# How to Retire Young Through Property Investment

**How to Retire Young Through Property Investment**

In the last ten over years of my real estate career, I have seen so many young adults who had just started out in their career splurge on luxury items that depreciate over time, and neglect planning financially for themselves. They are missing out on the advantages of compound interest through investments and leveraging on longer property loan tenure when they are young.

When you buy a property at 30 years old, you will be able to go for full loan tenure of 30 years and keep your monthly instalments low. Hence, there will be more positive monthly cash flow (or at least less negative monthly cash flow).

On the contrary, if you are 45 years old when you buy your property, your loan tenure will be capped at 20 years and your monthly instalments will be a lot higher. In the end, you may not be able to go for as much loan as you desired.

Through proper and prudent property investments, one can make good use of the power of leveraging through mortgage loans.

For example, if you buy a $1m property, and you take an 80% loan, your down payment is only 20% at $200,000.

So if the property appreciates by 20%, and hence the value becomes $1.2m, your returns (before expenses) are not just 20% but will be 100% instead (200k/200k times 100% = 100%)!

And not forgetting the monthly rent you will collect, which will further add up to your investment returns!

The question now is that, can a person with an average income be able to own a property at a younger age? The answer is yes, and I have seen so many successful examples over many years!

To illustrate my point, let’s look at a 28-year-old adult that’s earning $5,000/month.

Assuming he manages to save $3,000/month, it will translate to savings of $36,000 per year. Let’s say he aims to buy an investment property at 35 years old. Hence in seven years’ time, he will be able to save up to $252,000, which is sufficient to place the down payment for a $1m property.

And if he has pay increment over the next few years from 28 years old, he would be able to save even more.

Let’s assume that if along the way, he has more monthly commitments (e.g. getting married, medical expenses etc.), and can only save $2000/month. Hence, by the age of 35, he will only be able to save up to $168,000. However, it is still possible to accumulate more than $200,000 in savings by the age of 35 through safe investments or savings vehicles, such as endowment plans or even Singapore Savings bonds (which have up to 2.5-3% of average yearly returns).

So what’s next when you have enough capital to invest in a good investment property? Act on it!

Let’s look at one example. Project name: Icon at Tanjong Pagar Unit type and size: 581 sq ft, one bedroom unit Purchase price: $1.05mil Expected conservative monthly rent: $3000 (average rent is between $3,200 to $3,500 per month)

Assuming one is taking an 80% loan, at 2% interest rate, with 30 years loan tenure Monthly instalment: $3200 (round up to nearest hundred) (Monthly loan interest is $1400/mth conservatively as this interest amount will get lower as the loan amount gets lesser every month)

**Question:**
**So the $3000 monthly rent is less than the monthly loan instalment of $3200. Is this a lousy buy or is this still worth considering?**

**Let’s crunch some numbers and do some assessments!**

**Buying expenses when you first bought this unit:**
1) Stamp duty: $28,000 (round up)
2) Legal fees: $3,000
3) Others: $2,000
**Subtotal (a): $33,000**

**Monthly expenses if you rent out this unit:**
1) Loan interest: $1,400
2) Maintenance fees: $150
3) Rental income tax: $100 (depends on the individual’s tax bracket)
4) Property tax: $200
5) Others: $200 (e.g. repairs, furnishing, vacancy periods when the unit is not able to rent out)
**Subtotal (b): $2,050**
Monthly gain: $3,000 (rent collected) less $2,050: $950
**Yearly gain: 12 months times $950 = $11,400 (c)**
**Monthly cashflow**: $3,000 rent less (items 2-5 for monthly expenses: $650) less $3,200 instalment = **($850)**

**Selling expenses assuming selling at price of $1,200,000 five years later (based on a 3% year-on-year price appreciation):**
1) Agent commission: $26,000 (assuming 2% of selling price plus GST, figure is rounded up)
2) Legal fees: $3,000
3) Others: $1,000
**Subtotal (d): $30,000**
**Total gain:**
$1,200,000 (selling price) less $1,050,000 (purchase price) plus yearly gain of $11,400 (c) times 5 years less buying expenses $33,000 (a) less selling expenses $30,000 (d) = **$144,000**

**Initial downpayment:**
**20% of $1,050,000: $210,000**
**Percentage gain on initial invested capital**:
$144,000/$210,000 times 100% = **68.5%**

**Yearly percentage gain on initial invested capital:**
68.5%/5 years = **13.7%**

For the above scenario, he has to ensure that he has enough savings for the negative cashflow of $850 every month. If he liquidates his property at the age of 40, he will have $210,000 of principal and $144,000 of earnings, which will total up to $354,000. That amount is sufficient to place a down payment for another property of $1.5-$1.7m.

Imagine if at he sells off the second property again, he may be able to reap off even more profits, which may allow him to enjoy an earlier retirement very comfortably.

Of course, every investment comes with a set of risks. But, as long as one does his due diligence and had set aside enough reserves to hold on to the property, property investing can prove to be highly rewarding.

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