Any investment can have the potential to be a cash cow. However, keep in mind that with this potential come significant risk factors that you must consider. In other words, anything that has the potential to generate returns will also have associated risks. You might end up losing your money with your investments.
Real estate is one of the safer investment vehicles due to its tangibility. So, you can consider investing in real estate as one of your major players in your investment portfolio. An income property is a property that has been bought or developed with the goal of earning income from it. This could be in the form of rentals, or even flipping properties. Take a look at any Singapore property website and you will see the multiple forms of income properties.
Here are four reasons why an income property can be a lucrative investment
1. You will be your own boss
The good thing about investments, particularly real estate investments, is that you become your own boss. You will be in charge of all your choices. You will choose which property you want to invest in, what type of tenants you want to rent to, how much you will charge your tenants in rent, as well as how you are going to maintain and manage your property (and property portfolio) as a whole.
If you are tired of the average 9 to 5 job, tired of being subject to the whims and wishes of your boss and the company infrastructure in general, you should consider becoming your own boss. That means no more adhering to a dress code, no more waking at 7 am. As your own boss, you can do as you please.
An income property not only allows you to become your own boss by calling the shots, it also makes you put more effort into your investment management because the returns will be going into your pocket.
2. Potential appreciation of a highly leveraged asset
Leverage means that you invest a relatively small amount of your own money in your investments and borrow the rest from a lender. The amount borrowed amount can often be four to twenty times more than what comes out of your own pockets. Purchasing a property using significantly much more debt than equity is said to be a highly leveraged investment.
For example, if you invest $10,000 in a property, and use leverage to borrow $90,000 from a bank, you will be able to combine that to buy a $100,000-worth property or asset. Assuming that each year, for 10 years, your income property appreciates by 5%. This is where your highly leveraged asset benefits you. The appreciation on your property will be on the entire $100,000 asset, not just $10,000 worth of your own money. So, after 10 years, your income property will be worth $162,889. Simply by using leverage, you will have turned your initial investment of $10,000 into an appreciation profit of over $60,000.
3. Rental income is money in your pocket
If your goal for your income property is to turn it into a rental, you will make a profit from the rental incomes. Assuming that you are able to find tenants, and supposed you have one tenant for your property. If your mortgage repayment is $700 a month, and you charge $1,100 a month in rent, you will have a surplus of $400 that goes into your pocket each month. Right? Not exactly.
You will need to plan ahead for the maintenance costs and 5% in vacancy costs. Therefore, from this $400, you will put $110 into a separate bank account as a pool of funds for any maintenance issues and potential vacancy costs. After all this is done, you will have about $290 each month that goes directly into your pockets.
4. Your tenants will be amortizing your mortgage for you
Assuming you have a 30-year fixed rate mortgage plan, which is one of the most popular types of loans, your interest rate will remain the same for the entire duration of your loan. Starting out, a significant amount of your repayments will be going towards paying the interest rather than to the principal. By year 15, however, the payment ratio will be about a 50/50 split.
Thus, the longer you hold on to the property, the more of the loan principal your tenants will be paying down for you, and in turn the more wealth you will be creating for yourself. For each year that you own the property, you will be using your tenant’s monthly rents to pay off your mortgage and debt. This helps you reduce the amount of your loan, without you needing to come up with the extra funds to repay the loan. You will thus be building wealth and will eventually be able to access this money either by refinancing your loan or by selling the property. Or, perhaps you could even hold on to it, turning it into a long-term profit generator that is bound to contribute much to your journey of building wealth.
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