A must-have cash flow asset in any investor's portfolio!

I believe this asset class is one of the best asset classes around if not the best to be owned by anyone. The asset class I am referring to is real estate property. I am not referring to real estate investment trusts (REITs) which is what I call the paper equivalent of owning real estate property as one only has minimal control over the physical properties under management by the REIT unless one is a major unitholder in the REIT. I am referring to one being the owner of real physical properties, having the full rights over the physical property.

There are three common major types of real estate properties one can own namely, residential, commercial and industrial properties. I am by no means an industry expert in properties. However, by my limited research so far, all three types of properties have their individual unique strengths and attributes. It really depends on what an investor is looking for, capital appreciation or cashflow from owning the property.

I shall not delve into the unique strengths and attributes of each of these types of properties in this post. However, I will like to impress upon the reader that real estate property is one of the best investment asset classes around to own. I call it a must have in any investor's portfolio. Real estate property may also form a large portion of an investor's porfolio since a real estate property is usually in the hundreds of thousands or even millions in the case of high-end properties. I am sharing this in the context of property valuations in Singapore. Private residential property such as condominiums are easily priced at $500,000 and above in a normal market. Gone were the days when one can buy private residential properties at below such a value. Commercial and industrial properties are also not cheap over here in Singapore with prices also in the range of hundreds of thousands to millions.

As such, a typical investor with no enormous cash reserves has to apply leverage when investing in real esate properties. It is the application of leverage that makes real estate properties very attractive as an investment class. What makes it further outstanding is that in Singapore, the leverage one can apply when investing in properties is one of the cheapest around. This is what I call cheap leverage applied onto a stable investment asset class.   

A typical investor buying into residential real estate over here in Singapore needs to pay a downpayment of cash and/or CPF of 20% on the valuation of the private residential property such as a condominium. In additional to this, there are also other costs such as agent commision fee, stamp buyer fees and legal fees. After one factors in all of the costs and downpayment needed in buying a private property, the amount of capital needed to invest in a property is still not too high compared to its valuation. This provides a very favourable loan to value ratio. One can apply for a high amount of loan with a low initial capital commitment compared to the valuation of the property.

This makes real estate property a highly leveraged asset class for an investor. Furthermore, the interest rate for mortgage loans to buy properties is one of the lowest around compared to other types of loans in Singapore. This makes investing in properties a cheap highly leveraged asset class for investors. Properties tend to hold their values or increase in value over the long term (if the property in question is really a good buy). This further adds on to the attractiveness of real estate properties as an investment class as one can look at stable capital apppreciation over the long term (in many cases, capital appreciation in properties is known to beat inflation over the long term).

If an investor decides to rent out a property and the rentals collected are able to pay for the expenses in maintaining the property and even pay for the mortgage loan, the result of this is that another person (the tenant) is effectively paying the property for the investor. Once the property is fully paid for, the investor can sell the property at a profit (when the valuation of the property is higher than the initial purchase price) or continue to rent out the property for rental income which translates to recurring passive cash flow income which may be perpeptual (in the case of freehold properties).

As such, real estate properties can potentially provide a source of recurring passive income (once the property is fully paid for and the liabilities on the property is significantly reduced) for an investor's retirement period. I have personally known of people who have enjoyed and are still enjoying the recurring passive rental income stream from owning real esate properties. Of course, one can critique that this income stream is not totally passive as an owner of the property still needs to engage the tenant fulfiling his obligations to the tenant to manage the rental property. However, this property management work is not taxing at all compared to holding a full-time job. If a landlord chooses not to get directly involved in managing the property and tenant, he or she can engage a property management company at a cost which still makes the cash flow on the property attractive minus the headache of managing the property and tenant.

With prudent planning considering that one is able to buy and has holding power on a property through the ups and downs of the property market, not over commiting financially, one will be able to reap the rewards of a cheap and highly leveraged investment asset class which promises good cash flow. This is a must have cash flow asset that any investor should aspire to own in his portfolio. The important thing in any investment is to assess one's capability to buy and hold the investment asset while reaping the cash flow and financial reward, and only sell at a right time (when capital appreciation far outweighs the potential future cash flows or when another better investment asset comes along).

In all these, the caveat of buying undervalued or reasonably valued cash flow assets and selling over valued assets  still holds even when investing in real estate property. Successful investing is simply a numbers game (a science) and also a sound judgement game (an art). It was never meant to be an emotional game (getting caught up with greed and fear). If the numbers are good after one has assessed the potential of the investment asset, one should own the asset. 

PS: Please note that this post is just a very small time discussion on the topic of property investment. There are so much more things to know about the topic of property investment. I thought that real estate property is such a noteworthy and very important investment asset class that any investor must not miss in his investment portfolio.

PSS: Do note also that any information provided in this post is in the context of Singapore property market. I am also not to be held responsible for any misinformation in this post. One should always do his own research before investing in any asset classes. Prudence is the mark of a successful investor.

Real estate property, a must-have cash flow asset in any investor's portfolio!

Reflections on my investing journey so far - "It is still cash flow that triumphs".

As I reflect on my past three years plus of investing in stocks and shares, I learnt many lessons, some slightly bitter ones and some are good ones. So far, I am glad to say that I have not made any realised losses from the stock market yet. In fact, I have made steady returns of approximately 13% per annum over the past 3 years plus of investing mainly through recurring cash flows from dividends received from my stocks investments and some gains through selling of shares (a lesser amount though compared to dividends received). This figure of returns may not be exceptionally significant, but it is already better than most other alternative forms of investments. Also, I have not made a single realised loss on my investments so far.

I have learnt through my humble experience in investing so far that it is better to have the mindset of building assets that return stable continuous cash flow than to invest for quick returns. Even if one is going for an accelerated way of investing by investing for appreciation in value of assets (be it paper assets like stocks and shares or physical assets like real estate properties), one must still own an increasing amount of assets through the years that provides recurring and increasing cash flow that can beat inflation over the years.

Getting positive cash flow through owning assets is really everything about successful investing. Appreciation in value of assets is an icing on the cake. Even after one sells off an asset that has appreciated in value and made a gain, he is still faced with the decision to reinvest his gains and original capital into another asset. If he does not reinvest his cash, then cash will depreciate in value over time. By not investing one's cash, one is getting poorer by the days.

Ultimately, I believe the distinction between rich and poor people is just in the mentality of how they view money. The rich becomes financially educated and invests to control or own assets that provide them recurring and increasing cash flow that fights inflation. Of course, any appreciation in value of the assets is also welcomed. The poor views investing as risky or is just ignorant of the merits of doing proper investments. The simple key to successful investing is just to continue learning how to invest and just do it and really learn from mistakes and successes whenever investment decisions are made.

The more learning and experience one gains through own research and learning from mentors, the better it becomes as one matures in his investing journey. As I have already expressed in an earlier post quite sometime ago, my view on successful investing has not changed now. Building up the amount of high quality assets one can have the most control (be it paper assets - this tends to have lesser control for the investor as shares are just meager part-ownership of an invested company unless one is a major shareholder, physical assets or business) over time and getting increasing recurring cash flow which beats inflation will allow one to reach financial freedom sometime in life. Cash flow received from assets is further plough back to reinvest in more quality assets which further increases cash flow. This is a virtuous cycle of increasing cash flow over time (by compounding), cash flow that further feeds more cash flow.

Patience and endurance to resist instant gratification in seeing immediate gains is important. Surprisingly, I learnt through these three years plus of investing that money goes to the one who is not greedy for it. The more one is not greedy for money, the more rational and composed one is when it comes to long term financial planning and constantly making the right investment decisions. It is all about the mindset of the investor. The success and failure of investing is not so much affected by the economy, but often it is the wrong emotions of greed and fear that causes the investor to make unwise investing decisions.

I will continue to look out first and foremost for quality assets (be it in paper or physical assets or business) to invest for good quality cash flow while secondly welcoming the idea of appreciation in value of invested assets. Building cash flow through owning and controlling more and more quality assets over time that beat inflation heads down is the crux of successful investing that will enable one to reach financial freedom. Better yet is that the quality assets one has owned can appreciate in value over time. This simple rule of successful investing has not changed through the ages. I believe it will not in future too.

Are you into building more and more positive cash flow (by owning and controlling more quality assets) or "building" more and more negative cash flow over time (by spending more than one's income, chalking up bad debts or making unwise investment not in cash flow producing assets but in investments that may lose their value in the end resulting in a loss)? If 'cash' thinks that it is really king, 'cash flow' will be laughing his heads off at 'cash'. Perhaps, the mindset of wanting cash flow is probably better than the mindset of wanting cash when it comes to successful investing?

Think of cash flow investing as installing more and more taps that can be opened to provide more and more cash inflows. The choice of the right taps to install is important so that the right taps (quality cash flow positive assets) can continually provide more and more cash inflows over a long period of time to build one's passive income.

Differentiate - For it does not pay to be a copycat!

In the business world and our lives, there are so many different things happening around us constantly. Everyone of us is in one way or another trading our time, effort and knowledge for a living. Time, effort and knowledge can be seen as forms of products and services offered to help answer another's needs or problems. Businesses are providing products and services and getting paid by their customers for such provision. Employees are being paid by their employers for their services. There are so many businesses vying for market share for their products and services as well as job-seekers going around looking for potential employers to persuade them to consider employing their services in order to secure a living.

With so much competition between businesses, job-seekers and even employees on their jobs, what makes a winner stands out among the crowd. The magic element is "differentiation". There is no incentive in being a copycat, an exact replica of another. By being a copycat, an individual or business can only at best be as good as the original and nothing better. To be a copycat also means being a follower, one who has no leadership in pushing frontiers to always explore better ways of doing things and improving oneself. The only means to a copycat is to imitate another leader. The copycat may survive for a while by imitation, but since there is no real innovation and tenacity to constantly better oneself, the copycat will sooner or later cease to survive once it cannot catch up with being a copycat of the leader.   

As such, the only means to keep improving oneself or even to survive in this competitive environment of business and life is to "differentiate". In businesses, differentiation means having a unique selling point, how the business can be seen as different from it's competitors. To be different just for the sake of being different does not work. What works in differentiation is to differentiate in ways that better serve the needs of a target niche market.

There is no such thing as a forever market leader. There is also no such thing as a perfect market leader that can always serve their niche market in all perfectness. There are always unanswered avenues for innovation and improvement of products and services to better answer the needs of a niche market. The business that fails to constantly differentiate in ways that better serve their niche market will eventually lose out to another business that is able to differentiate their products and services to better answer the needs of their niche market.  

What are the ways a business can differentiate? There are five strategies of differentiation as follows:-

1. Differentiate by being the leader.

2. Differentiate by being the specialist.

3. Differentiate by pricing.

4. Differentiate by design.

5. Differentiate by polarity positioning.

Differentiate by being the leader

A business can differentiate by being a leader of it's niche market. This means being the first in the market to offer a new solution to an existing problem. This new solution is in the form of a new product/ service that will better solve an existing problem. By being a leader in one's niche market, the new solutions in the form of new products/ services will gain market share rapidly since these new products/ services can indeed better solve an existing problem or answer a need of the niche market better than other products/ services around.

An example of such differentiation by being the leader can be found in the health and wellness industry where chairs are no longer just for sitting, but have gone through innovation to include massage capabilities so one not only sits but sitting becomes relaxation and enjoyment for consumers of such massage chairs.

Another example of differentiation by being the leader is in Apple's invention of it's first Apple iphones to include the keypad within the screen of the phone so it becomes a touchscreen and some computer desktop capabilities are also merged into the small touchscreen. Thus, one can operate the smartphone as both a phone and computer but at so much smaller size and with the natural convenience of touch using fingers on touchscreens.

Differentiate by being the specialist

A business can also differentiate by being the specialist in it's niche market. The niche market always look out for the best specialist which is the best in solving an existing problem compared to other competitors around. Usually, this involves a company focusing on one point in it's product or service offering and working to become the best in the market in that critical selling point. This selling point may not necessarily be a unique one, but it is definitely the best selling point for the specialist.

For example, a transport company can differentiate by being a specialist in providing the fastest transport service around. Another transport company can focus by being a specialist in providing the most reliable transport service around, making sure it maintains a clean track record of no damage ever to any goods transported under it's service.

Differentiate by pricing

Another way a business can differentiate itself is by pricing of it's products or services. A business should try not to compete based on prices alone. Mere competition by price wars does more harm than good to the business profit margins. In order not to compete on prices, businesses must offer unique products and services of premium quality so as to charge higher premium prices on the unique products and services.

The niche market may not readily accept higher prices for premium products and services offered. Thus, a company must communicate clearly and carefully to justify the higher price that it's niche market is paying for an added premium value of the superior products and services that can better solve their existing problems.

Differentiate by design

Differentiating by design involves a company aligning the ways it work to it's brand image. A company can focus on a few major qualities that are congruent to it's brand image and make sure it keeps to delivering on the qualities.

For example, a pizza company wants to project a brand image of always being polite and understanding the needs of it's customers. It can train it's employees to greet it's customers with a certain style and manner that projects politeness. It can also train it's employees on particular ways to handle complaints from customers that still project politeness even in difficult situations. To understand the needs of it's customers, the pizza company can have a customer feedback system to receive feedback ratings and suggestions on ways the company can better it's pizza products and customer services.

Thus, a company that can constantly deliver on the promises and qualities of it's brand image will be able to differentiate itself by design.

Differentiate by polarity positioning

Differentiating by polarity positioning involves doing things differently from one's competitors to achieve the same desired solution to an existing problem for one's niche market.

For example, airline companies provide the same solution to their market which is to carry their customers (their passengers) safely from one destination to another within reasonable travelling time. However, airline companies do not deliver this solution in the same way. Singapore airlines pride itself on providing it's customers with luxurious and premium quality flight experience while budget airlines provide their customers with a low cost and simple but still reasonable air travel experience. 

Thus, businesses can do things very differently from their competitors by different polarity positioning while achieving similar promise of solution to the niche market's problem. 

Conclusion

To increase business profit margins and expand market share, businesses must differentiate themselves from their competitors. It is damaging to businesses serving the same niche market to be competiting on similar terms and prices.

I recall a biology topic of interest that also provides an analogy to survival by differentiation. It is the topic of natural selection. In the harsh living environment, individuals of the same species (e.g. we humans) are found to be not exactly the same with one another. This differences in the individuals allow some individuals of the species to still survive when the harsh environment changes. Such individuals are the fitter ones with desirable characteristics that are able to survive in the changed environment. Should the original members of the same species be exact copies of one another, a sudden change in the environment would have wipe out the entire species. Thus, we see the merit of being different in the correct ways (for the fitter individuals) according to the rules of the changed environment, working out to ensure survival of these members of the species.

Differentiation in the correct manner is not only desirable, but necessary for survival in the harsh environment of life and business. Differentiation is also about a business providing unique and better experiences for it's customers that they cannot find elsewhere from the competitors.

Be similarly crowded out and suffocate or be different from the crowd in better ways.

Differentiate.......do it or die.