Malaysians love to invest in property.
Property investment has turned out to be one of the most popular forms of investments among Malaysians. Everyone from young professionals, aunties, uncles to retirees are constantly on the lookout for good property investments. Many people share their up sides of the investment, but they seldom rave about their loses.
Before getting started, it is important for you to get a full picture of what you are about to get into.
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#1 Real Estate: The Safe Bet?
The first myth to debunk is that people do not lose money on their property investments.
Is that true? Of course not!
During a slowdown in the economy, taking a ‘direct loss’ on your property investment is common. We define ‘direct loss’ as selling at a price that is lower than what you have purchased the property for.
Real estate investments are “real” (no pun intended), in a sense that they hold real value, are of a limited supply and usually only tend to appreciate in value as compared to stocks and other forms of investments.
As Asians, most Malaysians would prefer to bet safe rather than take unnecessary risks in the stock market, so think again – is real estate really a safe bet for investment?
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#2 Quality Of Investments Matter
It is not uncommon for a property investment to fail. It is also possible for a property’s value to depreciate. If you need to take a loan to finance your property investment, that could cost you a net loss if the property’s rate of appreciation is lower than your housing loan’s annual interests.
Furthermore, you will also have to take into account stamp duties and agent fees while cashing out on a property, quit-rent, maintenance and many other hidden costs.
Not all property investments are created equal, some are better than others. It is always important to take note of the risks and possible implications to your property investment.
#3 Passive Income Vs Flipping
To know what makes a good property investment, you will first need to know what kind of property investment you are making.
Are you investing for capital gains in hopes of selling the property a few years down the road at a much higher price, or are you investing for a stable stream of passive income in the form of rental.
Not too long ago, it was possible to make huge returns by buying a property before it was even completed and selling it off at a much higher price and making a handsome amount of profit the moment the property is completed.
This is commonly known as “flipping”.
However, with the cooling property market in recent years and the introduction of the Real Property Gains Tax (RPGT), any potential profits you could make through flipping would be severely reduced by the tax you would have to pay if you sold your property within a couple of years of buying it. That makes “flipping” only worthwhile if you were let in on a really good deal where you were able to buy a property at way below market price.
However, such opportunities are hard to come by and are usually only accessible by a privileged few. Hence, that leaves most of us with only the option of investing for long-term capital gains or for passive income via rental yields.
#4 Commercial Vs Residential
As a comparison, commercial properties such as factories or shop lots tend to give a much better rental yield than residential properties. Commercial tenants are also usually more loyal and better paymasters due to the fact that they are usually businesses that have budgeted enough for rental and are unlikely to change their business premises for at least a couple of years.
Rent for commercial units also tend to be higher than residential ones.
On the other hand, residential tenants tend to have a higher turnover rate and the chances of you getting a troublesome tenant is also higher. The amount of work you would have to do to look for new tenants, place ads, pay for agent fees, repairing and maintaining the unit might end up costing you a significant chunk that would erode any profits that you might have gained from the rental.
However, it is also important to note that commercial properties are usually much more expensive than residential ones and not everyone can afford to buy a commercial shop lot in a good location that costs upwards of at least RM2 million.
#5 Timing
Once you’ve decided on the type of property investment you plan to make. Timing is another important factor that you should take into account.
If you purchase a property at a time when the demand for properties is low or slowing down, you stand to get one at a much lower price and make more over the long term.
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#6 Price Appreciation
It also has to do with the density of the area, development of the area and the build quality of the building.
If it is a condominium that you are buying, a good condominium management is also an important factor that could affect whether the condominium appreciates in value or not.
#7 Rental Yield
If you are planning to rely on the property’s rental to service your mortgage or for passive income, then it would make sense for you to check on the rental yield for similar properties in the area before purchasing the property.
Ideally, the monthly rental your property can command should be higher than your monthly mortgage repayments. However, if that is not possible, it shouldn’t be too far below your monthly repayments as you will then have to fork out a significant amount to service your mortgage.
#8 Location. Location. Location.
Ultimately, property investment is all about location.
Location trumps everything else. A property in a good area will get higher rental yields and is likely to continue appreciating in value. It will also be easy to find new tenants or buyers if the property is located in a good location.
Conversely, a property in a bad or underdeveloped location can remain vacant for a long time, in which case you wouldn’t be able to get any tenants and would have to service your mortgage and interests entirely out of your own pocket. It is unlikely that you will be able to find a buyer to take the property off your hands in such cases too.
Hence, it only makes sense to invest in a property if it is located at a good location.
#9 Ease Of Transaction
Also, you might want to consider how easy it would be to sell off the property in the future. Generally, more luxurious and high-end properties would take a longer time to sell due to their high prices and limited amount of people who can afford them.
The process of selling a leasehold property also typically takes longer than a freehold property.
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#10 The Quality Of The Deal
Lastly, it is important to make sure that you are getting a good deal on your investment. Make sure that the property is not overpriced to begin with. Otherwise, you won’t stand to make any money from the investment because you have already overpaid for it.
Always try to go for good properties at good locations that are selling at below market prices or at least fair value.
With these tips, hopefully you will be able to identify a good property investment when you see one. Property agents and your peers can always paint a nice picture on the investment, but at the end the day, we should be financially prudent on the upsides and downsides of investing in properties.
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