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BY DANNY KO

PROPERTY INVESTMENT 101

DISCLAIMER
The ideas expressed are solely the opinions of the author. The
content on this site is provided as general information only and
should not be taken as investment advice. The author cannot
accept responsibility for any losses you may incur as a result
of this analysis. Individuals should consult with their personal
financial advisors.

Property Investment 101

PROPERTY INVESTMENT

101

Property investment has become increasingly


popular in Malaysia. It used to be the
necessity to own a property as home. But
now it becomes an investment. Property
investment concept is straight forward
where you buy the property and make a
profit when you sell. However, there are
many complicated situations that make the
process difficult. The process of acquiring
financing, getting accurate information or
perhaps selling the property with maximum
profit are some of the challenges investors
would experience during the course of their
investment journey.
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Property Investment 101

SECTION ONE

TYPES OF REAL ESTATE


INVESTMENT

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Property Investment 101

TYPES OF
REAL ESTATE INVESMENTS
Basic Rental Properties
A person will buy a property and rent it
out to a tenant. The owner, the landlord, is
responsible for paying the mortgage, taxes
and maintenance. The owner may charge
at certain amount of rent in order to have
surplus after deducting monthly repayment
of the mortgage. Most landlords will charge
enough rent to cover monthly mortgage
repayment but in some cases this is not
possible mainly due to high property prices
vs low rental rate. Whether a person should
be renting or buying, a simple indication is to
use Price to Rent Ratio (more at Investopedia).
Buying a property and renting it out is a
good investment strategy. However, there
are much more things you need to consider
when buying to rent. You need to take into
account such as adequate maintenance to
the property, bad tenant who damages the
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Property Investment 101

property or non-paying tenant, worse still,


where there is no tenant at all. Any of the
above is happening to you, then there is
likelihood that you will have negative cash
flow. The initial part tend to be the hardest
is to look for ideal property that is within
your budget and has low vacancy in the area.

Investment Groups
Real estate investment groups are like small
mutual funds for rental properties. If you
want to own a rental property, but dont
want the hassle of being a landlord, a real
estate investment group may be the right
strategy for you. In the overseas, it is usually
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Property Investment 101

manage by a company that will buy or build


a set of apartment or condos and then allow
investors to buy them through the company,
thus joining the group. In Malaysia, for
starters, is to have private investment group.
A typical private investment group has five to
eight members where they will buy a single
property at a time and sell them when the
price appreciated or long term for rental.
Many private investment groups can join
together and buy newly developed property
in bulk thus getting attractive discounts from
developers.
If you are investing through a company,
they will manage all the units, taking care of
maintenance, advertising vacant units etc.
For these, the company takes a percentage
of the monthly rent or when the property is
sold.

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Property Investment 101

Trading (Flipping) Properties


Property trading is when a person buys
properties with the intention of holding
them for a short period of time, usually the
properties are being kept up to six months.
When the time is right, the properties will be
sold for profit. Property trading is also called
flipping properties and is based on buying
properties that are either in very hot market
or really low in prices.
Similar to forex, a short term trade will give
you significant profit but when the market is
bad and turning against you, then it will spell
danger because property traders generally
dont keep enough cash to pay mortgage.

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Property Investment 101

REITs
A REIT is a type of security that invests in real
estate through property or mortgages and
often trades on major exchanges like a stock.
REITs provide investors with an extremely
liquid stake in real estate. They receive special
tax considerations and typically offer high
dividend yields.
To compare with other investment types,
REITs provide flexibility in term of investment
in many kind of real estates e.g. malls or
office buildings. Unlike other type of property
investments, investors can cash out easily
through REITs.

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Property Investment 101

SECTION TWO

WHY INVEST IN PROPERTY?

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WHY INVEST IN
PROPERTY?
Investing in property can create wealth
but only with the proper planning and exit
strategy. Most people know that in long term,
the price of property will appreciate though
at times there would be ups and downs. If
you are able to hold on during the market
turbulence, then there is likelihood for you
to make a huge profit from it.
If are not an expert in property, by all means
do your own home work and learn from
various websites out there that specialise
in education on investment. And of course,
there are plenty of ways to invest in property
without even need to know anything about
property such as REITs as introduced in
section one.
Most people think that property investment is
about making good profit in a short period of
time. Thats what happening in Malaysia few
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Property Investment 101

years back especially with the introduction of


Developer Interest Bearing Scheme (DIBS).
Property investment is more towards long
term investment. Those with holding power
will definitely make profit. The danger to jump
into property investment hoping to make
profit in short term is when the market is not
behaving the way you expected and your
cash is all locked in one property. Property is
not a liquid asset and therefore you cannot
simply cash out anytime you desire.

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Property Investment 101

Capital growth
The easiest way to determine capital growth
is overall appreciation of the property minus
the price that you bought it. For instance, if
you bought a property for RM500,000 and
after three years, the value appreciated
to RM590,000; then your capital growth is
RM90,000 for three years. That gives you
RM30,000 per year or 6.0% growth per year.

Rental yield
Rental yield is the money you received when
you rent out your property. If the property
your bought for RM500,000 and monthly
rental is RM1,800 per month; your annual
rental income would be RM21,600. Simply
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Property Investment 101

divide your annual rental income by your


property price (when you bought) to get
rental yield. For this scenario, the rental yield
for the property is 4.32%. Generally, investors
are looking at 6% rental yield as benchmark
for good rental. The higher the rental yield,
the better the rental income.

