Is It Better To Buy A Residential Property First Before Building A Investment Portfolio, or The Other Way Round?

After dabbling with investing for more than a decade now, I have the following thought of property versus portfolio, and wonder how things will turn out if I have done things differently.  Before I begin, kindly note that all perspectives below are my personal viewpoints, which may be biased and have limited scope, and caters to my personal circumstances of being a single Singapore Permanent Resident and is unable to purchase HDB flat of any kind, hence only able to consider private property.  Do perform your own due diligence.

Is it better to build up a dividend portfolio first and then use dividend income generated to save up for the down-payment for a residential property, and subsequently use the dividends to pay for the monthly instalments of the property, or will it be better to buy the residential property as early as possible before building a dividend portfolio?

Personally, I did the latter.  One important thing to note here is that the main purpose of the private residential property is meant for own stay and not meant for investment.  The most that can be done with it is room rental and not whole unit rental (again, this is to cater to my personal situation).  Perhaps it is the effect of "grass is greener on the other side", I think that building up a dividend portfolio before a private property purchase seems to be better financially.  To validate my thoughts, I suppose I will dig in deeper into the pros and cons of both methodologies.

Kindly note that the decision to build up a dividend portfolio first or buy a property as early as possible depends very much on individual's financial goals, risk tolerance, and personal circumstances.  Both options have their own advantages and considerations.  

Building a Dividend Portfolio First- Pros:

1)    Income Generation

Building a dividend portfolio allows you to generate a steady stream of passive income from dividend payments, which can be used to cover expenses, including property-related costs.  At the same time, the capital amount is not depleted, although the market value of the portfolio may fluctuation based on market conditions.  However, short-term price volatility should not matter much to income investor, as long as the business fundamentals remain strong and impact on dividends are minimal.

2)    Flexibility 

A dividend portfolio provides you with flexibility and liquidity.  Ever quarterly or semi-annually, one can access the funds relatively easily when the dividends are paid out, which can be useful for various purposes.  On the flip side, if the lump sum is paid as down-payment for property at the beginning, that amount will not be available anytime soon, and that may cause short term cash-flow issues in times of emergencies.

Building a Dividend Portfolio First- Cons:

1)    Time Considerations: 

Building a dividend portfolio takes time, especially if you plan to accumulate a substantial amount of income-generating assets. It may delay your property purchase.  The most impactful about this is the probability of facing runaway prices of residential properties during this period of growing one's portfolio.  For instance, it may take about 5 years to build a SGD 200K portfolio.  During the same period, using the following property as an example (assuming 860 sqft unit in OCR) the down-payment and taxes required (about 28%) for the same property may have risen from about SGD 235K to about SGD 280K.  At this pace, property purchase may end up being a chasing game, as the amount to save for down-payment and miscellaneous keeps increasing year after year.

2)    Market Volatility: 

Stock markets can be volatile, and dividend payments are not guaranteed. If you rely solely on dividend income for property payments, fluctuations in the market could affect your ability to cover your expenses.  One example will be what happened to the REITs and Banks during the pandemic, where the distribution per unit declined up to 60%.  In such times, the reduced dividend payout may no longer be sufficient to cover monthly instalments of the property, and cash from other sources will be required for top up, which defeats the purpose of this strategy.

Buying Property Early- Pros:

1)    Potential Appreciation: 

Real estate has the potential to appreciate in value over time, allowing you to build equity and potentially benefit from capital gains.  Hence buying a property before building the dividend portfolio can allow one to tap into these capital gains and use it to benefit both property and dividend portfolio.  This is basically the top benefit I have experienced, as I sold off the first property at a profit, and downgraded to a smaller property.  The profit from the sale received in cash allowed me to inject that as capital into my dividend portfolio to speed up the growth of the portfolio.  However, I would like to highlight that the success of this scenario is very much limited to properties in Singapore.  I would not recommend this method for properties in other countries (based on what I know).  Kindly do your due diligence.

2)    Rental Income: 

If one plans to rent out the property, it can provide a consistent income stream that can help offset expenses or contribute to the growth of the dividend portfolio.  However for myself, as I was only able to rent out a common room, the rental income can only offset a small part of my mortgage payment and not able to grow my portfolio.

3)    Leverage and Mortgage Payments: 

By buying property early, one can leverage financing options such as mortgages, allowing individuals to acquire an asset with relatively little upfront capital and potentially benefit from property value appreciation.

Buying Property Early- Cons:

1)    Higher Financial Commitment: 

Purchasing a property typically requires a significant financial commitment, including down payment, closing costs, maintenance expenses, and potential mortgage payments.  This may limit one's ability to allocate funds to dividend investments initially.  This is especially so for my personal case.  A relatively low income will mean that I can only meaningfully allocate funds to only one of the purpose at a time (and I chose property first).  

2)    Market Risks: 

Real estate markets can be volatile, and there is no guarantee of property value appreciation.  Individuals may face challenges if property values decline or if one experience difficulty finding tenants.  Therefore, always understand personal circumstances and do due diligence before plunging in.  Property always lacks the rapid liquidity that investment portfolio provides.

Ultimately, it is important to consider your personal long-term financial goals, risk tolerance, and time horizon.  Some individuals may prefer to focus on building a dividend portfolio first to establish a passive income stream, while others may prioritize acquiring property early to benefit from potential appreciation and rental income.  It could be beneficial to consult with a financial advisor who can provide personalized guidance based on your specific circumstances.  Whatever it is, hope that every investor does well in your plans and strategies!  

In a closing thought, I would like to share this video of an interview with a 90 year old who stayed in Singapore since 1961.  To quote him, "I should have bought a house here last time, in the 1960s.  My friend bought a house for SGD 80K, which is now worth more than SGD 8M.  The value of money has changed tremendously from 1960s compared to now."  His words kind of validate what I have done is quite right, to get a residence as soon as possible.  Nonetheless, do the best for your financial situations, within your abilities.  Barista FIRE, here I come...!