Stomp today profiled a story where a group of investors seem to be scammed by a group called CTL Global. Through property seminars organized by CTL Global in Marina Bay Sands, they were sold the prospect of good yielding “fixer-upper” properties in USA, Fixer-upper are properties that needs redecoration, reconstruction or redesign. The folks didn’t get much rent from CTL Global and some of them were informed that if they do not pay the mortgage, these supposedly foreclosed properties will be foreclosed again.
You can read more here > Singaporean’s lose thousands after US property scheme turns sour
The common advice that seem to resonate with most is “if it is too good to be true, then it probably is”
I think perhaps the lesson learnt here is a bit incorrect.
Fixer-upper in the USA
One thing I notice in the personal finance stuff that I read up from the states is that majority of the folks who achieved financial independence are that they usually have an above average income (but not always super high), an above 50% channelling rate to wealth building but most of all they favor either low cost index funds or a few properties providing income.
Properties are rather big over there as in Singapore but in comparison to Singapore, their equities and bond markets are doing very well as well not to mention they have a stronger equity culture.
There is a reason these FI folks favor properties is that for them to arrive to this thinking of hastening financial independence, they are also a harsh evaluator and optimizer of their investment assets.
From a podcast that I listen to, Mr Money Moustache shared that the prospective properties the guys look at are not those in the San Francisco or Boston areas, where the price of property are sky high. Hey those are the prices closer to what we are paying in Singapore!
He highlights, however that USA is large enough that you can still find valued buys.
Their rule of evaluation is the 1% gross rent to price. It provides them a basic valuation metric to provide margin of safety in their evaluation.
What this means is that if I purchase a SG$1.4 million Kovan Melody condo, each month I should rent it at $14,000 per month (14000/1400000=1%). Now we know that is not possible.
So how is it that this is possible?
Some of the FI blogs gave us a good idea:
How one house throws us $5,000 a year at me by Afford Anything
This is their third house purchase. It was purchase for $94,000 and they spent $6000 to furnish and fix it up. When the post was posted it rents for $1,250 per month so based on the 1% rule this one yields 1.25% per month.
The annual net income after expenses is $11,946 which yields nearly 12%.
As their mortgage is interest only (means no principal payback) which amounts to 7% per year, after paying back the interest, they get $4,946 per year which is a 5% yield after all the costs, taxes and interest payment.
There is a lot of good thing over there in that the start up cost to build wealth this way is way lower for something you have build up competency a long the way growing up.
Can $100,000 Invested in rental property retire me right now
FI Fighter here is evaluating some prospective purchase to see if he can provide himself with a monthly $1500 income using $100,000 to reach financial independence. In the article, he provides a rather systematic evaluation of each prospects:
The crux is that these properties are available and you can imagine these illustrations to entice Singaporean’s to invest over there. Based on what these bloggers accounted, they are not ghost properties and are rather prevalent (even though in recent times, these deals are getting rarer)
And there is a reason why these properties are sold so cheap because you have to put in a fair bit of work. You certainly won’t be expecting a lot of Singapore properties with these issues. Much of these folks tried to rehab these themselves but eventually find that it is better to spend some money to find professional help.
The investor mind set versus that of the owner manager
The problem here is more so of whether the investor were well equipped to deal with this investment. Many a times, investors are expecting to do very little work, go to these seminars or talks and think that these knowledge are enough to adequately equipped to conduct due diligence and sound evaluation.
If you are the owner manager of the property, you are an employee who expects to work and get paid. You probably know the operations of the business better. But if you are an investor, you have to content with a whole difference set of problems namely, agency, corporate governance and compensation.
The skill set and competency required to be an investor is very different from a property owner and many do not have a fundamental sound mental model to do a good evaluation.
Mr Ng said: “I’m not familiar with the US property market – none of the investors are. But the presentation by CTL Property was good and its founder Clara Tan was very convincing,”
“What drew many of us in was, CTL is a one-stop shop, offering full services from tax submissions, tax filing, getting legal representations and so forth,” he said.
If you ask me, I also want to invest and have such a good asset that provides such good returns, but there is a trust issue here. Had this be my good friend who is living in the USA, I could probably draw up a payment relationship with him to supervise the property and to advice on tax and legal matter. In the case of these arrangement, you have very little idea what are the cash that flow out of this relationship system. This is not to say that your friend cannot play you out. We all are subjected to bad luck at times.
If we have to jump through so many hoops, we got to think whether the returns are worth all the hassle. I felt most of the time we let our System 1 brain think for us in HOPING that things will eventually work out.
I realize that had I not read widely enough on this topic, I would dismissed such deals as too good to be true. From this review, the deal is not too good to be true. It is just that there are many strings attached, some you can think of, some are very country focused.
It shifts my thinking in that some of these great return deals are really great, but its the people that sells these to us that is questionable.
Your mental model should always ask if this is such a good deal, why don’t CTL buy it themselves, rehab and rent it out.
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Monday 9th of February 2015
It looks like the investors in CTL property may have overlooked the agency problem. Anytime you work through an agent, you run the risk of agency problem and it needs to be managed.
A stock investor will face the follow examples: -managers of the company not acting in the shareholders' interest -the brokerage firm not segregating your shares from their own shares -brokerages issuing research reports that encourage/push inappropriate investments to clients
Owner-managers may have to put in more sweat equity, but they do exert greater control over their investments. Hence this problem is mitigated, or avoided entirely
Monday 9th of February 2015
Hi Humbleblogger, very true that.
Monday 9th of February 2015
Being an investor requires work.
It means understanding as much as possible: - the business model - the business operations - the business problems - the business moat
Being a landlord, it would require similar understandings:
- how can the cost of a $1 million property help my retirement? - how does it work? - what are the problems? - how sustainable is this?
There is much more than these questions.. each has it own set of sub tasks and thats where the real work begins.
People fall prey to scams because they believe that earning big bucks is as easy as buying 4D or TOTO... just pay and hope that the ticket wins 1st prize... or 2nd... doesnt matter really.. at least there is a chance as opposed to not buying at all!
Critical thinking skills did not develop well in our society, and especially in our schools. Tuition helps to 'game' the system but beyond the 'system'... that is where transfer of knowledge did not happen.
Monday 9th of February 2015
you summarized well and i hope I can improve and think critically.