The Definitive (Near) Utopian Guide in Cash-flow property investing

Any long term, “true-blood” property investor will tell you that cash flow ranks way higher than capital again. But in a constrained environment, for that to happen, there are usually 3 limiting factors:

  1. Issues in tenant management, including vacancy rate. Pinpointing the right location with sustainable demand is just half of the equation; next comes the issues when it comes to DIY tenant management.

  2. Limited loan tenure due to age. It is ironic that income is the highest for most people after mid 40’s but when he/she takes a home loan at this time, repayment year is capped up until their expected productive years.

  3. Non-cash flow positive aka low or negative rental yield. After deducting mortgage repayments and maintenance plus other related fees, you still bleed cash to sustain the property until it breaks evens one day after the rental you can charge is > your cash outflow.

Addressing Issue #1 – Minimize the tenancy risks in a regulated environment

2 things to minimize the risk- a low vacancy rate in that area and a background check on potential tenants.

What is the benchmark, you may ask? Let’s take an example of retail malls – perhaps one of the type of property manager which is stringent in managing occupancy rates – retails malls manager.  Capita Malls, the top malls management company in Asia, keeps its vacancy rates below 3%.

cmmt occupancy

Second point – tenant background due diligence. Unfortunately in Malaysia, the best you can do is to interview the tenants based on what-you-see-is-what-you-get basis. Let’s face it, a defaulting tenant is as good as no tenant when there is no cash flow. There is no system to check on the background of the tenant. Such as this, National Tenancy Database >

To top this up, if you can appoint a professional property manager to manages all these for you when your property portfolio grows, paying him a fee annually, wouldn’t this be ideal so you can concentrate on your career/business? After all, isn’t this the reason to invest in property – no-brainer cash flow and capital appreciation?

Addressing Issue#2 – No age discrimination in mortgage tenure

Ideally, we want our loan tenure to still extend to at least 30 years when we are at the peak of our earning power – for most, it is over 40 years old. Our course, this means the final 10 or so years of the loan will extend beyond our mandatory retirement age of 60, but bear in mind you can plan to pay this off before the stipulated full loan tenure using EPF, etc. The purpose of getting it extended is to lessen the burden on our cash flow in the 40’s because most likely we will have tertiary-education-going children soon.

Addressing Issue# 3 – Interest-only-loan

All of us know that the amortization tables tells us a portion of our mortgage repayment goes in paying the interest portion of the outstanding loan amount and the rest goes into settling the principal portion. For many people, the early years are normally the “critical years” because the potential of the property in question is yet to be realized – maybe it’s a new area coming up, etc. The critical years might be short (2-3 years) or long (5 years or more). Therefore, you might face a problem where you are NOT able to command a rental that is high enough to cover your loan repayment.

heirloom cash on cash

In certain countries like Australia,  when investors really invest in property for long term cash flow, they leverage using interest-only-loan instead, which extends over the full loan tenure – which also means you are technically NOT settling your original loan amount…forever. This may look counter-intuitive but this is a pretty advanced strategy to take into account a consistent capital appreciation for at least, say, 10 years. Should you decide to liquidate after 10 years, this can be used to offset the original loan amount.

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