It may surprise you but this is actually what every homeowner believes him or herself to be (at least deep at heart). Real estate is a really popular topic in Hong Kong. You can hear about real estate almost on a daily basis either at your workplace, or within your friends and family circle. It ranges from how to apply for a bigger public housing unit, to how much one square foot of a new build costs, to how many hundreds of millions of dollars houses with all kinds of luxury and great views had been transacted. Particularly those who has bought and sold their apartment at least once would think that they are and had been investing in property.
This is why, to many people, property investing is common sense and straight forward. It’s become so natural a topic that most people only compare the purchase price of properties, not giving a second thought (or respect) that there’s indeed a whole lot of knowledge, education and perseverance required if you ever want to be successful. The term “professional property investor” doesn’t even exist in many people’s mind as a valid occupation. You will agree with me on this, but why aren’t there many people educating themselves on property investment when most of them are still struggling with paying their mortgages? If many people are already on the property ladder buying and selling property every so often, why don’t they pride themselves to be a property investor?
What differentiate a professional property investor from an amateur property investor?
What do amateur investors think: Capital Appreciation
If you hear capital appreciation to be their main concern, something like ‘Oh my apartment has increased 2 million in value in just 5 years!’ or ‘this apartment will certainly appreciate in value so I’m planning to hold and sell it on after 3 years’, you know you’re talking to an amateur investor. They’d consider it a ‘profit’ if they hear that there’s been a growth of capital value in the property they purchase, even if they can’t (certainly don’t know how to) make use of it.
Rental income is not what they usually aim for, since the house prices in Hong Kong is so out of proportionally high that rental income usually wouldn’t be enough to pay off the monthly mortgage, not to mention the management fee, rates and insurance etc.
If you hear capital appreciation to be their main concern, something like ‘Oh my apartment has increased 2 million in value in just 5 years!’ or ‘this apartment will certainly appreciate in value so I’m planning to hold and sell it on after 3 years’, you know you’re talking to an amateur investor. They’d consider it a ‘profit’ if they hear that there’s been a growth of capital value in the property they purchase, even if they can’t (certainly don’t know how to) make use of it.
Rental income is not what they usually aim for, since the house prices in Hong Kong is so out of proportionally high that rental income usually wouldn’t be enough to pay off the monthly mortgage, not to mention the management fee, rates and insurance etc.
So capital appreciation is the one and only strategy the majority of Hong Kong people have in their pocket.
The strategy that amateur investors employ looks like this: they first decide on the area where they’d like to live, probably with good school network, a nice view, or close to public mass transport system (how can we live without the MTR?). Secondly, they’ll look for properties that they can afford. Thirdly, they’ll compare the prices it used to be a couple of years ago with the one right now, trying to figure out how much the property value will appreciate in the upcoming years. If they’re buying a new build, they would still only be concerned about the value that could increase in the future.
There are pros and cons to this think logic. The good thing being that:
- They only need to deal with one bank.
- The value of properties in Hong Kong tend to increase over a long period of time (which also happens in many other countries), which is quite a secure return.
The downside of it being that all capital is tied to ONE property. Which means that the homeowner will need to pay off the mortgage by themselves. And only after ten to fifteen years they’ll be able to pay off the mortgage or sell on the property, to be able to enjoy the increased equity of the property.
Some would therefore, turn to investment options which would generate higher return in shorter amount of time, such as the stock market. But higher return only happens when the market is going up, which isn’t always the case. Most of them enter the stock market with no education and end up losing a lot of money. Some even lost their entire life’s savings in the stock market.
What do professional property investors do differently? It’s the complete opposite!
Ever wondered what the professional property investors do differently to achieve financial freedom? It’s not the things they do differently. They actually do the complete opposite! The strategy they pursuit, the attitude towards knowledge and education and the mindset are the complete opposites.
There’s a lot to be discussed. Let’s just focus on the strategy for today.
First of all, one of the most important rules of thumb is to make profit when you buy and not when you sell. This is achieved by buying the property below current market value. To be able to replace their income, professional investors focus on positive cash flow, which is the net income they receive through rent, after deducting all the expenses including the mortgage payment. The investor themselves does not pay for the mortgage, the tenant does.
Professional property investors have a different approach when it comes to buying the right property. They have an SAP approach: Strategy à Area à Property. After setting an ultimate goal, they’d first define their strategy, which would bring them to achieving their goal. It could be buy-to-let, HMO (House of multiple occupations), buy-to-sell (flip), commercial to residential conversion, development etc. Or a combination of two or more of the above. Next, they’ll look for the right area where the chosen strategy would work. The last thing they’d be looking at is finding the right property. Since they’ve done enough of their due diligence, they’d be able to identify a good property deal when it comes their way. This systematic approach minimises the risk, and maximises the profit they can make. Amateur investor has an APS or even PAS approach, trying to fit a certain strategy to the property they like.
Once the property has been rented out, professional investors would pull out as much money as possible through remortgaging the property. Since the property was bought below market value, after doing it up and have it rented out, the property itself has gone up to at least the market value, allowing the investor to remortgage and pull out most of the investment capital, which they can then reinvest in another property. Only very little money is tied in the deal. Not only do they enjoy the current income generated from positive cash flow from the property, they will still enjoy the capital gain of the property if they keep it long enough. The risk has been greatly reduced through these two things: Choosing an area with high rental demand so that you can easily find a tenant who is going to pay for the rent, and at the same time owning the property and enjoy capital appreciation which comes along anyway in most cases.
In our next blog, we’ll talk about another important difference – the mindset.