These are the new perspectives in today’s property investment, syndicated from a few sources quoted at the end of this post.
#1) Quit looking for both great rental yield and capital appreciation at the same time
You can have it all in property investment, but not at the same time.
Here’s why:
Typically, rental yield would be low when the property prices increase much faster than the rental rate. Assume you bought a condo few years ago and rented it out. Today, the market price for your condo has increased. Let’s say it has increased 20% or about 6% per year. Would your rental has increased so much if you were still renting to the same tenant?
Chances are no.
Even if you found a new tenant, would the new tenant be willing to pay 20% higher rental so that you can maintain your yield? Of course, the fortunate thing is, you bought it much earlier, so your yield is much higher compared to those who are buying the same apartment today.
What is ‘rental yield is always good’? If rental yield is always good, it only tells you that there has not been huge capital appreciation. Come on, choose one. Practically, in property investment, great rental and great capital appreciation would typically find it hard to sleep on the same bed. Choose one. The plus point though is that after a while, capital appreciation does happen at least due to inflation.
#2) Shun the bulk buy trend afflicting property investment in Malaysia
• How to spot it – Organized by property investment clubs (PIC), normally after a paid full course program members are offered to enroll into this exclusive clubs for exclusive deals
• Modus operandi – The leaders will say “Follow me, buy what I am buying and you will be financially free in 2 years” or “Because we are big, we can get discounts from developers” or “I have 10 millions worth of properties track record, so do as I said”
• Why people fall for it – People who are greedy to get rich quick, hate their jobs or lazy.
• Why property investment club target new development projects – huge commissions to be reaped if able to sell to unsuspecting members. Developers increase price from RM 500k to RM 600k. Then arrange for 10% rebate/discount. So the jacked up price of RM 540k looks like a steal. Members of property investment clubs bought these properties via zero/minimal deposits with little/no due diligence (aka zombie investors). Property investment club pocket the difference RM RM 40k
• What happens next – Upon completion of properties, members realized the properties cannot be flipped at their projected price either due to oversupply, initial overpaid or unrealistic expectations. Worse, it could not be rented close to their holdings costs.
#3) Redefine boosters which amplifies the desirability of a project for property investment
Boosters are catalysts. Essentially, boosters could be shopping malls, private colleges, schools, commercial hubs or Public Transportation like MRT / LRT, etc. However, consider both “new” and “existing” boosters to determine any pricing disparities between the under con and sub sale markets. Unreasonably priced boosters may be overrated, and at times fatal.
Some sanity checks should then be applied:
• Question the absolute price: For instance, does it make sense for a Suburban condo near a LRT to be priced at nearly RM 1,000 psf? How about a Suburban Condo near a LRT that has an absolute price of > RM 650K?
• Question the projected rental yields: If it’s RM 650K, the monthly loan instalment would be circa RM 3K per month (assuming 90% margin of financing). It would then be logical that you would expect at least RM 3K rental per month to break even.
To give some perspective, the RM 3K can easily be the monthly instalment to buy an entry level BMW, Mercedes or Audi. Would it then make sense for a tenant to pay RM 3K in rental per month to stay in a condo that leverages on a LRT, especially if it’s in the suburbs? You mean someone that could afford to pay RM 3K rental per month would want to take a LRT to commute? Logic dictates that such a tenant profile would probably have his or her own mode of public transportation. Would a local professional be willing to pay RM 3K per month? If you are targeting expats, what is the supply of units available, and is the supply of expats sustainable in those areas / projects?
Have an independent mind that challenges the status quo. As such, do not just follow a set of criteria blindly or literally. E.g. you may be restricting your thinking if you specify that you MUST have X number of NEW boosters or catalysts near a development in order for it to be investment grade. Other factors like the secondary market, “existing” boosters, resident profile & proximity to work areas should also be considered.
#4) Execute Property Investment in your Circle of Competence
Some people are willing to invest in areas which they are unfamiliar with, sometimes up to 40 or 50km from where they reside. So what if there are new & sexy infrastructures, shopping malls or public transportation being built in those areas?
If positive inertia like a new MRT line falls within your target areas – that’s fantastic! But, if it is not within your target areas, you are at a natural disadvantage since those areas are unfamiliar to you.
As a start, I would suggest building a network of properties in areas you are most familiar with first. (E.g. focus on where you, your family or your close friends stay as a starting point).
It is almost impossible to be familiar in all areas, even real estate agents aren’t. True that you could lose out from not investing in new & unfamiliar areas; but you could gain better advantages and focus by sticking and building your expertise focused areas.
#5) “People, People, People” – new concept, but few agree on.
It’s the people that make the location. Not the location that make the people
The old adage in property investment – “Location, Location, Location” is way too overrated.
For instance, what’s so great about TTDI’s location? It used to be a rubber estate. Bandar Utama? This ex palm oil plantation is surrounded by traffic jams and congestion. Yet, many people aspire to stay in those addresses. Is it really due to the location? You mean people are willing to pay a premium because it’s close to a fancy or happening commercial hub? Seriously?
“People, people, people” is a concept which is also as important in any property investment consideration. BU & TTDI is the home of the country’s affluent upper class, and many people aspire to live with the affluent. Anecdotally, these are the homes of families with at least RM 15,000 household income. (conservatively speaking). Take away the “people” element, and perhaps the “location” element may take a back seat after all.
#6) How to invest in landed properties with negative cash flows
To start off, one would have cash flow positive rentals from high rise property investment. These that provide positive cash flows are your lifeline.
To start off – BUY AT A MARGIN OF SAFETY
For example, a new housing project in a new self-contained area costs RM 1 mil. About 5 km away, a mature area costs RM 500k. This is called the hypothetical pricing disparity. Evaluate the residents’ profile in this mature area – is it vastly different from the new housing project? If not, you can confirm it is a true pricing disparity.
The mature area could still has an “upside” due to the ceiling price established by new housing project. If the unit in the new housing area appreciates even further, existing mature area around it should logically follow suit, due to the margin of safety.
Then – DEAL WITH THE NEGATIVE CASH FLOW
Using a Numerical example of the 800K house, – You’ll be paying 3,700 per month to the bank (assuming 90% margin of financing), and collecting rent of RM 2,200 (let’s take a conservative yield of 3%). This will result in negative cash flow of – 1,500
• Even if you find a house with a Margin of Safety, you can’t afford a -1,500 downward drag on your income.
• As such, a Good Offense Starts with a Good Defence.
• Let’s say you have 2 condo’s that generate a + Cash Flow of RM 750 each, or a Total + Cash Flow of RM 1,500. You will use these 2 condos to offset the – 1,500 from the landed property.
• This the “Concept of Pairing”. On a Net basis, one must be Cash Flow NEUTRAL at a worst case scenario. But bear in mind – you only pair this with Landed properties which you believe had a Margin of Safety. You do not buy landed housing banking SOLELY on the HOPE that it will appreciate, otherwise this will erode you holding power over your entire property investment portfolio.
Sources:
Of zombie investors and massive rebates – Focus Malaysia Dec 2015 by Faizul Ridzuan
Rental yield vs Property price appreciation -kopiandproperty.com by Charles