Real Estate is (almost) a Ponzi Scheme

[Full Disclosure: I’m a licensed real estate salesperson with PropNex. Updating and maintaining this blog helps me condense and express my thoughts about the real estate scene in Singapore. Hope you enjoy the read! Feel free to ask me any question here, or drop me a DM on Facebook.]

The words ‘Ponzi Scheme’ typically conjure up feelings of apprehension, suspicion, and even downright disgust for the average listener. After all, who hasn’t heard of real-life horror stories or two from their cousin, acquaintance, or co-worker about this often misleading and almost always fraudulent investment strategy? Therefore, to pronounce that the real estate market is (almost) Ponzi Scheme is a bold claim. But the parenthetical ‘almost’ is there for a reason.

In this article, I outline the similarities AND differences between a Ponzi Scheme and the real estate market, which will shed light on the fundamental principles of the real estate market. If you read on, you get to the fun part. Virtually everyone comes out of a Ponzi Scheme sucked high and dry, but with the knowledge that I impart, you can emerge victorious in your real estate investments.

Ponzi Scheme 101

On investopedia.com, James Chen summarizes the definition of a Ponzi Scheme succinctly: a ‘fraudulent investing scam promising high rates of return with little risk to investors.’ In the Ponzi funnel, money invested by new investors is used to pay earlier investors, so on and so forth. Therefore, client acquisition is the top priority in every Scheme, as they unravel as soon as ‘… the flood of new investors dries up and there isn’t enough money to go around.’

You would probably agree that this is a terrible way to invest hard-earned money. After all, no money is actually generated in the Scheme. Money is simply being passed on from one batch of investors to another, with no firm guarantee that more money flows into the funnel. So why do people still fall for this?

A vision. High returns, low risk and effort required. Gullible investors are being sold a vision of a picture-perfect investment strategy that promises what they desire: monetary gain, and lots of it.

Real Estate: A Fantasy and Safe Haven?

Now let’s take a look at the real estate market. In the first step of the real estate funnel, developers market and sell brand new properties to their first owners. The developers pocket the profits. The first owners then sell the properties to the second owners, and they pocket profits in the process. The pattern is clear now: the process goes on and on.

The real estate market is reminiscent of a Ponzi Scheme in that the asset — the property — is passed down the funnel, allowing earlier investors to profit off later investors. But of course, there are differences between actual Ponzi Schemes and the real estate market. For one, unlike the empty hollowness of a Ponzi Scheme, the real estate market is brimming with value. Lots of it. Real estate is ‘real’. It will always be worth something; in many cases, a lot. And that’s the vision of being in real estate. It sounds like a worthy game to play. Yes, there may be risks, but at the end of the day, you have physical space to occupy and a roof over your head. It’s tangible, it’s secure, and it can never disappear in thin air.

There is and will always be interest in real estate investing. It seems like a no-brainer to invest in a starter property or two once you have the financial means to. Owning a house is regarded as a milestone in adulthood, regardless of the culture or climate. However, are there any catches to participating in the real estate market?

Real Estate: Look Closer

Here are my two cents: you should stay cautious even when investing in something as ‘tangible’ and ‘low-risk’ as real estate. This is because there is a cap on how much the price of a property can increase. After all, that’s how markets work. Many factors play into the supply, the demand, and the pricing. If you enter the game as a 3rd or 4th owner, more likely than not you will end up making very little profit. As you also have to absorb the cost of owning the property, renting the property might actually be the more economical option.

This is definitely an unpopular opinion: sometimes you’re better off being a tenant. If you don’t do your due diligence, being a homeowner can and will put you at a disadvantage. Just getting into a Ponzi Scheme, accidentally or intentionally, does. If you choose the wrong property to purchase, you lock your name and equity into a deadweight asset — assets that could have been used to generate MORE assets.

How, then, should we proceed in the game of real estate? Suddenly, it seems as though traps are everywhere. As a real estate agent with over a decade’s worth of experience under my belt, this is my advice to you: identify what you want to get out of your real estate investment. What does the property mean to you? A place to stay? A weekend getaway? An annual investment? Why are you investing in it, and why that one specifically?

Final Thoughts

If you simply need a postcode and bed, there is more than one way of achieving this, because this is a need that has a relatively lower threshold for fulfilment. Again, unpopular opinion, but you can rent instead of buying. On the other hand, I advocate for buying properties that make financial sense if you are hoping to profit even a little in the future from your properties.

The vision of being a homeowner isn’t enough. Visions don’t earn you money. It may be hip to say that you are ‘in real estate’, but it takes much more than dumping a down payment into the first thing recommended by friend’s friend’s cousin. If you want to make money in real estate, move like you would a high stakes chess game. It may look and sound like a Ponzi Scheme, but certainly: don’t act like you’re in one.

Do you agree that the real estate market is a Ponzi Scheme? Are you desperate to break from one? Or simply interested in a slice of the real estate market in Singapore? I welcome any enquiries and interesting conversation; please feel free to reach out to me at +65 84845484 or thomastongs@gmail.com. You can also receive real estate advice from me via Facebook and Instagram.