Recently I found out this term “Asset-Rich and Cash Poor” and it describe majority of Singapore residents. Even Straits Times (<< click here to read more) publish an article that many Singaporeans risk retiring income-poor.
According to Manulife Asset Management, Singapore residents are generally quite well off. We have a household wealth of around S$250,000. However, three-fifths of that wealth is tied up in property or idling in low-interest bank deposits.
We always hear people saying Singapore residents are asset rich but cash poor. Although not always the case, many people “over consume” when it comes to their homes. Real estate can be good investments for income but, unless we have and are willing to rent out spare rooms, our homes are consumption items.
To be objective when it comes to view property it simply as an asset or liability is not easy for many people. Many people claim that property is an asset but this is only apply when you have pay finish the loan.
I always like the concept from Rich Dad Poor Dad book that argue on whether property is an asset or liabilities,
It seems like every financial “expert” says, “Your house is your biggest asset.” When I wrote Rich Dad Poor Dad, I said that your house was a liability. That was like spraying water on a hornets’ nest. The so-called experts lambasted me. At the time, the real estate market was skyrocketing. Everyone called me a contrarian, out to sell books. Today, after one of the worst housing crashes in US history, they aren’t laughing anymore.
Recently, I’ve been writing a series of posts on what I’m calling Rich Dad Scams, lies that are fed to people by the rich to keep them poor and in the middle class. Today, I’m going to write on one of the biggest Rich Dad Scams of all, “Your house is an asset.”
Money in, money out
Your financial planner, real estate agent, and accountant all call your house an asset. But in reality, an asset is only something that puts money in your pocket. If you have a house that you rent out to tenants, then it’s an asset. If you have a house, paid for or not, that you live in, then it can’t be an asset. Instead of putting money in your pocket, it takes money out of your pocket. That is the simple definition of a liability.
This is doubly true if you don’t own your home yet. Then it’s the bank’s asset, and it is working for them, but it’s not earning you anything.
So what is an asset?
In business terms, assets are your pros and liabilities are your cons. You need assets to offset your liabilities. Once you get away from the Rich Dad Scams, it’s easier to think in those terms, to think like an entrepreneur. But what exactly are assets?
The simple definition of an asset is something that puts money in your pocket. This is accomplished through four different categories, one of which is real estate. When I say real estate, I don’t mean your personal residence, which is a liability. What I mean is investment real estate, which is a great investment because it puts money in your pocket each month in the form of rent.
There are three other primary assets: business, paper, and commodities. If you are an entrepreneur or a business owner, your business is an asset. Paper assets are stocks, bonds, mutual funds, and so on. Finally, commodities include gold, and other resources like oil and gas, and so on.
My wife and I started out making our money in real estate, putting our money to work in properties that we could rent them out and see ongoing returns. After that, we diversified, so now we have some money in all of four of these asset areas.
Invest for cash flow, not appreciation
The Rich Dad Scam that your home is an asset was prevalent when I first wrote Rich Dad Poor Dad. That was in 1997, and everyone’s home values were climbing. It was easy to assume that your house was an asset because it was potentially making money for you in the long run through appreciation. People bought into the scam hook, line, and sinker, taking out home equity loans to buy cars, vacations, TV’s, and more. Today, those same people are so underwater that many of them are defaulting and going into foreclosure. Most people aren’t saying their home is an asset any longer.
A lot of Americans got a fast, ugly financial education when the real estate market turned around. They realized very quickly that their homes were not assets.
The difference between my poor dad and my rich dad was a financial education. And that’s not a classroom and books education, that’s a nuts-and-bolts, street-smart education, a way of looking at money that is true and that works, not just what the rich want you to believe.
Rather than invest for appreciation, my rich dad taught me to invest for cash flow and to treat appreciation like icing on a cake. I encourage you to do the same.
Having say that I am not against the idea to own a property but just always a good way to ask myself a question, am I accumulate more liabilities or asset? If property help me to gather more cash flow then it will be an asset but if it leech me too much of my cash then at this point of time it is still a liability to me.
