Why Buying Resale Properties Will be Your Best Investment
Updated: Jun 8, 2020
For every real estate investor, this idea will have surely come across your mind. Should I consider a new launch or resale property? This is often a tricky question to answer as there are lots of variables that comes to mind. Are you looking more at the capital appreciation or rental yield? In the best scenario, you can potentially earn in both areas. But every property is different so there is no one suitable solution.
New Launches (Building Under Construction)
Let us take for example the costs of a new launch property. Usually, for a new launch purchase, the time in which a buyer place their initial downpayment is very important. If a buyer were to place their downpayment RIGHT after the show flat launch, they will likely make a good capital profit within 3-5 years.
This is because usually, the developer will price these units low so as to attract initial buyers. These low prices might even result in the unit being lower than the initial land and construction costs borne by the developer. Technically you should make a purchase in scenarios like this as it will be a hedge against "hyperinflated" prices.
However, This does not mean you have lost your opportunity to do so, 1-2 years after the launch of the new launch properties. There are certain cases like firesales by the developers to encourage home purchases. The reason for these firesales could be because the developers are hard-pressed to beat ABSD rates.
38 Jervois was recently sold at at $500k discount for selected units due to this!
But what if you will like to consider resale properties as real estate investment as compared to new launches?
To better understand how to utilize your present funds in the most efficient way possible, to see if buying a resale or a new launch is better, we will have to understand what is internal rate of return (IRR).
Besides capital appreciation, another factor to take into consideration is the duration interval in which you are able to see returns back. This is where IRR comes in.
Comparing earning a net amount of $12,000 per year in rentals till the end of the mortgage and beyond versus someone earning the same net amount for three years and cashing out by the 4th year, with a profit of $100,000, which is a better solution?
Within the period of 4th years, the second option definitely provides a better IRR, since you are consistently still getting $12,000 year and still realizing the capital gains by the end of the 4th year.
Taking into account another scenario, once the timeframe is extrapolated till capital and rental gains are the same amount under both options, the first option will be better as after the 4th year, for the second option, no longer will you consistently be receiving rental, leading to a point where IRR will start to move in inversely in comparison to the first option.
I am sure from the two options, you understand that I am talking about in terms of resale properties. This is because, for new launches, you are still unable to collect rentals from it during the Building Under Construction phase!
If you are intending to hold onto a property for a short duration of time (3-10 years). Have a look at new launch properties. These properties are often priced at a discount due to the developers' initial way of attracting buyers. After a period of 3 years, due to a release of government measures (i.e. SSD), your capital will most likely increase. You will have to take note of your IRR, as after purchasing this unit, you are still liable to pay for your mortgage and without rental income, you will highly likely be experiencing negative cash flow during the new launch construction period. Take care as in not to over-leverage.
For a longer period of time (i.e. more than 10 years). Have a look at resale properties. Look for properties that are priced effectively and best, at below valuation. What you can do is do simple renovation works so that ideally the property is suitable for habitation by your incoming tenants. At the same time, you can start to seek refinancing options for your property, so you can have a better interest rate, reducing your overall capital outflow. This is based on the BRRR strategy, which I believe to be a highly effective way in real estate investing, which I will write in detail on another article!
Resale properties typically do not experience huge increases in value as compared to new launches, but they are fantastic for the slightly risk-averse investor. There are certainly some exceptional bargains in the market like through mortgage sales! If the resale unit that you have bought is old, think the late 80s/early 90s condominiums, there is also a potential for en-bloc! However, I would not purchase a property just based on that factor alone.
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