This next story is about an engineer and his wife making $500k from a rather low-risk investment.
(See previous case study.)
The engineer had observed that many wealthy people like to invest in property.
These rich people follow a rather simple strategy – buy an apartment or a shop when prices are low, rent it out, and sell when the price is right.
Often, they take a loan even when they can well afford to pay in full.
The engineer saw the beauty in this. To him, investing in property is easier than investing in equities (shares) where one often has to make “informed guesstimates” based on public information and sometimes rumours.
Property seems simpler to understand – all you need is a good location and a reasonable price. For the latter, he wanted the rental income to cover at least the monthly instalment for the maximum bank loan (mortgage).
A good location implies good rental return and ensures that there’s upside to the investment.
Taking a bank loan means leverage. Not risky leverage though, because a piece of property always has value, especially in land-scarce Singapore, more so if its location is good. (Note that it’s harder to use leverage with shares trading, unless you play with derivatives or take personal loans.)
So, in 2002, he bought an apartment in the River Valley area for $800k – paid 20% with cash and borrowed the rest – and rented it out to an expat for $3,000 a month, which was barely enough to cover the mortgage repayment.
In 2004, when the expat renewed the tenancy, the engineer raised the rent to $3,300.
He raised it again to $3,800 in 2006 when the economy started booming again. He was getting some additional pocket money.
Then in 2007, he sold the apartment for $1.3 million, making a net profit of more than $500k.
The return on investment is more than 300%, or more than 30% per year over 5 years.
How much return are you making from trading shares?
See other case studies.