Applying Sun ZI Art of War in Real Estate Property Investment
For the uninitiated, The Art of War is an ancient Chinese military treatise dating from the Late Spring and Autumn Period. The work, which is attributed to the ancient Chinese military strategist Sun Tzu, or Sun Zi, is composed of 13 chapters. In today’s post, we shall use Sun Zi’s Art of War and relate it to Real Estate Property Investment. Particularly, 10 out of the 13 chapters in The Art of War is relevant to property investment, and I actually used some of the concepts in the book and applied it to my experience in purchasing investment properties. We shall take a deep dive into some of these core principles today. Let’s go!
The 13 Chapters
In Sun Zi Art of War, there are 13 chapters, namely:
- Laying Plans
- Waging War
- Attack by Strategy
- Tactical Dispositions
- Weak Points and Strong
- Variation in Tactics
- The Army on the March
- The Nine Situations
- The Attack by Fire
- The Use of Spies
As mentioned, 10 of these chapters (underlined) are relevant to real estate investment, and we’ll be going through them today.
Chapter 1: Laying Plans
“25. Now the general who wins a battle makes many calculations in his temple ere the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus do many calculations lead to victory, and few calculations to defeat: how much more no calculation at all! It is by attention to this point that I can foresee who is likely to win or lose.”
Chapter 1 is particularly important because it points to the fact that preparation can lead to victory, and that a lack of preparation will certainly lead to defeat. In terms of property investment, you have to do your due diligence to do the following:
- Compare property attributes
- Know the selling points and advantages of each property
- Find favourable factors that are unique to the property
- Examine the market situation thoroughly
- Continuously analyse the strengths and weaknesses of your competitor properties
In order to do all of these, you’ll have to know the characteristics of good investment properties. There are 4 main things to look at—location, growth area, potential tenant pool, and accessibility and amenities.
In terms of location, buyers can choose from properties located in the Core Central Region, Rest of Central Region, and Outside Central Region. In order to choose the property that is best in terms of investment potential, you could use the Singapore Property Price Index Tool on my website here. You’ll find that properties in the Core Central Region have not reached its peak pricing. As a result, I will typically advice my clients to invest in a property in this region in 2021.
It is not just enough to look at your entry strategy. You should also think of your exit strategy. In this sense, it is important to look at the growth area of the property that you are looking at. For example, if you intend to buy a property and hold it for 10 years before selling it, you’ll have to know what the potential and expected changes are in the area. This means that you should know what MRT stations will pop up near your new home, what amenities or shopping centres will soon be built, and more.
On top of your entry and exit strategy, you should also be very clear as of who your potential tenants would be. In other words, where will your tenants come from, if you were to rent out your property?
Chapter 2: Waging War
“6. There is no instance of a country having benefited from prolonged warfare.”
“18. In war, then, let your great object be victory, not lengthy campaigns.”
The chapter of Waging War doesn’t seem like it could be relevant to property investments, but surprisingly, it does! Here are some tips that I’ve drawn from this chapter. First, everyone must profit from victories. We’ll always search for a win-win situation. This means that just as you want to make a profit from selling your property, your buyer must be able to see the growth potential and value in purchasing your property at a high price.
Second, part of waging war in the process of property investment is to do proper research and calculations. And once you’ve done that and determined a good property, do not hesitate, act fast, without delay or feel that you can always “find a better one”. That’s because there are a ton of property investors in Singapore—they are all after that one good property. Once you hesitate, someone else who acts fast will grab the chance to get the property.
Third, remember to buy early at launch. For this, there are two concepts that you have to know that we’ve discussed about before—the Yield Management Concept and Developer Pricing Strategy. In knowing the two concepts, you’ll understand that when a developer sells units at a launch, the first few units sold are to cover cost. Subsequent later units are sold for profit. Therefore, always buy earlier when developers are at the earlier stage of covering cost, instead of at a later stage where they’ll increase prices to earn a profit.
Finally, just like when you’re waging a war, don’t let your emotions cloud your vision. Research and calculate on your main objective in an objective manner.
Chapter 3: Attack by Strategy
Strategy flows naturally from knowing the capabilities of your army and that of your opponent.
“19. Hence the saying: If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” 191/840
Strategy is the logical outcome of self-study, self-mastery and observation of your opponent.
The key to chapter 3 is that research is the key to victory, and in doing so, you have to know yourself, know your enemy, and know your terrain. And we’ll dissect this in this section.
Knowing yourself means knowing your entry strategy and entering at a right price. That means you have to look not just at the property itself, but the surrounding properties, to compare if the price is right.
Knowing yourself also means to know your holding strategy. To be able to hold the property, you should be able to rent it out. Therefore, you should research on the tenant pool around the property.
Next, knowing yourself includes knowing your exit strategy. To do so, you could look at URA Master Plan to know the growth potential of the area so that you can plan when you should sell the property, or your exit strategy.
Finally, knowing yourself includes learning about your safety net. In other words, what is the holding power and protection that is available for you.
Knowing your enemy
In this case, your enemy refers to your competitor’s properties. To know your enemy, you have to look at the price of your neighbouring properties, the unique selling points of each property, the developer of each property and their respective leases. These will point to the quality and finishing of the completed property and are therefore important for you to look at.
You should also know the profile of your potential buyers and their objectives of buying the property. To do so, you have to profile your buyer. Here are some questions you should be asking:
- Are they buying it for their own stay or for investments?
- How old are they?
- What type of jobs do they hold?
- Where do they typically work?
- How much money are they making?
- How are these buyers going to travel around in terms of transport?
- What sort of lifestyles do they lead?
With this information, you can ascertain their budget and sell to them more effectively. For example, buyers who are buying for own stay will not be concerned with minor fluctuations in the market. That’s because their focus is on capital appreciation and long-term investment horizon of about 10 years. On the other hand, buyers who are buying a property for investment look to factors like return-of-investment, rentability, capital appreciation, as well as a shorter investment horizon of about 5 years.
Knowing your terrain
In terms of property investment, terrain refers to the economy/GDP, bank interest, as well as the market cycle. These natural elements are outside of our control. However, if we can time things right, we will know when is the right time to enter the market.
Chapter 4: Tactical Dispositions
“14. Hence the skillful fighter puts himself into a position which makes defeat impossible, and does not miss the moment for defeating the enemy.”
“15. Thus it is that in war the victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory.”
In chapter 4, you have to ask yourself these key questions:
- What are your tactics when it comes to investing?
- Why are you investing?
- Are you investing for rental or capital appreciation?
- Are you looking at a more defensive or offensive property?
- Tactics used in the defense are different than those used in the offense.
- When do you want to Exit?
Remember, your money is your army, and when you have done proper research and calculations, you will be able to utilize and mobilize your army to go far.
Chapter 6: Weak Points & Strong
“2. Therefore the clever combatant imposes his will on the enemy, but does not allow the enemy’s will to be imposed on him.”
“30. So in war, the way is to avoid what is strong and to strike at what is weak.”
In chapter 6, your enemy is your property. You have to know the strengths and weaknesses of your property so that when you are selling it, you’re able to “hide” the weaknesses to allow your property to have a higher value, and sell the strengths and market it to the buyer.
Chapter 7: Variations in Tactics
In chapter 7, Sun Zi builds on his biggest principles from earlier chapters, namely, Strategy is the logical outcome of knowing your strengths and your opponent’s weaknesses. Your goal is to win, but to do so you must not lose.
“There are roads which must not followed, armies which must be not attacked, towns which must not be besieged, positions which must not be contested, commands of the sovereign which must not be obeyed.”
There are five dangerous faults which may affect a general:
- Recklessness, which leads to destruction;
- Cowardice, which leads to capture;
- Hasty temper, which can be provoked by insults,
- A delicacy of honour which is sensitive to shame;
- Over-solicitude for his men, which exposes him to worry and trouble.
