Friday, November 18, 2016

How a visit from an old ex-colleague made me $100,000 richer !

On Tuesday, an old friend decided to come all the way to my home for a visit. My friend is transitioning quite well into real estate sales and was kind enough to share some really basic tips with me on managing my own property.

As you guys might know, while I have quite a decent amount of REITs in my portfolio, I am not too familiar with actual real estate. I live in an Executive Condominium which I service with the money I have left in my CPF-OA. Personally, I don't really think very much about my primary residence because I expect to live in it up to the medium term because my kids would have to go to school nearby. Furthermore, five years is not even up so I would not have been able to have a decent sale even if I wanted to.

So my friend introduced me to SRX, which allows me to input my home address and it would spit out an estimate of the value of my home along with the mount it would fetch if I rented it out. And, lo and behold, it gave me a valuation which is almost $100,000 higher than the price I paid for.

I have always been quite conservative in counting my net worth. For my EC, I simply took its value as the amount which I paid for when computing my net worth. Because my friend showed me the possibly of a different way to calculate the value of my home, I was made instantly richer.

You might ask why is this important at all ? It's all psychological right ?

Not exactly so.

Section 4A of the Securities and Futures Act defines an accredited investor as as someone whose personal assets exceed $2,000,000 or whose income in the last 12 months exceeds $300,000. My friend's "revaluation" of my property puts me very close into striking distance of accredited investor territory even though I had been unemployed for the past 3 years !

I think this is one area of the law which deserves some degree of reform in the future.

I'm not too sure accredited status should factor in a person's primary residence. A lot of Singaporean Baby Boomers qualified for AI status because they sat on their landed property for decades but have no real access to liquid assets or the knowledge to deal with sophisticated instruments.

Right now I have yet to reach AI status so I still cannot confirm whether this is a good or a bad thing. But based on what I know, some of the good things I qualify for are the more prominent value based funds ( like Aggregate ) and not to mention BFP's new flagship Angel investing course.

But with the good comes the bad.

The general approach is that accredited investors can look after themselves and regulation is quite lax for businesses which only deal with AIs. Land banking can no longer harm retail investors but it can still attract business from accredited investors. There is also a problem with diversification. If I need $250,000 to buy one structured note position, I would not be diversified even if I have $2,000,000 in my portfolio.

All in all, try not to lose the protection given to retail investors even if suddenly find yourself an accredited investor, the government puts it there for a good reason.

Anyway, if I ever volunteer to give up this protection and charge into accredited investor territory, I would probably have to be also very willing to put my legal training into good use.

So, what did my friend get for making me $100,000 richer ?

I bought him kopi and Thosai.











 

5 comments:

Retireby35.SgStyle said...

That's essentially the crux of the problem. The system allows for counting of the primary residence into the net worth determination 'accredited investor', which has resulted in a lot of mom and pop investors getting burned by the series of retail bonds aimed at the private banking market.

One classic case, albeit anecdotal is that one of these PB investors actually thought a coupon was with reference to a parking coupon...

Cory said...

It makes no sense if a multi-millionaire could buy a $5M home and yet be protected due to he has low cash if we exclude his residence.

We could pull the bar higher on the net worth of a person. It makes no sense to protect people who refuse to sell their expensive home when they are in financial trouble. They need to own their problem.



Christopher Ng Wai Chung said...

Both your feedback makes sense.

My idea of a compromise is to lower the bar to be an accredited investor to $1M but the equity and debt from a person's primary residence is excluded from calculation.

This keeps investors safe but will not overly shrink the pool of AIs which financial institutions need to sustain themselves.

Bruce said...

sorry for off the topic a bit.

is Thosai the indian pancake type(Dosa)?

Christopher Ng Wai Chung said...

Yes ! The breakfast of champions.

But in Singapore, Thosai seems to be the common term.