Singaporeans are known to be obsessed with property. In land-scarce Singapore, property is generally regarded as dual-purpose – as a residence and also as an investment asset. In fact, many regard property investment as a surefire way of making profit. You most likely would have come across a certain friend who had made a tidy profit through buying and selling property in the past decade.
But exactly how attractive is property as an investment asset? Does it make a difference whether the property is bought using 100% cash, or with borrowed funds (also known as bank loan)? To answer these, let’s take a look at how leverage affects the return on investment for property.
Leverage refers to using a loan to fund your property purchase, which is very common in Singapore, and also the reason why mortgage brokerages exist. So, you only pay a downpayment which is a fraction of the purchase price, and borrow the rest from a financier (bank or financial institution).
A Case Study:
The following is a real case study of one of our customers. In July 2009, he bought a 3-bedder in The Inspira (condo at Robertson Quay) via a sub-sale. A sub-sale refers to a property that is still under construction and sold by another individual owner who is not the Developer. Back in 2009, the downpayment requirement was slightly lower at 20%. We’ll round up numbers to the nearest $10,000 for this example.
The buyer bought the unit in July 2009 for $1,450,000, made a downpayment of 20% which amounted to $290,000 and took a loan of $1,160,000.
After about 3 and a half years, the unit was sold for $2,170,000. This represents a 49% growth in the property value.
In total, the gains came up to $720,000. But as the buyer only down-paid 20%, this means that their capital of $290,000 turned into a gain of $720,000. This is actually a 248% gain in percentage terms!
What difference would it have made if the owner had paid in full for the property?
If no loan was taken, the profit of $720,000 would have amounted to only 49.66% of the capital of $1,450,000. This is substantially lower compared to the 248% achieved (with leverage).
Take note that we did not factor in the legal fee, maintenance fee, and interests for the loan. Nor did we factor in the potential rental income whilst the owner was holding on to the property. All these would have affected the actual gains.
From this example, you can see that with leverage, you can amplify your returns (in percentage terms) while requiring a lower amount of capital.
However, it is crucial to understand that while leveraging can help amplify your profits in percentage terms, it can also amplify the amount of losses should the property fail to perform.
For instance, if the property above depreciates by just 10%, the price drops to $1,305,000. With leverage (outstanding loan of $1,160,000), the equity left in the property is only $145,000.
Compared to the downpayment of $290,000, this represents a loss of $145,000 which is equivalent to a 50% loss, rather than the 10% loss which would have been the case if the owner had paid the full $1, 450, 000 upfront. That is, the percentage loss is 5 times higher with leverage.
In other words, leverage is a double-edged sword that should be used with caution!
For Singapore property investors, it has been a pretty good ride for the past 15 years, with an average price growth of 88% from March 2009 to March 2024. With a bull market like this, the investor who had utilized leverage would have achieved a substantially higher return on investment.
It would have been smart to use leverage in hindsight. In the case of The Inspira owner, the annualized return is 41.66% instead of 11.91% per annum over the 3 year and 7 months investment horizon.
However, past performance is not necessarily indicative of future performance. In fact, it is highly unlikely that we are going to see the same magnitude of price increase over the next 15 years. Hence, use leverage with caution and avoid overextending yourself.
Regardless of whether you are buying property for your own stay or for investment, you would want to ensure that you minimize the interest payments as much as possible, in order to maximize your returns. As such, you will want to get the lowest interest rates whenever possible for your home loan. You can get in touch with our mortgage team for a free consultation on the best loan package via the link below: