Secrets of property investment

propertysecrets

Why should you invest in property?”

Do you want to know that you can actually create your own potential asset value (PAV) out of thin air by investing in property?

For example, if you buy a new RM500,000 condo and managed to get a 90% margin of financing, you have just created a PAV of RM450,000 – this is on the assumption that your rental yield can cover your monthly installment (principal & interest) for the rest of the financing period. Your PAV will be RM225,000 if your rental yield can only cover 50% of your monthly installments. Imagine by buying two properties (instead of one) with the rental covering 100% and 50% of the monthly installments, your PAVs will be double i.e. RM900,000 and RM450,000 respectively.

By getting a good package from the developer, you can create such PAVs with zero downpayment and without payment of legal charges and stamp duties!

Another way of looking at it is this – for every dollar of rental that you receive from the tenant is profit to you!

In the example above, we have not even touch on the potential capital appreciation of the property.

If you invest in shares or gold, can you create such PAVs out of thin air?

By now, you would realise why investers are so concerned about the rental yield when assessing a property to buy? These are cash flows that help them to pay their monthly installments in order to keep their PAVs on track!

A lot of investors therefore like to focus on buying properties that can consistently generate good rental yields. To them cash flow is the thing that can sustain their property investment game where capital appreciation is just icing on the cake. Clever investors will generally not flip their properties for a profit if they can generate good rental yields unless they have cash flow problems or require money to fund their next property purchase.

Are you warmed up now to read on?

 

Let’s now look at the three (3) secrets of property investment:

1. Use peoples’ money and not your own
2. Property must be able to rent out easily with reasonable rental rates
3. Good capital appreciation potential

1. Use People’s Money

Heard of the saying “Money Make Money?” Even if you do not have money, you can still make money…by using peoples’ money! People have been using this principle to become millionaires or billionaires – by “leveraging” on their financial standing and reputation to convince bankers to lend to them.

Similarly, if you are salary worker, you can leverage on your “employment” (steady monthly income) and “age” (to get longer financing period – lower monthly installments) to get banks to lend to you. By now, you should realise that your employment and age are  your valuable assets!

Note: It is easier for a businessman to be a property investor – they can easily get their loans approved as their bankers know them well.

In property investment, the idea is to use the least amount of your own money when buying a property while the rest should come from your bank. This is the power of leveraging. This way, you can get to purchase more properties with the amount of limited cash that you have.

Let’s talk more on the power of leverage with two examples:

Example 1:
You purchased a property for RM600,000 by CASH with
no bank borrowings. After 10 years, you sell it for
RM1 million with a profit of RM400,000 – 67% profit.

Example 2:
You purchase the same property for RM600,000 with 90% margin of financing with 10% downpayment. After 10 years, you sell it for RM1 million. Your profit is RM400,000 from your initial outlay of only RM60,000 – 666% profit. Your profit will be more if there is no downpayment.

By leveraging on bank borrowings as in Example 2, you still have cash of RM540,000  after the purchase which you can use to purchase more properties as long as you are eligible for more bank borrowings.

Recap: The idea of property investment is that the tenant (not you) will help to pay up your loan (monthly installments). On top of this, there is capital appreciation when you sell your property later.

In the end (if you choose not to sell), you will get a fully paid property (plus the bonus capital appreciation, if any), courtesy of your tenants where you only use minimal cash outlay. This is what property investment is all about.

You know the key to property investment is to leverage on your income and age. In order to buy multiples of properties to increase your PAVs, you need to “quickly” grow your monthly income (either as a salary worker or businessman) or else there is no leveraging as banks will not want to lend to you. They are telling you that if you do not have no sufficient income, there will be no more property investment for you.

The message is to quickly grow your career first before dreaming to be a property millionaire at an early age. This is one of the game rules of property investment.

When young, grow your income fast so that you can get a longer financing period with lower monthly installments unless you have a rich dad as a joint borrower.
Note: Rental income can be included as an income if you have tenancy agreements for your properties.

2. Property must be able to rent out easily with reasonable rental rates

The key here is the property must have steady rental cash flow which can cover most of your monthly installments (to ease your cash flow, try to minimise your monthly installments by maximising your margin of financing and period of financing)

To get regular and good rental income, the following are factors that create a good rental demand for such properties:

a. Properties that are near schools, universities, colleges, business offices with excellent amenities (shops/shopping malls) will have good rental demand
b. Walking distance to MRT stations. In town centres, out of town visitors always look for such properties (ideal for homestay business) for their short stay.
c. Avoid high density condos as it is difficult to rent out with so many units available
d. No foreseeable new condos coming up due to limited land available around the area
e. Condo must have at least 2 car parks or have sufficient space to park outside the condo

If you have the financial muscle (to pay for the 10% down payment, stamp duties, legal fees etc.), go for secondary market properties. Here, you can quite accurately access the already built property you are buying and most importantly, you will already know the rental demand and the expected rentals rates you can get (no guesses or surprises here).

Next, you get almost immediate rental income and there is no need to pay for progressive interest (if you buy new launches).

At the same time, you can look for bargains where some owners may be prepared to sell below market value (this is to cushion unforeseeable price decrease or increase capital appreciation profits)

Note: Newly property launches are generally overpriced as compared with properties in the secondary market.

You can also access how good the condo is being managed (plus no unwanted foreigners staying in the condo) and unlike new launches, there is no risk of the developer abandoning the project.

3. Good capital appreciation potential

Try to look for a condo that has the potential for good capital appreciation, if possible – my first preference.

Once your property has significantly appreciated in value, you can either refinance or sell it to get funds for your next purchase!

Even if your rental income cannot cover most of your monthly installments, a property with good capital appreciation can easily cover your rental shortfall several times over, in the long run.

For example, if you purchase a property for RM400,000 and sell it for RM600,000 5 years later, you get a healthy profit of RM200,000. If your monthly rental shortfall is RM500 (RM30,000 over 5 years), you still make RM170,000 profits!

This is possible if you have the financial means to cover the monthly rental shortfall.

The question is, how to find a property that can increase in value over time? For starters, look for properties that have the attributes as described in point number 2 (can generate good rental cash flow) above

With the above knowledge as a guide, do take your time to find your money making property – do not rush.

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