This is the most practical, highly actionable guide to buying or investing in commercial real estate property in Malaysia.
The best part?
We are going to reveal how the really wealthy property investors buy & invest in real estate properties using a concept I call the LPAV Quadrants
In short, regardless you have RM 500 or RM 500,000 to invest into your first commercial property, you’ll love this guide.
Let’s get started.
So here's how you can buy and invest in commercial properties with as little as RM 100.
....but for real though,
...this is really a way that you can buy and invest in commercial real estate properties in Malaysia with pretty much whatever money you have saved up right now,
...without doing much of the work yourself.
- There is no renovating the commercial properties to make it rent-able
- There is no trying to find tenants for your commercial properties and
- There is no dealing with 2:00 a.m. phone calls of a broken toilet that you have to fix.
You pretty much just can invest your money and earn money passively starting now.
And this is called a REIT which stands for real estate investment trusts.
Sounds too good to be true?
It is, but you need to read until the end....
But how does REIT compare with just straight-up buying or investing in commercial properties and is it even worth owning a REIT to begin with...
So let's find out, I'm going to be discussing the pros and cons of buying or investing in REITs - equivalent of commercial properties...
...as well as the positives and the negatives of straight-up just buying commercial properties and then that way...
...you can pretty much decide on your own which one is really the better choice.
The Advantages of Buying & Investing in REITs
The Disadvantages of Buying & Investing in REITs
The Disadvantages of Buying & Investing into Physical Commercial Real Estate Properties
REITs are your proxy for commercial properties investment.
REITs are really a fund structure which acts as a holding company for a portfolio of commercial real estate properties.
Now usually REITs have a specialization in the sense that some focus on warehouses, others focus on office buildings, retail malls or even school/college buildings.
Each REIT usually has a different specialization but by investing your money into this company you're thereby entitled to part of their profits in the form of regular dividends.
This means that you could potentially own a small share of maybe a 50, 100 or even 200 million ringgit commercial real estate property portfolio for really as little as RM 50 or RM 100.
Lots of corporations such as Paramount Corp Bhd nowadays started to adopt asset-light strategy, whereby it will dispose their assets into a REIT entity (Alpha REIT). This way, they monetize their real estate assets through this sale-leaseback transaction, enabling it to unlock capital resources from being tied up in long-term assets.
The other benefits are providing growth capital and allowing the company to focus on its core activities to ultimately better reward shareholders
REIT has pretty much zero barrier for entry to buy & invest in commercial properties.
Pretty much anyone with RM 50 to RM 100 can buy or invest in REIT.
This is unlike investing in commercial properties directly where you have to come up with anywhere from about 15% to sometimes 20% or 25% down-payment.
...and you have to qualify from a loan from the bank in order to buy it.
With REITs, you can pretty much just invest whatever money you have now and that's as easy as it is.
It's also really extremely easy to invest and buy into a REIT - you pretty much go on any stock trading website or app...
...click the little 'Buy' button and you're done.
That's it! You don't need:
- Hunting for months, looking for real estate properties.
- Accumulating that cash flow for 20% downpayment...
- Dealing with renovations or
- Dealing with banks or appraisals or inspections
All you do is literally just click the little 'Buy' button with whatever money you want to invest.
The REIT Manager has basically already done all the work for you so all you have to do is invest your money, sit back and say that you own like one ten thousandth of the mega strip-mall downtown.
No tenancy management when you buy & invest into a REIT
When you're a landlord, you have to make sure tenants pay their rent on time.
You have to make sure all the expenses are paid and the property is well-maintained.
With owning a REIT, you don't have to do anything because it's already taken care of for you.
It's also unbelievably easy to sell a REIT; you also don't have to pay a 2% or 3% commission to a real estate agent.
You don't need to deal with showings or inspections or negotiations or anything like that.
It's just as easy it is when you buy it - all you have to do is instead of clicking ‘buy’, you just click the button that says ‘sell’.
With REITs, you're really well diversified invested in commercial properties
It's not like you only own one property with one tenant with one roof and all that sort of stuff.
We've all heard it - the risks associated with real estate property investments.
With the REITs you can potentially own hundreds or even thousands or tens of thousands of pieces of real estate and just own a fraction of all of them.
With this your risk is pretty well spread out so if something happens to one building that's totally fine because chances are, you have a few other buildings that make up for that.
And with all of this you can get a pretty easy consistent five to sometimes six to eight percent return annually depending on the type of REIT and the type of commercial properties they're invested in.
So from the surface this might seem like a really good deal.
It might seem like blue skies and smooth sailing ahead but there is another side to REITs that we should discuss when you are no longer a newbie investors.
You have no control over the exact commercial properties invested in a REIT
Now the main downside with buying and investing in REITs is the amount of control you have.
Plain and simple, buying or investing in REIT takes away the control you have over conventional commercial real estate properties.
In other words, this is unlike owning physical real estate where you can basically customize your renovations if that fancy you.
And you can't pick the tenant that pays the highest price.
Or you can't pick where you buy commercial real estate that you feel is undervalued or has potential for excellent price appreciation.
When it comes to a REIT you don't have any control over this whatsoever.
...and generally this means that you tend to get a slightly lower return because you don't yield direct control over the investment.
Now, as they said, one man’s meat is another man’s poison ~ some people will certainly see this as a positive
...and that they don't want any responsibilities, or any control; they just want to buy exposure into commercial properties or invest their money and be done with it...
But usually if you know what you're doing you're able to get a much higher return than if you leave it to somebody else to do it for you.
You don't get to use leverage as you can in commercial property investing.
Now you also can't build equity in a REIT like you can in real estate properties.
Because you don't get to use leverage as you can in commercial real estate property investing.
Comparatively, when it comes to commercial property investing, or even any form of brick and mortar real estate, you're putting a small amount of money down and getting a long term loan on that.
...and every single month you're paying down the loan, thereby increasing the equity in your property.
Then after maybe fifteen to thirty years you own the property outright after the loan is settled.
...and there you go, you've just leveraged your money and built equity over a long period of time
With the REIT instead all you're doing is just putting in your money and whatever money you put in is pretty much what it's worth
So with that out of the way let's talk about actually physically owning real estate and we'll first start with some of the downsides about commercial real estate properties.
Commercial properties investing comes with high barrier to entry
It comes in the form of needing a substantial downpayment for the average Joe, and a loan, plus the income to actually support those loan payments.
You can't just go out and buy a RM 500,000 property if you don't have the downpayment of 20% or RM 100,000.
....or if you don’t make sufficient monthly income to support those payments.
This usually disqualifies most people from buying or investing in real estate especially if they're in an expensive area like KL City Center or Penang where the typical downpayment could be anywhere from fifty thousand to over two hundred thousand Ringgit.
Just to buy and saving this amount of money is probably the biggest downside I see.
Because not only does it take a lot of time to save that money but it also takes a lot of discipline.
It also requires a high income to have enough money left over to save.
Not to mention a sterling credit history needed for a bank to actually approve you on that loan and this is probably the biggest obstacle that we see when anyone want to buy or invest in commercial property.
Real estate property investing comes with time commitment
A friend related that it took him six months to find his first real estate property that was worth buying.
It took him another 30 days to actually close on that property, do all his inspections, get his loan and appraisal and everything else that goes along with that.
And then it took him another two months of renovating it for it to be ready.
That's a total of nine months from start to finish.
Then you also have the time aspects of actually managing a rental property.
Now this is generally something where you put a lot of time in upfront.
And then after that, it's really not too much work - he would estimate it probably spend about an hour a month managing his rental properties which really isn't too bad
But in the very beginning he did spend a ton of time getting it to the point where most part is pretty automated now.
This doesn't happen at all with a REIT
A caveat here is that you don’t have to contend with renovation when it comes to commercial real estate properties investments because tenants will usually do this themselves at their own expenses!
Real estate property assets lack immediate liquidity
You can't just go out and sell a property and get the money the next day.
Typically the very best case scenario is about two weeks, realistically it's more like thirty to sixty days to actually sell something and get your money.
And that’s not including the time it’s being listed beforebeing sold.
The ‘listing period’ can get excruciatingly long - the higher the asking price of the real estate property, the longer the ‘listing period’.
Furthermore, selling a piece of real estate property is not as simple as clicking the ‘sell’ button because
- you have to get professional photos done
- you have to to put it on the market
- you have to show it to your prospective buyers
- you have to negotiate the offers
It's quite a process to actually sell physical real estate properties now compared to this to a REIT where you just click the little sell button and you're done.
How the really wealthy property investors buy & invest in real estate properties
Wealthy property investors don’t play the property investing game like the rest.
They move away from residential real estate property properties to commercial real estate properties.
Because it cuts down a lot of the tenancy related issues that comes with residential property investment.
One good example is, it makes no sense to go into a rental price way with a competing landlord. But you can’t avoid this if you are playing in the residential property space.
After all, residential propertial tenants move in and out all the time, and they are always hunting for the ‘best deal’. They won’t hesistate to pack their things and move out if the opposite unit offers them lower rental rate.
That or it is just the norm that they move out due to changing jobs or moving to another cities.
The 4 Quadrants of Commercial Real Estate Property Investment
Commercial Property Investment Quadrant #1: Location
Define a good location for a commercial property
- Be in a high growth area with ‘inflow’ migration
- Be in a matured residential area
- Both of the above
If a commercial property fulfils ‘both of the above’, it basically fits the criteria of being located in a prime catchment area that is able to capture both residential and mobile customers.
Although, the quality of customers are equally important as the volume of customers (or footfall).
This boils down to the demographics of the population staying and working within a 10 kim radius.
And that refers things like average income level, age and gender.
(Example, you’d want to buy a commerical property in Mont Kiara, not Setapak.)
The income level of the residents determines the kind of business that would be profitable (a Michelin star restaurant in Sg Buloh or Mont Kiara? The answer’s obvious)
A commercial hub located in the vicinity of multinational corporations which employ thousands of staff means you have no shortage of lunch crowds and patrons after office hours.
The below is a good example (Sekitar 26 Enterprise in the middle)
Ceteris paribus, it is also better if the commercial property you are considering is located at a development area which has a theme.
How would a commercial hub without any eateries, foodcourt or restaurants fare in the long term?
Common sense right?
The right tenant mix complements each other.
A restaurant located in more ‘atas’ neighbourhoold like Bangsar enable it to price its menu higher. I don’t need to explain what happens when your tenants are doing well if you are the landlord, right?
The right tenancy mix does not mean ‘anything goes’ though, just imagine how out-of-place it would be if you find a pub or car workshop in the middle of any premium outlet villages.
On a broader scope, The Petaling District in Selangor remains the largest and the most active commercial property market.
In addition to matured townships, there are several developments in the pipeline which is designed to attract a generation who is vibrant, trendy and treasures the conveniences of modern-living.
Upcoming commercial property projects by established developers with award-winning developments do carry some weight as they have years of credibility, track record and reputation building successful projects.
Which is why it is borderline dangerous to dabble in subsale commercial property market.
Sekitar26 Enterprise by Paramount Property is just one of the few developments located within the Petaling District.
In fact, Paramount Property headquarters is shifting to this very commercial hub in 2019.
So tell me, how often you can buy or invest in a commercial property where the property developer office itself is located in the very same commercial hub?
Commercial Property Investment Quadrant #2: Visibility
Have you had any experience finding even the signboard of a business premise?
You see, visibility of a commercial property is of utmost importance in order to attract customers to the premise.
To ensure maximum visibility, this is the rule any commercial property cannot break -
The commercial property in question should be built in front and on the same level as the road or highway
If the commercial property is higher or lower than the road or any form of reinforced concrete wall/flyover, it will suffer from visibility problems.
Commercial Property Investment Quadrant #3: Accessibility
However, visibility alone does not guarantee the success of a business in a premise. There are many businesses located in very visible locations that have failed because they cannot be accessed due to logistics problems, such as confusing road structure.
