Melvin, there is also cost to cash. 25% +5%stamp =30%. This amount of cash can be making 4% tbill income. But when you buy you lose that income and you pay mortgage interest. You need to add these 2 up. If you add them up and property tax , maintenance, its clear as day that Rent is better. You will then argue there is capital appreciation but that is a risky assumption at this time. Its is a price risk. With negative carry cashflow, landlord can only depend on capital appreciation to cover the negative losses. Its a risky assumption.
Definitely Andrew :) Cost of funds is the main consideration for all investments. The 25%+5% is already reflected in the calculation in the video. Thus $422,100 to prep as cost of funds to invest in a 1.5M property. Cost of funds (Opportunity cost) applies both ways If someone choses to put this 422K into T bills or say an ETF fund or Bond. They lose the opportunity to invest in a property If someone choses to put his 422K into Real estate, they lose the opportunity to invest into T bills at 4% Thus both ways have to reflect the cost of funds cos opportunity cost applies both ways and not just on the real estate investment The Trap will be to invest in a property that does not have the fundamentals to position into an investment with chances of appreciation and rental coverage in order to hit a higher ROI say in example 3 and 4 T bills are stable and guaranteed. Real estate has risk One has to select based on their appetite. But if the correct real estate is selected, the rewards are there. Cheers. Love your inputs. Melvin
@@notgpodcast thanks for your reply. You need to factor this opportunity loss as a cost, which increases your break even calculation. If you dont include ( which you didnt ) then you might as well assume a property buyer pays in full cash, and your numbers will look fantastic. In that scenrio does that mean his cost is close to zero because he doesnt have a mortgage? Example if a 20mil bungalow (fully paid) owner rents his bungalow for 5k a month, is that profitable because he has no interest cost(because no loan)? Of course not, because we know 5k a month is a terrible deal when you factor what he can do with that 20mil cash ( opportunity cost )
You are welcomed :) Understand your point of view. Firstly, this opportunity as a cost applies again, to all areas of investment. Say if someone invest in an instrument, say STI ETF of 5% PA returns with a cost of funds of 400K. If we apply this concept of adding Opp cost as a cost to all investments we are going to invest in, then even for say an investment into T bill of 4%, we will have to apply a cost of 5% to it as well making it a nett loss of 1% because we could have invested that same 400K into STI ETF giving 5% instead, but we chose to invest in the T bill of 4%. What we are referring to is that you are definitely correct to apply Cost of Funds and Opp cost concept to investment, but it cannot be exclusive to just property investment. It has to be apply fairly to all investments should a person wishes to adopt this cost of funds concept. Secondly, If a buyer having 20Million pays in full for a property, it is actually not a wise move. Firstly, investors all over the world whom uses real estate as an investment leverages. Contary to what you shared, actually the numbers will be significantly worst off if he or she places in 20M into the real estate investment compared to putting in 25% at $5M into the real estate and leveraging 75% $15M from the bank at an interest rate. He can then place the $15M into your preferred investment say, what you recommend Andrew, T bills :) and in combination will be better off for this investor. In any case, we are for your point of view, because we talk about cost of funds and opportunity cost at length as well. To place this into the calculations, will be a never ending placement, because should we place 4% as cost? Or 5% as cost? Or maybe 10% as cost because there probably will be another investor that has an opportunity to invest in a certain equity or instrument giving them 10%? Thus the placement of this cost of funds is subjective. And real estate is a different instrument because on top of just returns, it generates a leverage point allowing the investor, assuming a 25% downpayment of $422K including stamp duties to own a property at $1.5M and should the property appreciates, that appreciation belongs to the investor alone, provided that his interest cost to the bank whom he leverages from are fulfilled timely monthly and of course factoring in all other expenses he needs to maintain that property. It is actually a whole different form of instrument which is why it’s classified as an asset with its own set of pros and cons. Similarly to other asset classes with their own set of pros and cons.
@@notgpodcast there is never an end to opportunity cost. A bitcoin enthusiast will tell you crypto averages 20% a year. If you use that as benchmark then residential property investing will look far worse. Hence none of these should be used as a gauge. The etf also has price risk and should not be used. We use the term risk free rate to make comparisons because this is where we say if i take no risk on my cash, how much do i get. You need to factor this in your costing because this is the bare minimum hurdle to beat. The crux of the problem is that rental yields are simply too low and to compensate low rent, you factor in the assumption that prices will for always go up. Prices are too high. Thats why in your scenarios alot of them dont work unless you factor appreciation. If you add the loss of income on your cash, almost all of the scenarios do not work. This is why prices dont just keep going up. Transactions get lesser because the equation is so out of whack now. I sold my property recently after it went up 50%. I have 4 mil in cash now making 3.8%-4% safe riskless income, making 160k profit a year. The equation is out of whack to a point it is better to rent a 20k modern bungalow than buying a small terrace 5.5mil. Cost per month is the same 20k. Similarly if you cash out a 9mil semi d, you get 30k tbill income you can stay in a gcb. For every assumption there is price growth there is also price loss.
Leverage is nice when everything goes up.. when it goes down, like 2013 to 2018, then your losses will be amplified 4x as well. Add the loss of income from your cash that is locked up, which can make alot of interest income at 4%. Double whammy.
