Tuesday, February 7, 2012

Buying for Investment vs Buying for Own Use

Real Estate will always be a good item for investment. So are companies and businesses. But a worrying mindset of many investors is that they have divorced the concept of the value of investment properties with the value of self-use properties. It is as if Investment Properties are different from Self-use Properties. It goes something like this:-

A: Hey B, I heard you just bought a new condo at XXX.

B: Yeah, had to queue up for it. You wouldn’t believe the crowd at the launching.

A: Good good. Congrats… But… I also heard it’s a bit pricey for its size..? It’s quite small and bare isn’t it?

B: Haha. Yeah. It’s expensive. But don’t worry. I am buying it for investment…

Now, does the intrinsic value of investment properties behave any differently from a property which you are going to live in? Why are some people very nitpicking when selecting a house for themselves but apparently more lenient when choosing investment properties?

It probably comes from a misconception that buying an overpriced investment property will not hurt because you will make it all back when you sell it off later; while a house which you are going to stay in will probably not be sold anytime soon, so you have to be careful that every cent you spend is worth it.

But wait a minute. Your investment property will also eventually be sold or rented to someone who is going to stay in it. That person will also be nitpicking and making sure that every cent he spends is worth it. Will he be willing to take it off your hands similarly over-priced?

While it is true that real estate tends to grow in value over time, you still can’t afford to be careless when picking investment properties. If you buy something over-priced, it will take you a long time before genuine capital appreciation catches up with your folly. You will be forced to sell at a loss if you do not have the required staying power.

All these probably comes from a speculative mindset, fed by the glossy marketing material by property developers assuring you of how secure your investment would be if you buy their properties.

If anything, you have to be even more nitpicking when choosing an investment property, because the subsequent buyer could be even more nitpicking than you.

Always just ask yourself a very simple question. Would I pay xxx amount of money in order to stay in this house? Would I pay xxx amount of money in order to rent this factory lot? Will I pay xxx amount of money to share in the profits and dividends of this company?

If the answer is no, then it doesn’t make sense as an investment. Don’t go thinking there are bigger idiots than you out there waiting to take a bomb off your hands. The music could very well stop when you are without a chair.

Investments must have intrinsic value, or value-in-use. Anything not based on this is speculative. Always remember, anything you buy for investment will subsequently be bought by someone else who is going to use it for real. Therefore, something which you don’t feel good buying yourself (at the price you are paying for) will not make a good investment. You may make speculative gains once or twice, but when the bomb eventually explodes in your face, you will find yourself wiped out.

Investment properties and self-use properties should not be viewed differently, as if all the money you spent on an investment property will be promptly gained back when you sell it.

The Golden Rule applies:
Do not buy and sell to others what you would not buy for yourself.

Who would have thought, the secrets of investing have long been revealed to us in the Holy Book :)


Andrew Chua
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7 comments:

  1. This is the greater fool problem, where you hope that there is some fool out there to buy the ticking timebomb out of your hands if your property investment goes sours.

    Cheers,
    KnowThyMoney

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  2. Im really scared to invest big money.. I think im gonna need some adviser first..

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  3. Thanks to share that information with us, its amazing for real estate business.Nice post

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  4. Great article! A lot of people don't understand that there are a lot of factors involved to know the value of a property. And you have to consider these factors to make sure you'll end up getting your money's worth or more which is even better. These are the first basic steps towards financial independence.

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  5. All these probably comes from a risky attitude, fed by the shiny marketing content by real estate asset designers guaranteeing you of how protected your financial commitment would be if you buy their qualities.

    Mercedes Torres

    ReplyDelete