Many investors are bullish on properties because they provide "positive carry", that is, the rental income exceeds other expenses (including management fee, mortgage payment, etc.). However, they are only half right - they should only count the interest expense portion of mortgage payment instead of the entire principal plus interest payment.
Why? The interest payment is an actual expense to the investor; he doesn't get anything in return. However, when you pay off the principal portion of the mortgage, you are increasing the equity of the property. For example, you have a 20-year mortgage attached to an investment property and the property gives you zero cash flow (the rental income offsets the mortgage payments and all other cash outflow for maintaining the property). After 20 years, even if the property does not appreciate in value and you receive no cash flow from the investment, the mortgage is paid off and your equity is increased by the amount of the original mortgage amount.
Accordingly, even though some property investments cannot provide a positive cash flow, as long as the cash outflow is less than the mortgage principal repayment amount, you are still increasing the equity of the property which you can tap in any time (you can sell the property or refinance to take out extra cash).
The problem is that yields in HK are so low, it is very hard to get a property which will show at least a break even cash flow with a 50% mortgage. I'm holding on to what I already have but do not intend to buy anything else.
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Traineeinvestor
Yes, in the current environment, I think there are a lot more attractive investments than Hong Kong properties.
ReplyDeleteHope that we as the owner will be successful in our Property Investment. Assuring the success of our business is not that easy to achieve. We must try and focus on how we can attract possible customers for our business.
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We have to be adventurous in order to learn new things in Real Estate Investing Australia. We all need to push hard our goals to get what we have planned to work for our business. Now that we have the knowledge needed, we must apply all those things to know that we will achieve what we have dreamed for our business.
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