Investors like myself who have already invested money in the stock market and blockchain technology, are looking for alternative asset classes to diversify our portfolio.
Real estate being one of the best alternative investments out there, it can be hard to get into without a large pool of capital.
Types of Real Estate
There are three main types of real estate, each with their unique risk and return. Understanding each is important.
Commercial properties, ex: office space, and retail shops; medium to high risk compared to residential. (higher potential to increase in value)
Residential properties, ex: houses and apartments; low risk compared to the other two options.
Industrial properties, ex: warehouses, and distribution centers; medium to high risk compared to residential.
All three types of real estate could be bought for “investment” purposes.
Each type of property carries a different risk profile. Commercial and industrial properties tend to cost more and are riskier but yield higher returns.
On the other hand, residential properties tend to cost less, require tenant management, are less risky and yield lower returns.
Why are residential properties a popular choice for investment?
Most first-time home buyers receive a tax discount on their first residential property.
This beneficial tax scheme offsets a large chunk of cost which incentivises investors who may have less capital.
Therefore, residential properties are a popular choice of investment.
However, there are downsides of investing in a residential property such as high maintenance cost and tenant management. You will have to deal with problems as little as a broken toilet.
Commercial and Industrial Properties
Investors who invest in commercial and industrial spaces usually have a larger pool of capital to invest as these spaces tend to cost more.
The value of commercial and industrial spaces can be heavily influenced by the overall economic trend.
When the economy is booming, commercial and industrial properties can appreciate by a lot, vice versa.
At times, commercial and industrial properties will also require tenancy agreements to boost the ROI, allowing you to increase the value of the property when you decide to sell.
If you have a large pool of capital ready to be invested and you’re looking for bigger profits, commercial and industrial spaces are good fit for you.
Regardless of which type of properties you invest in, you will still require an initial capital for your down payment.
How can I save up my initial capital quicker?
Before you begin, try to work out how much you need to save up to be able to purchase an investment property.
To figure this out, you need to know how much you can borrow from the bank aka what’s the loan to value for you?
Those who already have taken out a loan, this might affect how much you can borrow from the bank for a mortgage. Make sure you consult your banker or mortgage lender.
Focus on return on investment (ROI)
Investing in a cheaper property doesn’t mean it’s a worse investment, the return on investment (ROI) matters more than how much the property costs.
The idea of buying a more expensive property is to exploit economies of scale.
Invest in amounts that you are comfortable with and make sure you’re not overly invested in just real estate.
Start small and work your way up
Your first investment property doesn’t have to be a big investment. (Must have mindset!)
Small investors like myself are constantly looking to invest in smaller and cheaper properties.
Be patient and slowly ramp up the amounts you can invest in properties. Give yourself time to learn how to identify and invest in profitable properties. (***real estate is all about LOCATION, LOCATION, LOCATION****)
Invest with a friend or family member
Occasionally, investment properties are bought by multiple owners.
If you see a profitable investment but you lack capital, you can always ask family members or friends you trust to invest with you.
How to Minimise Tax Payments for Investment Properties?
To minimise tax payments, purchase a property under the entity of a limited company instead of individual ownership. By doing so, you will save up a lot of tax payments
(instead of having the property under your name, it will be under the company’s name, and the seller will simply transfer the shares of the company to you).
Depending on the taxation law in your country, this will vary. If your country tax law requires you to pay tax when you buy and sell a property, you can use this strategy.
Disclaimer: This strategy is 100% legal to use in Macau, but may not comply with your country or region. Use this strategy with caution and do your research to check if this is tax evading in your country.
How much should I save every month for my investment property?
Depending if you are already invested in other asset classes, the percentage you should allocate for property will vary.
For example, I am already invested in stocks, cryptocurrency, wine, venture capital, but not real estate. I can allocate all my saved up money towards property investment, but this might be different for you.
Currently, I am saving up as much as possible every month and allocating 30-40% of my net income towards my first investment property.
If you’re just starting off with investing, I would recommend you allocate an even amount of money across each category of assets to diversify your portfolio.
Although this will slow down the process of purchasing your first property, it’s better to ramp up your investment towards property after you have built a well-rounded portfolio.
Here are some monthly saving ideas that you can implement for some extra bucks every month.
Quick Savings Hack
Spend less money on eating out and drinks
Downgrade your car (sell your existing car and buy a cheaper one)
Rent out a room
Dig out items in your house that you can sell on eBay or Facebook
Create a secondary income (Add a side hustle)
Focus on paying your debt first
Become a taxi driver or Uber driver on the weekends
Don’t buy stuff you don’t need
Downgrade your living (find a place with a cheaper rent than the one you’re currently paying and save the difference)
Encourage your spouse to be part of the saving process (as they might be one of the owners of the property, it will speed up the process if both of you are chipping in together).
If you are looking to buy an investment property in Macau, I’ve got a great friend that’s in the real estate market that I can refer you to. DM me for his contact.
Who is planning to buy real estate in the near future?
Let me know down in the comments when and what type of real estate do you plan to buy?