16
Issue # 3
PROPERTY360DIGEST
PROPERTY360DIGEST
Issue # 3
17
FEATURED COLUMNIST
Ikhram Merican
Since writing my book, The
Ultimate Guide to Buying
Property, I have been meeting
and speaking quite regularly
to a diverse group of property
investors. They range
from newbies to seasoned
professionals.
The more experienced
property investors, in general,
have found a strategy that
suits their temperament and
financial capability. This is
really important - whatever
strategy you employ to invest in
property, it must suit YOU.
“The essence of strategy is choosing what not to do” - Michael Porter
You will see as we go along in this
post, that not every strategy may be right
for you. For example, you may find one
appealing, but it may be very risky for you
if you do not have sufficient capital. Always
remember...
Before listing down the different
strategies, I want to stress that this is not a
comprehensive guide. It is meant to expose
you to the different strategies investors
employ. It will not make you an expert.
You must do your own research and build
expertise before attempting to embark on
a strategy that is new to you.
One of the safest methods to build
expertise is to find a mentor who employs
a strategy you like. This mentor can save
you a lot in mistakes that I call “tuition fees.”
Choosing the
So let’s dig in shall we?
The “Forced Saving” Strategy
I have written about this idea in a post
on property investment for employees.
It is a long-term approach to property
investment that is simple, fairly safe, and
does not eat up too much of your time.
In this method, your cash-flow may be
correct strategy
is key
In Property Investment
negative but you’re not negatively geared.
You should never be negatively geared. If
you’re wondering what’s the difference,
read on.
Negative cash-flow is a situation where
your total outgoings on the property
is more than your total income from
it. Your outgoings include mortgage
repayments and every running cost (taxes,
insurance, repairs, maintenance, agent
fees, insurance, etc) but excludes capital
expenditure (initial renovation, closing
costs, property price, etc).
The calculation for gearing, on the other
hand, does not include capital re-payments
from your mortgage. It only includes the
interest portion of your mortgage.
So, you can have negative cash-flow but
you may not be negatively geared.
Ok, back to the forced saving strategy.
In this strategy, the goal is to maximise
borrowing so your capital outlay is minimal;
and to leverage capital appreciation over
the long-term. The rental income you
collect must cover your interest payments
and at the very least, 30% of your running
cost. This combination helps you maximise
ROI if there is good capital appreciation.
Although your cash-flow is negative
here, the combination of proportionate
rental income and capital appreciation
is building equity for you. It’s like forcing
yourself to set aside a small investment
every month, for high returns in the future.
Hence, the phrase “forced saving.”
The annualised ROI from this strategy
over the long-term (upon a sale) can
average 11%. This is much better than the
4% return that banks would give you.
The biggest risk to this strategy is that
if you lose your source of income (i.e
your job), you may not be able to hold
the property for long. Hence, it is very
important to ensure that you have savings
and that you’re focused on growing your
income (read excelling at your work).
If you don’t like the long-term approach,
the next strategy may appeal to you...
The Lease Option Strategy
If you can’t get a mortgage and you’re
low on capital, this is one of the best
ways to get invested in property. It is a
very creative method but requires work.
However, with more effort comes bigger
results. The potential for high returns here
in a relatively short-term is promising.
How does it work? Let me illustrate with
a hypothetical example.
You actively look for homeowners who
cannot afford to service their mortgages
anymore. They have defaulted or are at risk
of defaulting. Usually, the property is going
for a 2nd or 3rd round of auction bidding.
You find one such owner, Mr Jeremy.
Jeremy’s property is a double-storey terrace
house with a market value of RM500,000.
His outstanding balance with the bank is
RM280,000 and the monthly instalment
payment is RM1,500.
The property has a reserve price of
RM300,000 in an upcoming auction.
You approach Jeremy and tell him
that you’re willing to buy his house at
RM320,000. However, you will only pay him
for the house in 1-year. In the meantime,
you will pay his monthly instalments for the
period of 1-year. He can live in the house
rent-free.
You are effectively leasing his house with
an option to buy within 1 year.
During this 1-year period, you will look
for a buyer at RM420,000 (16% below
market value). The difference between the
sale price and what you have to pay Jeremy
plus other costs is your profit.
Jeremy agrees and you negotiate
commencement of monthly instalment
payments with his bank. A lawyer helps you
draft an air-tight agreement with Jeremy.
During the 1-year period, your costs are
as follows:
· Monthly instalment to bank - RM18,000
· Legal fees - RM3,000
12-months into your lease option
with Jeremy and you find a buyer for
RM420,000. After paying Jeremy RM320,000
and deducting your costs amounting to
RM21,000, you have a profit of RM79,000.
For an investment of RM21,000 (monthly
instalments and legal fees), you gain
RM58,000 (RM79,000 - RM21,000). That is a
276% return in 1-year!
You may ask, why would Jeremy agree to
a deal like this?
Because it’s a win-win situation. If the
bank auction is unsuccessful, there is the
risk of the reserve price dropping further.
You are offering Jeremy RM20,000 more
than the current reserve price plus you’re
giving him a place to stay rent-free for a
year.
This strategy requires that you have
a solid agreement and structure in place
between yourself and Jeremy. Lease
option deals often fail because the owner
jeopardises the sale. You MUST have a very
experienced lawyer for this.
The best firm for this in Malaysia is
Messrs. Elizabeth Siew & Co. I’ve spoken to
their managing partner, Sharon, and I find
her to be very skilled at these deals.
What’s the risk to you here?
There is a possibility that you may not
be able to sell the property within the
stipulated timeframe. In the example
above, if you don’t sell Jeremy’s house