Getting the benchmark


To be honest, there is no blanket benchmark
for all properties as capital growth and rental
yield differ by location, type of properties,
demographic, states etc. An investor would
normally compare to what is considered as
safest and secure investment that guarantee
a return. For example, general fixed deposit
rate is 3% per annum and EPF is 6% dividend
per annum. Thats the minimum return an
investor should be looking at. Any investment
that fetch higher than those two investment
tools would consider a good return. But all
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Property Investment 101

these need to take into account for other risk


factors involved and investors risk appetite.
Always bear in mind when making your
investment as the higher the return, the
greater the risk. Contrary, the lower the
return, the safer and secure the investment.
As explained previously, general rental yield
is 6% per annum as benchmark. If the rental
yield for a property is on the benchmark,
then there is likelihood that the rental income
could break even your mortgage repayment.
Anything above is a plus.
Locating the location
This has been told many times that location
is one of the ultimate factor for property
investment that we cannot ignore. What
are the things to look for when determining
the location? Property gurus out there tell
us many times to follow two things the
infrastructure and where the money goes.
The infrastructure basically referring to
accessibility to highways, where the public
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transport is being built e.g. MRT, buses. Where


there are huge investments in certain area
whether they are private/foreign investors
or government, then those are the places
that worth to pay attention to. For instance,
the government announce in budget 2016
to allocate approximately RM11 billion for
development in Cyberjaya. Other factors
to consider when determining the location
are job opportunity, population growth, the
supply for same type of property in the area,
etc. Properties near hospital, universities or
colleges tend to fetch high rental income and
prices to appreciate more.

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Property Investment 101

When to buy
This is highly debatable by many property
gurus. There is never bad time to buy a
property as in long run, property prices will
definitely increase. Other property gurus
say otherwise to compare property as
stock market where you will need to always
buy low and sell high. For this, there is no
straight forward answer. But what generally
important to take note before investing in a
property is to ensure that you have sufficient
cash flow. A fund that you do not need in the
event of emergency. As we explained before,
property is not a liquid asset and cashing
out quickly is almost impossible unless you
are willing to let it go at loss. Other thing to
consider is whether you have sufficient fund
to service the mortgage repayment. Here we
refer to as holding power. Besides servicing
your mortgage, there are other indirect and
recurring cost such as maintenance, yearly
assessment fee, utilities, etc.

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Property Investment 101

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SECTION THREE

PROPERTY INVESTMENT
GUIDELINES

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SIMPLE GUIDELINES FOR


PROPERTY INVESTMENT
Know your capacity. Dont follow what other
people are doing. Do you own homework and
study carefully whether the investment is
suitable for you. You can follow these simple
steps before jumping in your investment
journey.
Step 1 - Setting up your goals
Determine your personal goal in property
investment. Are you looking for short term
or long term investment? The goals you set
will determine the strategy you will use. From
the stage of acquisition to exit strategy. It can
be mixed strategies but you need to list them
down in your property portfolio so that you
can track the performance and dispose the
properties when the time is right.

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Property Investment 101

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Step 2 Check for affordability


Compile a list of your assets and liabilities.
Next is your income and expenses. Determine
how much disposable income you may have
after deducting all expenses and outgoings.
This is useful when you need to calculate if
you could afford to invest in any property. In
addition, when you are getting financing from
banks, the banker will ask similar questions
and having such list will streamline the whole
process thus saving precious time.
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Property Investment 101

Step 3 Conduct own research


You cannot underestimate the power of
internet. You can pretty much search anything
on the internet and get them answered.
Nowadays, there any many property websites
that provide free education, news updates
etc. Read more about general property
investment tips and conduct a research on
the area that you are familiar with. A tip from
Bih Yeong (the author for Salary Man: Cracking
The Property Investment Code) is to draw a
3km radius on a map at the centre of your
preferred location. Plot similar properties
within the boundary and then compare the
price and sizes. Using this method you can
determine whether the property is a good
buy and at the same time to research both
historical data on price appreciation and
rental yield.
Generally, if the property has high occupancy
rate, there would be less listing on the web
offering for rental. Same to apply if there is
high volume of units being put on the web,
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meaning many owners are selling at the


same time thus giving us the opportunity
to grab best deal. Next is up to your skill to
negotiate with the seller. The other way to
do your research is through observation
where you need to be physically present near
the property at night to see if all units and
parking are fully occupied to determine the
occupancy. But this method is less favourable
but it certainly works.
Step 4 - Formulating your strategy
Once you have done your research and
identified your target property, then it is
time to formulate your strategy in acquiring
the property. It could start from monitoring
the price or getting financing. There could
be many ways to get finance to buy the
property. The most straight forward way is
to get mortgage from the bank. But having to
own the property alone means that you need
to use your own money for down payment
of 10%. There are many ways out there, one
of which is group buy. Group buy strategy
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consist of 4-8 members and usually the cost


is being shared equally. Instead of paying the
down payment all by yourself, you are now
paying one fifth of the total sum. The extra
money that you have can be used for your
next property. If you managed to negotiate
to the point where the seller is willing to give
you 10% below market value, then you can
literally buying the property without any
capital. These are some of the strategies that
you can use for property acquisition. There
are many other strategies that you can look
up on the internet supported by case study.
Lastly, never forget to include exit plan. For
example, if you are thinking to maximise
your capital with highest return for short
term investment, then your strategy would
be keeping the property for five years until
RPGT is 0% on the fifth year.

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Property Investment 101

Step 5 Build your network


During the course of your property
investment journey, like it or not you may
need some professional or area expert to
help you out with your acquisition. An estate
agent can assist in providing some useful
information such as rental rate, occupancy
rate, demographic, crime rate, facilities, etc.
While property valuer will help you to get
some information on the property price that
you may not get elsewhere. These are the
people that could streamline your research
and buying process. Networking with likeminded investor is a great way to share
different strategies and perhaps will become
your investment partner.

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