(Hands up if you have experienced it? Where you can see the building or signboard but you just cannot reach it as you are driving? Even with Waze!)
Accessibility is not only the ease of traffc flow leading to the commercial property, but is referring to having ample parking space in the vicinity, be it:
- Parking spaces in front of the commercial property
- Parking spaces behind the commercial property
- Basement parking
- Multi level parking
Rise your hands if you are you turned off by commercial area with banks and hence, limited parkings? Double park? Triple park?
Such a nuisance, yes? Making multiple rounds in a congested area, justto find a parking spot is frustratingly time-consuming, not to mention utterly unproductive.
Understandably, this situation is underthought for matured commercial hubs which were developed in the past.
But hey, we are in 2018...there’s no excuse for new commercial hubs to not have ample of parking spaces.
A visionary developer expects growing visitorship of its commercial area. Hence, providing ample of parking lots should not be an afterthought.
On top of that, it is ideal if the commercial properties are located on the left side of the road or highway in conjunction with traffic flow (since it’s left driving side in Malaysia)
Commercial Property Investment Quadrant #4: Placement and design
The orientation and design of a commercial property can also impact its potential rental and capital gain.
For units facing either east or west direction, occupants would have to pay more for air-conditioning and tinted glass windows due to morning or sunset.
Given a choice, commerical properties facing north or south are preferred.
Similarly, for end lots or corner lots, it is preferred not to have the sun beating down on them directly from the east or west.
Contrary to rule of thumb for buying a home, a commercial property at a cross or T junction is not necessarily bad.
The 3 mindset and strategy of wealthy real estate property investors - how they invest differently
#1 Wealthy investors truly don’t have time
They don't have time and certainly don't want to to manage all these tenancy-related issues described above - their time as a wealthy individual is better spent on other higher ROI things like their businesses.
That is why they prefer to buy & invest in commercial properties for long term.
Furthermore, commercial real estate property tenants are more ‘sticky’ because no businesses want to move if their businesses are doing good, yes?
In addition to that, landlord can sign longer leases for commercial real estate properties, and in some cases, comes with automatic rental escalation clause.
Despite this fact, tenants are more than happy to pay higher rental if their businesses are thriving.
#2 Wealthy real estate investors wants high control over their investments
This element is lacking in residential real estate property investments.
It’s a tenants’ market when it comes to residential real estate, and this is not likely to get better. Landlord for residential real estate normally has less negotiation power when dealing with tenants, not to mention the fact it is a very ‘over-crowded’ space because the barrier of entry is low (say, a 500k apartment), versus a 2 million shop-lot at a prime area.
Picture this, when you are a landlord of an affordably-priced studio apartment, you are competing against 89 others landlords (working 9-5 job) in the same building block, who will not hesitate to undercut you on the rental rate - just so that their units at least get tenanted, even though it is rental-cash-flow-negative.
Compared to that being a landlord of a commercial unit like the coveted Sekitar26 community, you likely have the high negotiation power and able to say to prospective tenants - ‘take it or leave it’.
Additionally, if your commercial unit is in a competitive area, tenants would be lining up should your existing one choose to terminate or not renew his tenancy, sparing you the hassle of finding new tenants. As tenancy periods for commercial units are longer compared to residential ones, you save on agent commissions.
It may be counter-intuitive, but the fact that most commercial properties leases are signed on the basis of triple net leases (where tenants pays the building insurance, maintenance etc) means more net rental received in your pocket.
No wealthy investors wants to and have time to fix a broken toilet or lamp 2 am in the morning!
After all, wealthy investors are not desperate for the rental cash flow to cover their mortgages repayments, especially if you can afford to buy cash!
While in tenancy management area, commercial property investment comes out champion by a long shot. For residential property, furnishings and renovations are pretty much a necessity to rent out your unit in competitive areas. On the other hand, commercial property tenants prefer their units bare, as they usually want to design and renovate them to their liking.
Subsequently, tenant management is much easier, comparatively. Residential property owners often face problems of frequent complaints and runaway tenants leaving outstanding rent and utilities. Commercial property tenants, conversely, generally pose much less problems and are more likely to adhere to the terms of tenancy agreements.
