Posted by: Janet Schlarbaum
Author: Michael Russell
Investors today are flooded with various choices of investment instruments like fixed deposits, shares, unit trust, gold, bonds, etc. Before investing, it’s important to gauge your risk appetite.
Risk appetite is sometimes influenced by our culture, upbringing, character, age or profession. For instance, the older a person gets the more risk averse he’s likely to be. Therefore, there are factors to consider when making an investment. Ask yourself; how much capital do I have to invest? What is my expected rate of return? Is it short, medium or long term investment? What are the options available to me? How much I could afford to lose? How do these options compare against each other? Have I considered all possible costs of investment?
By answering these questions, we can narrow down the choices to those that most suit us. This is one method of profiling. It reduces confusion in deciding which type of investments we should invest in.
The famous saying, ‘diversify your investment portfolio’; in property investment, diversification can come in the form of various property types, such as residential, commercial and industrial. In shares, it would be investing in different companies involved in different industries. If one share suffers losses, your overall investment is set off by investments in other companies that may still be profitable.
There are basically three broad streams of growth for property investments, which are capital growth (buy and hold), rental income (cash flow) and a combination of both. Some investors look for high yield properties (for the rental income) while others go for capital growth or appreciation. The best would be a combination of both.
Prior investing, bear in mind the incidental costs involved like legal fees, stamp duty, assessment, quit rent, management fees, insurance, valuation fees and so on. There’re many methods for investment appraisal and one of the most commonly used, called Yield.
For instance, an existing three-storey shop office is currently tenanted at a net income of $5,000 per month and the property is going for $1 million. Is this a good investment?
Yield = ($5,000 x 12) รท $1million = 6%
Assuming, current fixed deposit rates are at 4% per annum, thus, this investment gives you a 2% higher rate of return than placing your money in the bank. The yield should be more than surplus the cost of funds. Seasoned investors would go for a property investment with a yield of twice the fixed deposit rates, which in this case - 8% or more.