Of course, no one want more liabilities, the more the liabilities, the higher the expenses, the tougher for you to achieve financial freedom.
Also, for those who are keen to get a property, there is a reference you should be aware of, that is 3-3-5 rules.
What is 3-3-5 rule?
There are some general guidelines to check whether a property is affordable to you. For the sake of easy memorization, let’s call it the 3-3-5 rule.
Rule 1: 30% of property price
Your initial capital should at least be 30 percent of the property’s asking price, in order to pay for the downpayment, transaction costs and other miscellaneous expenses.
Rule 2: 1/3 of monthly salary
Your monthly mortgage payment should not exceed one-third of your monthly salary.
Rule 3: 5 times of annual income
The purchase price of the property cannot exceed five times of your annual income.
For Daniel he can only afford to buy a property priced below $360,000. Since he relies only on a single income to support his property, he has higher risk than the couple. His approach should be more conservative.
As for Joshua and Esther, their budget cannot go beyond $500,000 because of the limitation in their initial capital. If they want to increase their budget, they should find ways to save more before plunging into the market.
Why you need to be conservative?
Sounds tough, doesn’t it?
To buy an investment property, you’d rather be conservative than aggressive. To support your home, you’d better be safe than sorry.
If you have problems even paying for 30 percent of the property, you can’t really afford it.
If the value of your target property far exceeds five times of your annual income, you are either buying an overpriced property or buying a property out of your reach financially.
Many people buy their home without thinking carefully. They are tempted to use the government housing grant or subsidy for first-time buyers.
You may not aware of the fact that this small amount of subsidy, say, $30,000 or $40,000, can easily be offset by the fall in your property’s value when the bear market comes after your purchase. You are left to pay the outstanding loan from an overpriced property.
Interest rates can go up. Property prices can go south. Jobs can be lost.
Do you have the holding power to go through the next property cycle? Would you still be able to service your housing mortgage under all circumstances? Do you have the cash reserve to top up the difference in case your property’s value drops below the market price?
If you can’t give a definite answer, you are not ready yet.
In a sea of comments, let me clarify three points here:
1. Income level and savings out of reach?
The characters in the case study probably fall into the ‘high-income’ group. And the income gap between the rich and the poor is getting wider in Singapore. Read the article “Ultra-rich club gets bigger and wealthier” in today’s Straits Times and My Paper.
Nonetheless, how much you earn may be out of your control, but how much you can save is completely determined by you.
2. The 3-3-5 rule unrealistic?
Some readers think that practising the 3-3-5 rule is infeasible in today’s property market.
I understand that it is unpleasant to find out that you can’t really afford your dream home after taking the 3-3-5 test. If I were a developer or an agent, I would definitely come up with a 1-2-10 rule so that everyone could happily jump into the market and buy something.
We are having the ‘boiling frog’ phenomenon here: When people are in a high-price environment for too long, they will gradually think that it is normal and acceptable to pay high prices. Similarly, when people are in a prolonged boom of the property market, they will forget what is a ‘value-for-money’ home, or why it is necessary to calculate the ROI of an investment property.
When market prices are climbing rapidly, salespeople will tell customers that it is impossible to go back to the low prices in the past. However, history has proved time and again that they are wrong. Cycles do repeat themselves over the past few decades.
And it is when market prices have been corrected sharply that people begin to realize that many buyers have overpaid for their properties bought during the last peak of the property cycle. These buyers are going to pay the price of holding their overpriced properties ‘for the long-term’ to wait for break-even, while missing the opportunities to buy when prices become reasonable again.
3. Use your own judgment
Developers can sell at future prices and sellers can market at unreasonably high prices. But as buyers, it doesn’t mean that we have to take whatever we are offered. Before we commit to any big purchase, we have the right to exercise our individual judgment to determine whether the product prices are reasonable.
Finally, let me end this with a good quote:
It is not it can’t be done. It is people who don’t know that it can be done, or they choose to believe that it can’t be done.
**Cited from PropertySoul
Hope you enjoy reading this article and give you some insight for your financial planning. Until then, see ya!