Conventional wisdom has it that we compute our Net Worth by deducting "Assets" from "Liabilities". Robert Kiyosaki in his seminal "Rich Dad, Poor Dad", came up with the notion of "Cashflow" as being key.
Is a property therefore an asset or a liability? Suppose the property cost $500,000, for which a loan of 80% was taken. It would therefore be an Asset worth $500,000, and at the same time a Liability of $400,000; the Net Worth is therefore only $100,000. What is the Cashflow then? If you're living in the property (i.e. home), then the Cashflow is $0 since it earns no income.
On the other hand, if it was rented out and generating a revenue of $20,000 a year (4% yield - i.e. 4% of $500,000 = $20,000), then it gives a Cashflow of $20,000. If the monthly rental income is equal to the monthly loan instalment, then we could imagine that the rentee is paying for you to own the property! How nice.
In truth, there are further costs involved that would have reduced Cashflow generated. A property that is not the residence incurs a 10% property tax, rather than 4%. There are also other fees due to maintenance, tax on the revenue, and other upkeeping/maintenance costs involved. This would be offset by some deductibles against the taxable income of course; deductibles that are associated with rental properties.
In Singapore, rental yields are typically in the 3-6% range. Given this, I am doubtful if a positive Cashflow could be achieved, unless the upfront payment for the property was very high in the first place. Certainly 20% down isn't likely to cut it.
There is a counter argument about the property as a home. That is, to consider the opportunity cost; which would have meant renting a property for a home. I believe, that in the long run, paying for a home would always beat the notion of renting a property to live in. At the end of paying all the instalments, one gets to own a property. But a rental remains a rental - there is nothing owned at the end of the day. Given this, the solution appears apparent - own a property. The problem is of course the lengthy lock-in of a sizeable portion of one's wealth.
I recall somebody told me that wealth is generated in 3 ways:
- Work for your money;
- Make your money work for you; or
- Get other's money to work for you.
So, we could work to pay for a property. Or, we could do so and rent it out, and get others to pay for your property! The recourse therefore: buy a property, collect rent, stay with thy parents! Be Cashflow positive!