Depends on which side of the coin you are looking at

I was reading the Straits Times titled "Young Asian adults likely to face cash crunch in retirement" by Lorna Tan and it was mentioned nearly one-third (30 percent) of millennial investors expect to run out of money later in life. Mr Michael Dommermuth, Manulife's head of wealth and asset management said," While previous generations relied heavily on real estate for their retirement fund, economics and demographics mean that today's millennials need to take a different approach." Young people today will need to start saving, and investing, sooner rather than later. 

My parents' generation relied on properties to help them grow their first pot of gold. The condominium cost only S$500k in 2002 for a 2 bedder + 1 study 1080 sqft in the suburban. Today it can command about S$1,000k in 2017 based on today's market. That's a whopping 100% return. However, you need to look at the economical status of the country at this present moment. Does it seem like a developing stage? Or is it fully developed? In the 1960, a GCB cost about $10k and it will become $20m in today's context because of the inflation and the growing of the nations. However, going forward with the moderate to slow growth, how far can the property market move? With the ageing population, how far can the property market move? Yes, let's open up the flood gate and increase our population to 7m, maybe our property market will see a new high? My personal view is depressing times for the property market ahead.

Interestingly, if you look at PropertyGuru "Singapore millennials look to property for financial security" by Romesh Navartnarajah, it chooses to focus on 68 percent of Singapore millennials plan to purchase a property, with two out of five doing so to generate rental income. Despite having the lowest satisfaction with rental yields in Asia, Singapore millennials (aged between 25 and 34) favour investing in property to achieve financial security, reported the Business Times, citing the Manulife Investor Sentiment Index Survey. 

Recently, we rented out our parents' condo, we realised that there are other hidden cost which will drastically affect your yield. Rental income will be added to your based income which will be taxable. A rented out property will command a higher property tax. You still need to pay for your maintenance fees. Unless you bought the condo at the range of 500-700k range, you will not get a decent yield. Using recent years quantum as a basis, if you buy a 1m condo, less all miscellaneous cost, a net rental income of 2.5 k/month is 3% yield.  You can easily achieve this by buying a property counter or a REIT and save all the headache of been a landlord.

Your house is not an asset

Is your house an asset?

People think that owning a house is an asset. As rich dad poor dad author Robert Kiyosaki pointed out in his book Rich Dad Poor Dad a house is a liability until it is fully paid for then it becomes an asset.  Some thinks that the only to save money is to park it in properties. My definition of an asset is when the house produces cash flow for you. Do note that in Singapore, even the resale public housing can cost up to $700,000 for 5 room flat in Clementi. You will get your flat fully paid off when you are old. Who wants to wait until they are old to have money?

A house is a highly leverage tool, with 20% of down payment, you can leverage up to 80% of the property price by loaning from the bank. This is good if the property price is on an upward trend. However, leverage is a double edge sword, if property price is on downward trend, there is a possibility of margin call by the bank if it drops more than your initial 20% down payment.

The house much like an university education is over hyped has been fed to you by parents. However, our parents bought their house when Singapore is developing and the house is cheap. It works for our parents but old ways of doing things are not viable in this generation. It is a middle class myth perpetuated by outdated thinking, politicians and mass media.

Is renting always a waste of money?

Why will you pay rent to the landlord when you can buy? You may argue that the money that you spend on the rental every month can be used to pay the deposit of your house. Firstly, people rent because they can be mobile and nimble. Mobility is a great thing in today's world. A lot of parents rent a place near their desired primary school for their children.

When you are renting, you are renting space that has no future value. When you buy, you are still renting, you are renting money. The money you rent are used to pay mortgage and a house which depreciates for you to live in. However, there is interest based on the principal you loan.

For simple illustration, there are two brothers Zhixiang the owner and Zhixiong the renter. Both have assets of $100,000 each, liabilities of $0 and net worth of $100,000 each at the start. Zhixiang bought a $500,000 house. He paid $100,000 as down payment. He took a loan of $400,000 and incur stamp duties, legal fees, insurance, fees etc for an amount of $30,000. Hence, his current situation is Assets of $500,000, Liabilities of $430,000, new Net Worth is $70,000. Zhixiong found an identical house next door which rent for $2000 per month. His assets and net worth is still the same as before. However, his Net Worth is higher than his brother Zhixiang. Now we look at Zhixiang the owner, say he took a 3% fixed rate mortgage for 30 years, total monthly payment will be $1,686 and the total interest paid will be $207,109. If we add other charges, the monthly fees will probably be close or slightly lesser than $2000. However, Zhixiang will need to continue to pay for the interest of more than $200,000 whereas Zhixiong can use the additional cash flow to invest in shares which gives cash dividend and appreciation over the long run.

The difference at the end of 20 years ultimately depends on whether Zhixiong can save the differences and also house owner needs to be mindful of the impact of transaction costs of buying and selling houses too often. Real world fluctuations can throw your projection out of the window. Hence, it will be wise to project modestly and not take on too much debt. It makes a lot of sense to buy a modest house to live in so that you will have money left over to invest as well.