Melvin, there is also cost to cash. 25% +5%stamp =30%. This amount of cash can be making 4% tbill income. But when you buy you lose that income and you pay mortgage interest. You need to add these 2 up. If you add them up and property tax , maintenance, its clear as day that Rent is better. You will then argue there is capital appreciation but that is a risky assumption at this time. Its is a price risk. With negative carry cashflow, landlord can only depend on capital appreciation to cover the negative losses. Its a risky assumption.
“Clear as day”? 😂🤡
Definitely Andrew :) Cost of funds is the main consideration for all investments. The 25%+5% is already reflected in the calculation in the video. Thus $422,100 to prep as cost of funds to invest in a 1.5M property.
Cost of funds (Opportunity cost) applies both ways
If someone choses to put this 422K into T bills or say an ETF fund or Bond. They lose the opportunity to invest in a property
If someone choses to put his 422K into Real estate, they lose the opportunity to invest into T bills at 4%
Thus both ways have to reflect the cost of funds cos opportunity cost applies both ways and not just on the real estate investment
The Trap will be to invest in a property that does not have the fundamentals to position into an investment with chances of appreciation and rental coverage in order to hit a higher ROI say in example 3 and 4
T bills are stable and guaranteed. Real estate has risk
One has to select based on their appetite. But if the correct real estate is selected, the rewards are there.
Cheers. Love your inputs.
Melvin
@@notgpodcast thanks for your reply. You need to factor this opportunity loss as a cost, which increases your break even calculation.
If you dont include ( which you didnt ) then you might as well assume a property buyer pays in full cash, and your numbers will look fantastic. In that scenrio does that mean his cost is close to zero because he doesnt have a mortgage? Example if a 20mil bungalow (fully paid) owner rents his bungalow for 5k a month, is that profitable because he has no interest cost(because no loan)? Of course not, because we know 5k a month is a terrible deal when you factor what he can do with that 20mil cash ( opportunity cost )
You are welcomed :) Understand your point of view.
Firstly, this opportunity as a cost applies again, to all areas of investment.
Say if someone invest in an instrument, say STI ETF of 5% PA returns with a cost of funds of 400K. If we apply this concept of adding Opp cost as a cost to all investments we are going to invest in, then even for say an investment into T bill of 4%, we will have to apply a cost of 5% to it as well making it a nett loss of 1% because we could have invested that same 400K into STI ETF giving 5% instead, but we chose to invest in the T bill of 4%.
What we are referring to is that you are definitely correct to apply Cost of Funds and Opp cost concept to investment, but it cannot be exclusive to just property investment. It has to be apply fairly to all investments should a person wishes to adopt this cost of funds concept.
Secondly,
If a buyer having 20Million pays in full for a property, it is actually not a wise move. Firstly, investors all over the world whom uses real estate as an investment leverages. Contary to what you shared, actually the numbers will be significantly worst off if he or she places in 20M into the real estate investment compared to putting in 25% at $5M into the real estate and leveraging 75% $15M from the bank at an interest rate. He can then place the $15M into your preferred investment say, what you recommend Andrew, T bills :) and in combination will be better off for this investor.
In any case, we are for your point of view, because we talk about cost of funds and opportunity cost at length as well. To place this into the calculations, will be a never ending placement, because should we place 4% as cost? Or 5% as cost? Or maybe 10% as cost because there probably will be another investor that has an opportunity to invest in a certain equity or instrument giving them 10%? Thus the placement of this cost of funds is subjective. And real estate is a different instrument because on top of just returns, it generates a leverage point allowing the investor, assuming a 25% downpayment of $422K including stamp duties to own a property at $1.5M and should the property appreciates, that appreciation belongs to the investor alone, provided that his interest cost to the bank whom he leverages from are fulfilled timely monthly and of course factoring in all other expenses he needs to maintain that property. It is actually a whole different form of instrument which is why it’s classified as an asset with its own set of pros and cons. Similarly to other asset classes with their own set of pros and cons.
@@notgpodcast there is never an end to opportunity cost. A bitcoin enthusiast will tell you crypto averages 20% a year. If you use that as benchmark then residential property investing will look far worse. Hence none of these should be used as a gauge. The etf also has price risk and should not be used.
We use the term risk free rate to make comparisons because this is where we say if i take no risk on my cash, how much do i get. You need to factor this in your costing because this is the bare minimum hurdle to beat.
The crux of the problem is that rental yields are simply too low and to compensate low rent, you factor in the assumption that prices will for always go up. Prices are too high. Thats why in your scenarios alot of them dont work unless you factor appreciation. If you add the loss of income on your cash, almost all of the scenarios do not work.
This is why prices dont just keep going up. Transactions get lesser because the equation is so out of whack now.
I sold my property recently after it went up 50%. I have 4 mil in cash now making 3.8%-4% safe riskless income, making 160k profit a year. The equation is out of whack to a point it is better to rent a 20k modern bungalow than buying a small terrace 5.5mil. Cost per month is the same 20k. Similarly if you cash out a 9mil semi d, you get 30k tbill income you can stay in a gcb. For every assumption there is price growth there is also price loss.
Leverage is nice when everything goes up.. when it goes down, like 2013 to 2018, then your losses will be amplified 4x as well. Add the loss of income from your cash that is locked up, which can make alot of interest income at 4%. Double whammy.
May I know which property have good price appreciation and good rental yield. 😊
Hi @yipkf18
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