We are in the midst of acquiring a freehold house in Birmingham. The cash on cash return with 70% leverage is around 15% per year. If I assume capital appreciation of 4% per year, the IRR rises to 30% per year. Of course it is good income but not exactly passive!
First, the acquisition is time consuming. If you are getting a mortgage, you require lots of documentation with banks. Even if you are not, you still need to engage the solicitor. It takes about 10 to 20 man powers to acquire a property and if you are drawing an income of SGD15k per year, that's SGD750 per hour of work!
Second, value adding to the property, such as extensions, loft conversions, fixing the bathroom etc requires another 10 man hours to monitor even if you outsource to a project manager. The value add of such a strategy through improved rentability or cashflow can be anywhere from 20 - 30% IRR.
Third, even if you outsource the management of the lease you still have bills to pay, such as council rates, monitoring the agent's performance. It could cost you any where from 2 - 4 hours a month!
It's not exactly stress-free unlike stocks.
There is also a lack of liquidity so to sell a property takes anywhere from one month to one year!
I would do both, invest in stocks and buy properties. Stocks can achieve around 15 - 30% IRR but have great liquidity if you invest in heavily traded stocks. But in a bear market you can be down by 50 - 70% if you forgot to cut loss and if you leverage on stocks, you can get wiped out and lose your pants! Property is forgiving. Even if you buy a lemon, you could recover and make a positive return over a longer term like 10 years.
The lesson we've learned is that we need to scale up for properties. It is less efficient to acquire small properties but better to acquire an entire block of apartments, serviced apartments, private rented sector housing, or commercial property. you make the same effort whether you acquire a GBP130k property in Birmingham or GBP13m of commercial property outside of London! I'd rather be drawing an income of SGD1.5m per year of salary from one transaction than SGD15k per year!
First, the acquisition is time consuming. If you are getting a mortgage, you require lots of documentation with banks. Even if you are not, you still need to engage the solicitor. It takes about 10 to 20 man powers to acquire a property and if you are drawing an income of SGD15k per year, that's SGD750 per hour of work!
Second, value adding to the property, such as extensions, loft conversions, fixing the bathroom etc requires another 10 man hours to monitor even if you outsource to a project manager. The value add of such a strategy through improved rentability or cashflow can be anywhere from 20 - 30% IRR.
Third, even if you outsource the management of the lease you still have bills to pay, such as council rates, monitoring the agent's performance. It could cost you any where from 2 - 4 hours a month!
It's not exactly stress-free unlike stocks.
There is also a lack of liquidity so to sell a property takes anywhere from one month to one year!
I would do both, invest in stocks and buy properties. Stocks can achieve around 15 - 30% IRR but have great liquidity if you invest in heavily traded stocks. But in a bear market you can be down by 50 - 70% if you forgot to cut loss and if you leverage on stocks, you can get wiped out and lose your pants! Property is forgiving. Even if you buy a lemon, you could recover and make a positive return over a longer term like 10 years.
The lesson we've learned is that we need to scale up for properties. It is less efficient to acquire small properties but better to acquire an entire block of apartments, serviced apartments, private rented sector housing, or commercial property. you make the same effort whether you acquire a GBP130k property in Birmingham or GBP13m of commercial property outside of London! I'd rather be drawing an income of SGD1.5m per year of salary from one transaction than SGD15k per year!
