How to exercise prudence when investing in property

“Prudence is a key accounting principle which makes sure that assets and income are not overstated and liabilities and expenses are not understated.” The first few lessons in Financial Accounting will teach you this.

However, this principle is hardly practised by many companies these days, especially when expansion in revenue is always followed by even higher costs and most of the time, losses.

How about prudence as a key principle in property investments? Do note that the concept of prudence and the concept of not doing anything are two totally different things altogether.

Be wary, bad times are here. If you intend to buy many property units and quickly sell these off once the keys are in your hand, think again. But only because the number of transactions has been falling for many quarters.

Demand is now fully restrained by everyone who continues to say negative things about everything. If you are a first-time buyer today, as soon as you have spoken to three different people, it is best to “wait and see” instead of viewing, comparing and buying (primary) or viewing, negotiating and buying (secondary).

Be savvy, bad times may also be the best times. Perhaps the sheer number of friends you have in real estate, who have publicly stated their wish to be Uber drivers, is another good sign for the present bad times.

So, is this a sign to step out of the market or jump in? Neither actually. It simply means that before you sign on any dotted line, you must make sure that what you buy is really worth what you are paying for it.

Way back in 2010, nearly everything and anything one bought gave great returns.

Be safe, compare seriously. Today, it is much more important to understand what you are buying. Compare it to all the property prices within the same area as well as neighbouring areas.

A rebate from the developer cannot save you when the property you bought today is still much higher-priced than everything else nearby.

By the way, is it really necessary to pay a high premium for a LRT/MRT station 500 metres away from the property of your choice versus another development about 10 minutes away but priced 15% lower?

No right or wrong answer there. There are markets for both. Buying the former means you target people who opt for convenience. Buying the latter means you are looking at affordability.

Be wary about the world economy. The world economy remains extremely fragile. Google “financial crisis” for some truly informative pieces. Then Google “property bubble” for further reading.

Note that the countries mentioned in those articles include the big and developed ones as well, and not just emerging markets like Malaysia. So keep in mind that this is not the time to over-leverage or to take more risks than necessary.

Of course, if you did not buy anything, and nothing really negative happens within the next five years, then you may have lost one cycle of opportunity.

On a longer term basis, when you look at the overall cost of doing business, the demand from a young population, continuous urbanisation as well as a growing economy, property prices have just one way to go – and that’s “up”. It will not be a straight line and this is the reason that whatever you invest in, you must always exercise prudence. Minimise unnecessary risks by understanding a little more about what you are investing in.

By the way, it’s better to step away from any property investments promising fast returns today. Too many people have been burned by buying properties in faraway lands only to realise that these are potential pyramid schemes.

Happy investing!

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