlike buying a home for stay).
2. It’s a very high risk type of real estate investment, and the returns are never justifiable.
The rich would have done better putting their money in their business or elsewhere, than in an exotic investment like a vacation home. Then, again, if it’s simply money for ‘show-off’, entertainment, etc, it’s a different story altogether.
if these overseas properties were that good, the local investors would have snapped them up for themselves – but they don’t and there’s always a good reason why. If you observe, many of such properties are heavily marketed overseas to foreign investors who are more ignorant than smart.
Personally, I don’t and will never invest in such ‘gimmicks”, often a propaganda by the developers, fanciful marketing, property agents, profit interests.
-How about the risks involved? What should one consider before taking the plunge?
1. Over-building in the location. Developers of such properties would see a sudden surge of tourists or economic growth, and they will decide that’s where they can make money selling to foreign investors. So they start building, and soon you have a location full of these vacation homes. Laws of demand and supply comes in.
2. Most important – It’s overseas and therefore a very ‘alien’ territory to most people. How much does the investor understand about the location, politics, economy, history, tax implications, current market, housing rules, etc….too much uncertainty for too little profits if any.
3. Risks of listening to sales advice, rather than real advice. Example, your property can be managed easily by property managers which can be disastrous sales advice. True fact is, most property managers makes money, working with the relevant contractors, by hiking up repair costs, maintenance costs, and billed it to their unwary foreign clients – without them them knowing the real costs.
-Would you agree that some considerations might include a)Financial feasibility, b)Tax implications, c)Current market situation, d)Housing rules, e)Rental rates, f)Debt to Net Worth ratio? Please comment and elaborate on each of these, or any other factors you might think of?
Yes, of course as in above answers. My advice, if anyone wants to invest in such overseas properties, find a credible and trust worthy local partner of that country and do it together. The local partner must be someone who has done such investments many times, and therefore very familiar with the ‘terrain’, ‘weather’, rules, business landscape, etc.
-What kind of rental yield should one ideally aim for?
As for the high risks involved, one should be looking at very high yields to compensate for the huge risks involved. 50% ROI per annum? This may sound outrageous, but the ‘premium loading’ is to compensate those risks. I would ask for that. If I run a start-up business, my asking ROI is 100 to 200 or even 300% of my costs due to the high risk nature of starting businesses.
Then, is it even possible to get those kind of returns? Of course not. No developers would offer any kind of such returns to retail investors. So, it means, don’t invest at all.
But, if the rich has plenty of money to burn, ‘hide’, stash money away to prevent taxation from their own govt. , then go ahead.
As I always like to repeat, overseas vacation homes are no more than exotic investments, like art collection or wine.
-Any other tips for a homeowner on how to make their second property work harder for them?
The rich would have their successful businesses working hard for them already. They don’t need a 2nd property or a 3rd property like a vacation home hoping to make more money. Unless you are talking about the middle-class – people who still need to work to earn their living. (your audience here may or may not be in this category)
When the Rich (HNW/Ultra HNW) invest in property, they do so for a few reasons:
1. Pass down the generations.
They stash their money away to prevent taxation. Many rich Asian buyers typically will want to leave something for their next generation. It’s in the culture.
2. Hedge against inflation.
They just need to make little ROI, as long as their money is protected against inflation. This is their primary objective and these people can afford to hold for a very long time. So for example, if the ROI is 4% and inflation is 4% over the years, they are fine with breaking even. They don’t have to make plenty of money in property since their successful business is already doing that for their wealth. If they do make, it’s only bonus for them. If they lose, well, it does not hurt them either.
So this is how the very rich buyers think – “If I lose some money in real estate, but the money lost is lesser than what I have to pay in taxes or prevent confiscation of my undeclared wealth from the government, then I’m still profitable.”
3. For wannabes, fun, entertainment, exotic purpose, show-offs, another collection to add to their artsy collection, etc.
Exotic properties like vacation homes and leisure apartments are lifestyle investments, not a wealth builder. They are like wine and art and are nothing more than “toy collections” for the rich.
As for the typical homeowner who earns a high income (not rich), they would have done better investing in bread-and-butter properties that are simple to understand and in their home countries. Examples: cash flow residential properties or older resale properties, etc.
Click Here To Find Out How You Can Harness Your Intentions And Turn Them Into Reality
Have you benefited from our articles? LIKE us on Facebook to get more benefits.
To your investment success,
