In Singapore, owning a property is often seen as a symbol of wealth and success, which is why many people covet them as investments.
With rising property prices and a range of cooling measures in place, such as higher stamp duties and tighter loan-to-value limits, investing in Singapore properties has become less financially rewarding for many potential buyers.
So some investors have begun exploring opportunities abroad. Weihan, for example, has already invested in nearly a dozen properties in the United States.
But investing in overseas property can be risky, and this is often the first concern that comes to mind.
I was curious to learn more about how Weihan did it successfully and what his investment approach and strategies were, and how he was able to successfully execute his plans living half a globe away.
Why U.S. properties?
The first important point he shared with me was that not every country is suitable for foreign investors. He emphasized that a country must have a proper rule of law that is fair to both landlords and tenants, respect ownership rights, and not be prone to disasters in order to be a viable option.
Weihan ultimately chose the United States because of its lack of foreign ownership restrictions, which allowed him to compete on equal footing with local investors.
Compared to Singapore, the properties in the United States are priced lower, offer higher rental yields and enjoy stronger rental demand.
For example, the amount paid under the Additional Buyer’s Stamp Duty (ABSD) in Singapore would be sufficient to buy one freehold house in the U.S.
Moreover, in the U.S, he could also refinance the properties and use the proceeds to buy additional properties without paying additional taxes, which would have not been possible in Singapore.
If an investor bought a second property in Singapore, he would have had to pay a 16% ABSD and subsequent purchases would have been taxed at 25%. Such high taxes would have significantly lowered his investment returns, or worse, losing money on the investments.
However, in the U.S., property investors can refinance their properties and keep rolling the cash to acquire additional properties indefinitely. This flexibility has enabled Weihan to grow his property portfolio much more quickly and with greater returns.
Target middle-class properties
When Weihan first started, he bought the properties with full cash as they were priced below US$100,000 then. The initial properties became proof of his property investing experience and he used that to get financing from the banks. Thereafter he built up his credit score.
His target properties are typically the middle-class rental properties that are now priced around US$150,000 to US$180,000. These properties are easier to get tenants and are easier to sell too.
While high-end properties may seem appealing, they often carry higher mortgage payments and do not yield the same level of cash flow.
On the other hand, low-end rentals may appear to be profitable on paper due to their lower price point, but they often come with problematic tenants, frequent evictions, vacancies, and additional repair costs, resulting in significant headaches for landlords and lost cash flow.
Hence, the middle-class rental properties provide the best risk-adjusted returns.
The 1% Rule
He abides by the 1% rule: the monthly rent must be at least 1% of the purchase price. So the rentals would be US$1,500 to US$1,800 per month for these middle-class rental properties.
This 1% per month would translate to about 12% per year, which provides enough margin to pay for operating expenses and receive a positive cash flow after the deductions.
5% to infinite rental yields
The net rental yield varies greatly with each property, starting from 5% to infinite returns.
This is because properties are heterogeneous in nature – locations, conditions, and other differences would affect property values and hence their yields too.
It could also be macro factors that drive the yields higher. For example, Weihan experienced massive rental growth the past few years and some of his property rental yields have increased to over 8% in 2 years, while some even went above 30%.
His preferred strategy is to buy the ugliest house in the nice neighborhood and transform it into a nice property. This is how he creates appreciation and increases the property’s value tremendously.
Sometimes he can even achieve an infinite return. He shared a case study.
He bought a beaten up house for US$79,000 and spent US$16,000 renovating it.
The valuation increased to US$160,000 after the renovation, he refinanced the loan at 70% of the value and managed to draw out US$100,000 in cash.
The proceeds were more than the US$95,000 he paid for the house and renovation!
On top of that he receives a net rental income of US$410 per month.
This is what he meant by having an infinite return.
Rate hikes have been good for property investors
One concern for property investors is the ongoing rate hikes in the U.S. This would increase the cost of funds and in turn reduce the returns.
On the contrary, Weihan has not been hit by the rate hikes as he took 30-year fixed rate mortgages. Yes, the rates can be fixed for decades in the U.S., while the mortgage rates can only be fixed for five years in Singapore.
In addition, margin calls are not applicable, even when the value of the collateral declines below the loan quantum. As long as the mortgage is paid diligently, the lenders cannot foreclose the properties.
Hence, his existing loans were not impacted. Only the new loans are charged at higher rates.
But the benefit was bigger – the higher mortgage rates have brought down the prices of the properties, making them more reasonable for Weihan to invest in them.
Managing overseas property investments
It is important to build a team that can be the eyes, ears and feet on the ground since a foreign investor wouldn’t be in the country for the majority of the time.
Weihan traveled to the U.S. initially but did not visit again for 3 years even though he bought more properties during that period.
This was possible because of the team and the team comprises agents, property managers, lenders, property inspectors, and handymen. They take care of everything while he is in Singapore.
His job was to trust but verify – occasionally check everything is in order and that the monthly statement is correct, with the rent being deposited into his bank account.
What could go wrong?
There are several ways in which one can lose money in US property investing.
Firstly, investing without sufficient knowledge and research can lead to poor investment decisions, such as investing in properties located in high-crime or economically depressed neighborhoods.
Secondly, poor property management can lead to decreased profits or even losses. This includes inadequate tenant screening, inefficient maintenance, and failure to respond to tenant complaints and repair requests in a timely manner.
Lastly, underestimating the risks associated with a property can result in unexpected expenses that eat into your profits or even lead to negative cash flow. For example, unforeseen issues such as roof or plumbing problems can require costly repairs that exceed your projected budget.
Overall, it’s essential to approach US property investing with due diligence, thorough research, and careful risk assessment to maximize your chances of success and minimize the risk of financial loss.
Weihan shares his property investment stories on his YouTube channel and Instagram.