Applying this to property investment, we see that there are certain properties that should not be touched upon, no matter how cheap or tempting they may be. An example would be En bloc properties. In my experience, many of my clients wish to purchase En bloc properties, in hopes that they will make a quick buck when the property is called for En bloc. However, that is not always true. Sometimes, En bloc may fail and sellers might market the property that it is likely to be En bloc when it actual fact it may not. Remember, your seller is also your enemy—sellers would always want to fetch the highest possible price for the property.
Chapter 10: Terrain
Chapter 10 is about focusing on your options and knowing your battlefield. To do so, it is essential to arrive early and get the best positions. In other words, there exists a First Mover Advantage—the first person to enter the market will always win. However, in questionable markets, let your competitor enter first to determine whether opportunities exist.
When we talk about focusing on your options, it is important to understand not to limit your options. Ask yourself if residential property is your only option. Have you considered other options like commercial, industrial, or overseas properties? It is also important to learn about the financing options that are available for you out there. Besides taking a housing loan, have you thought of pledging or unpledged loans? What about equity loans?
In addition, are there other ways to legally avoid ABSD?
Chapter 11: The Nine Situations
“32 The principle on which to manage an army is to set up one standard of courage which all must reach.”
In this chapter, we’ll talk about the importance of having a proper investing system and to invest in the right fundamentals. Here are some key things that you have to pay attention to.
- Choose a favourable battleground
- You must consider the situation of each opportunity well
- Do not attack or defend where you cannot have the advantage
- You must have the ability to hold onto the property, despite hard times, for example, you should have essential financial prudence to tide out, say a pandemic situation. Check out our Affordability Calculator.
- Speed is essential. Move rapidly and miss no opportunity
- When you see a good property, act fast and smart
- Devise winning plans and actively solicit new resources.
- Always re-evaluate your portfolio (At least once a year)
- Make certain the consequences of failure of the organization are understood.
- Understand why others failed and avoid the mistakes that they made
Chapter 12: The Attack by Fire
“19 If it is to your advantage, make a forward move; if not, stay where you are.”
“3 There is a proper season for making attacks with fire, and special days for starting a Conflagration (extensive fire).”
This chapter also emphasizes the importance of attacking only when you see an advantage. This means that you should already know when is the best time to attack, or to sell the property, before you go ahead to make the purchase of the property.
The proper season to attack also refers to the proper area to attack—growth areas. This is where the URA Masterplan comes in to let you know about future developments. Growth areas add to the value of your property and new businesses and lifestyle centres will increase your tenant pool. When your property is easy to rent, it’ll naturally be easy to sell, which leads to a higher capital appreciation.
You should also have multiple exit strategies planned out. Take a look at the example below.
You’ll see that each of the listed projects have multiple exit points, and that’s extremely important when you are looking for a good property to invest in.
This is something special which I do for all my clients. We use tools to analysis which properties in Singapore are the best, next we zoom in to 3-4 projects and do a comparison, analysing their growth potential, holding power (rental) and the potential exit points.
Eg, I would recommend Kent Ridge Hill for more investment and use for rental as the development is closer to Business Centres, but I would recommend Parc Esta for a project more for own stay due to closer to MRT and also more good schools around the vicinity.
Chapter 13: The Use of Spies
In the final chapter, Sun Zi tells how spies—those that provide data and insight about the capabilities of the opposition—are to be used to win battles.
“3. Thus the highest form of generalship is to baulk the enemy’s plans; the next best is to prevent the junction of the enemy’s forces; the next in order is to attack the enemy’s army in the field; and the worst policy of all is to besiege walled cities.”
In other words, good information is critical to success. This information must come from those who know the situation. Your agents, consultants, bankers, and lawyers are your spies in this case. They will be the ones to provide you with the information and research that you need. So, remember to be nice to them!
Let us end with a final quote:
“27 Hence it is only the enlightened ruler and the wise general who will use the highest intelligence of the army for purposes of spying, and thereby they achieve great results.”
If the goal of war is to win battles that must be fought, then use of data and intelligence to prevent battles from being fought is a noble purpose. Be sure to keep in mind the concepts in Sun Zi’s Art of War and apply it to your real estate property investment!