All in all, wealthy investors are not using property investment to get rich,
Instead, property investment is just one way for them to park their wealth for long term.
To transition into a wealthy investor mindset, you need to remember this.
#3 Wealthy investors wants to maximize their return on investments (ROI) better than others
In other words, the mindset of maximizing result with minimal effort.
Think about it - most commercial real estate properties are rented out bare (empty), requiring no renovations, thereby landlord need not furnish the unit for 'rent-ability'.
All renovation costs are borne by the tenants, whom surely need to customize the unit fixtures and layout per their business needs.
Which also means, tenants in commercial real estate properties don’t easily shift out from the premise because they’ve invested a lot in the renovation (another logical factor contributing to the ‘stickiness’ of the tenants), compared to tenants in residential real estate properties who can just pack up and leave in 24 hours.
And because they are doing business and have invested a substantial sum in the premise renovation, tenants in commercial real estate property will take good care of the unit itself, compared to tenants renting a residential real estate property.
So now let's talk about some of the major advantages of actually owning physical real estate
#1 You can leverage other people's (bank) money
This is probably one of the biggest advantages of actually buying and investing in physical real estate properties.
While it is true that REITs do use leverage as well when buying any commercial real estate properties into their portfolio...
...but that is at the REIT manager level, as a REIT investor, you don't get the benefits of leveraging your money compared to when you buy or invest directly into any real estate properties by taking loans.
#2 You can get tax benefits
Your rental income from owning actual real estate is usually entirely tax-deductible against your property related expenses like repairs & refurbishments and even interest on mortgage repayments.
In some countries (not in Malaysia though) ecause you're able to actually depreciate the structure itself against the rental income received.
#3 You have absolute control over your investment
Which means that you have the ability to find a very very good deal that's undervalued and you can further enhance your returns by adding more equity to it.
Real estate is such a localized market and every single property is different from one another.
(In the stock market, it is very hard to take advantage of price inefficiency but in real estate investing, you can)
You could for instance find a seller who's really distressed or desperate to sell it.
He could be willing to let it go at a hundred thousand Ringgit below what it's worth.
...and BAM! you just made a hundred thousand Ringgit from one deal.
And when you know your market really well you can do specific renovations to get the highest Ringgit amount possible.
This means that usually by physically owning real estate you can maximize your returns as much as you can borrow money from the equity in your home completely tax-free and that's called the cash out refinance.
So let's say your home is now worth 500k and your remaining mortgage is only 200k, this means that you have 300k of equity in that real estate property.
You're pretty much able to borrow, say, up to 80% of the equity that you have in that property so on 300k you can pull out 80% of that as cash and not pay any taxes on that.
This means you could pull out all the money that was stuck in real estate property... invest it elsewhere and not pay any taxes on those gains.
So at the end of the day this is really what it comes down to if your goal is to build long equity in value, owning physical real estate properties is really the way to go.
Even though it's more money and more time when you buy an investment property, you're continuously building equity and a tangible asset
...and at the same time you have a tenant who's paying down your mortgage so your equity stake increases at simultaneously.
Also, as your real estate property appreciates in value, having more equity in a property like gives you the ability to borrow against that money in the future and then use that money to continue to buy more assets and thereby also growing your portfolio.
So basically with this it's more work, it's more time and it's also more money to be made.
However if you don't have a lot of money and you don't want to spend any time on direct property investment but you still want the exposure and learn the ropes of commercial real estate properties investment, REIT is definitely good way to start.
Now It’s Your Turn
Phew! We put A TON of work into this guide. So we hope you enjoyed it.
Now we’d like to hear what you have to say.
If you have RM 400,000 sitting in your bank account now, would you prefer to invest into a 2 million commercial property or park that in REITs?
Let me know by leaving a comment below.
This article is sponsored by Paramount Property, an award-winning developer with more than 35 years of proven track record in the property development industry in Malaysia. Paramount Property most recent commercial property project is at Shah Alam, known as Sekitar26 Enterprise.