Why not use a flat deposit to start a business?
Savings do not have to be used to buy a flat - using them to start a business can be worth it
As a property reporter, I often receive questions from readers and friends about the property market.
The most common question is whether now is the best time to buy a flat, but a 29-year-old man asked me recently whether he should spend his HK$1 million in savings on buying a home or starting up a new business.
"Since I am a fan of music and coffee, it has been my dream to open a café where people can enjoy music and coffee together," he said.
"I also hope to sell musical instruments and CDs at the café, if possible. I have been working and saving very hard to pursue this dream.
"But when I discuss the plan with my parents, they are strongly opposed to it, saying retail rents in Hong Kong are too high, and thus the profit margin for a café will be too low.
"They say I should use the money to buy a flat, instead."
It is quite typical for Hong Kong parents to prefer their children to buy a flat than take the risk of starting a business.
But let's look more carefully at the two options.
First, what kind of home can one buy with a HK$1 million down payment in the present market?
Assuming he pays about 30 per cent of the flat's price as a down payment, he will be able to borrow enough to buy a unit priced at HK$3 million or less.
If he has a stable job and income, he could borrow more money and pay only 10 per cent of the flat price as down payment. Then he would be able to buy a HK$4 million home, for which he would have to make mortgage payments for the next 30 years.
With a budget of HK$3 million to HK$4 million, he could buy, for example, a 30-year-old flat with a gross floor area of about 400 square feet at City One Shatin or a 595 sq ft flat at Yoho Town in Yuen Long.
"It really depends on what he wants to buy a home for - whether it is for his own use or as an investment," said Willy Liu Wai-keung, chief executive of real estate agency Ricacorp Properties.
"If it's for rental income, the yield is now over 3 per cent per annum, which is definitely a better return than putting the money in the bank.
"Starting up a business is about building a career, which can be something totally different. It can generate more income if he is good at it. But if he is just investing money in the business and asks someone to take care of it, it's more like a pure investment, and the profit margin depends on the type of business."
Liu said the rent for upper-floor premises in Causeway Bay or Mong Kok could go as low as HK$30,000 to HK$50,000 per month.
To me, buying a home for long-term investment seems to be the safer option, since I do not think home prices will drop significantly in the long term, while running a business always has its risks.
However, if there were a chance that the music café business was sustainable, I think I would choose to pursue my dream if I were the 29-year-old man. That is an age at which one can face more risks and challenges. It is quite an achievement to have saved HK$1 million by this time, which may imply he can save even more if he continues to work hard. And he could still live with his parents.
If he can find some business partners to share the risks and costs, and ideally start up the business during his leisure time without quitting his job, his HK$1 million could probably be used to run his dream business for a while, as it would cover rent and other costs for about a year.
If the business wasn't looking good, he could always shut it down and cut his losses.
So why not?