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Where should you put your money while waiting to purchase your next property

20151110 where should you put your money while waiting for your next property

Many people are looking to purchase their next property. Certainly more so when in the past years, housing price have appreciated substantially.

Property is seen as the asset class that is  more easily understandable, have a decent growth over the long term. Yet, some recognize that they might have missed the boat and would want to wait until they find prices more ‘attractive’.

Certainly, with the last of the government measures put in place in mid 2013, property prices have came down only the slightest.

My good friend is always looking at an investment property as his Wealth Machine.

At first, he suffered from the same behavioral issues as many investors, feeling the urge to pull the trigger, hearing many contrasting views in the media.

He has since, decided to do something he usually doesn’t do: read and build competency. The result is that it has structured his thinking when it comes to prospecting properties, valuing properties and getting to know the metrics.

His question for me recently is more like:

 While waiting to put the money into properties, where should he put his money. Fixed deposit earns very little and if the cycle is longer than anticipated, there will be much opportunity cost to putting the money in fixed deposit.

Here are my thoughts to this question.

Why are you waiting to buy the property instead of buying it now?

You are probably waiting, because you deem that according to your own way of valuing, properties are not cheap.

The most important factor when investing is the value you get at the purchase price.

Everyone likes to quote Warren Buffett saying the rule of investing is not to lose money and the second rule is not to forget rule number one.

Certainly, properties can be great investments but they can also be poor investments. A lot will depend on the price you pay for the value you get.

A MacBook Pro is great for productivity and resale value. It is valued if you pay $1500 for it. Its a bargain if you pay $700 for it.

It is poor value if you pay $5000 for it.

MacBook’s intrinsic value to a buyer is easier to assess compare to listed businesses on the stock exchange. Properties are somewhat partially listed assets. And they have their own valuation metrics.

  1. You can look at the prevailing market prices versus the historical trendlines
  2. The price to rent for different segment
  3. The price to median income for the targeted population
  4. You can look at the housing affordability based on the percentage of median income spent to service mortgage

For a good article on affordability, you can check out Property Soul’s 3 checks whether you can afford the property.

Use the right metrics, but also that while the general metrics tell you whether the market is attractive or not, property market is unlike the stock market and thus if you do diligent work, you might be able to purchase attractive value properties.

You may not need to wait at all, if you already have the amount for the down payment, and that what is on your mind is valuation.

However, if the reason you are waiting is that

  1. You have yet to build up the amount for down payment
  2. Your income versus expenses are not ready yet
  3. You have not achieve the adequate job security

Then you would want to shift your cash into something in the mean time.

Think shifting between Assets not parking

I do not like the word parking, because words influence your behavior. Parking gives the idea of letting your guard down.

I prefer the words allocating or shifting, which gives the idea that there is some active financial evaluation and actions taken.

In growing our assets, what we are trying to achieve on a high level is to put our assets with enough diversification in assets that gives us the best returns per unit risk.

There are definitely assets that gives better returns than a private property in Singapore. We can include overseas properties as well.

Yet if you do not normalize the returns by the risk, then you will blindly put your money into something yielding 14%.

Risk here is a probability you will lose a substantial chunk of your money and that it will take a long time for you to get your money back.

When you are able to assess each type of assets for their

  1. returns
  2. nature of the asset
  3. risks
  4. value

What you should do is simple: Put your money in the assets that you have the purchasing power to buy with the best returns per unit risk at the best price.

That is essentially the holy grail of investing really.

Here, I listed 7 different assets, including a private property. We can see them normalize to a high level based on their return in terms of yield and growth and the risk.

In this way you can evaluate which of them gives the best return.

However, notice that for risk, each of them have an alphabet. Risk is essentially challenging to put a figure to them. It is what makes assets hard to value.

Many thought they know the risk that they are facing, only to realize there are things that they think they know but they actually do not know, and there are things that they don’t know that others know.

Cash in a hybrid savings account like the OCBC 360 or a BOC SmartSaver is something that people think they understand best. Not yielding very attractive as a stock like Sheng Siong which potentially can provide a total return of 9% over the long run.

We can find good places to allocate money to in the mean time. The dividend yielding stocks such as Ascendas REIT and Rickmers Maritime  can be purchase for as little as $3000 to $5000, even less if you use the Standard Chartered Online Trading with no minimum.

[Related: More dividend yield stocks with prices updated daily end of the day here]

You can put your money in a portfolio of assets that you can understand, have assessed and value well, while waiting to purchase your property.

How not to lose money

One question that will pop in your head is that what if, when the property prices do come down, you lose money on these assets you allocate to?

These listed businesses could be valued at much less.

Firstly, you are not suppose to lose money. Remember what Warren Buffett says. By that, he means that you always buy the asset at a price much less than what the asset is valued at.

You should have valued that if you buy Sheng Siong at $0.85 cents, its actually worth $1.20 based on the cash flow for the next 10 years.The price drops because either the future cash flow is less than anticipated or that the market is fickle and decides to put a bargain price on the stock.

Most of us, myself included, have a tendency to look at losses much worse than how I would look at winnings. This is a normal psychological trait of ours.

[Related: This article shows you how I think about stocks and other wealth assets, how I evaluate them on a higher level]

You just got to tell yourself, what matters is at the end of the road in 30 years. And the road to more wealth in 30 years is to make more good decisions than bad.

Going back to the previous point, we are always shifting or optimizing our assets. The assets we owned currently are sunked costs. The decisions in the past do not matter much.

What matters is the outlook for the assets you purchase going forward.

So if you chose to buy the private property, you are evaluating that at this purchase price, its returns per unit risk is much higher than the returns per unit risk for the assets that you currently owned.

Why else would you be buying the property for investments? If it is for living then, the evaluation would change since returns is NOT the only thing you should be looking at!

If it is for investments, you are always looking at price you pay for the best returns per unit risk.

If you use this way of evaluating, you might realize, perhaps it is more wise to buy more of Sheng Siong shares!

You may be losing money on paper, but you are making smart decisions if you think this way that you are always allocating your portfolio with the best returns per unit risk at attractive prices.

Where do you find so many assets?

There is no alternative ways to go about doing this.

How are you going to find attractive properties? If the property is darn attractive and affordable, do you think the agent will give it to you or they gobble up themselves?

You have to have a support network or resources to keep up with the prices and whats available.

Similarly, finding good REITS, Sustainable listed businesses, Preferences Shares, Bonds will mean you need a support network and resources to keep track.

Not just that you need a system and network to consistently prospect for them.

What if you do not have the time and competency for it?

If you failed to build up, the competency to evaluate value versus price, compute the rewards, evaluate the risk, do not know what is attractive right now, then stick with the things that you understand best.

That will be fixed deposits and savings accounts.

Even with the mass advertisement, there are many who are unaware of the Singapore Savings Bonds.

To be fair, people underestimate the work that is required to invest, and look at many investments as safe, only later realizing that these “sheeps” are really “wolves” underneath.


The one downside is that if you keep shifting between these assets, you might not have the adequate capital when the time to purchase property comes.

REITs, and Stocks might provide decent returns at the right price, but they can be volatile.

The aggregate volatility might result in you not having enough for the proposed down payment.

The flip side is that, your sum grows more than decent, and you have more than enough when the time comes to purchase the investment property.

My views in this article can be rather alternative, but it is to frame the high level thinking in my good friend’s head when thinking of investing in general.

This article is longer than how I want it, but if you made it this far, I hope it provides some non-conventional personal finance ideas how you can allocate your money.

Do let me know if you have similar questions, or something along these lines. I don’t just do these for my good friends but readers as well.
To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.
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