Issue # 3
18
PROPERTY360DIGEST
merit. A property that is generating net
income for you, is a property that you could
technically hold forever. That’s Warrant
Buffet’s favourite holding period.
The key to sound property investment
is to be able to hold it. If your property is
generating income for you, then even if
you lose your job, you may not be forced
to sell your property. When you are in such
a situation, the up and down cycles of the
property market have very little impact on
you. You can always hold your property
until the next boom to sell if you so desire.
Generally, positive cash flow properties
are few and far between. Therefore, many
investors who subscribe to this strategy
skip the usual long-term tenancies in
favour of more creative ways to increase
the potential income from the property.
This includes:
1.
Short-term accommodation
(becoming an AirBnB host is one example)
2.
Student accommodation
3.
Housing for multiple occupants
The last 2 methods involve subdividing
the property further for more rooms that
can be rented out separately to different
people. This is growing in popularity and is
proving to be a feasible approach for some.
The rental income you collect must cover your interest payments and at the very least, 30% of your running cost.
within a year, your costs go up and the
lease may not be extendable.
Your risk, however, is limited to
RM21,000.
The other downside to the lease option
strategy is that deals like the example
above are not easy to find. They’re
infrequent and you need a good network
of bankers or some degree of marketing to
find them.
list of all properties they’re auctioning. One
such example is www.ngchanmau.com.
You’ll have to look for hot deals. You’re
looking for auctions where the price is
ideally 40% below market value. This is
where a RM200,000 property is going
for RM120,000. If you can successfully
purchase it at somewhere close to this
price, your next plan of action is to beautify
it.
The Auction Property Strategy
I met one property investor with an
annual target of RM600,000 in gross
income using this strategy alone. His
target is a fraction of some of the bigger
players. I find this strategy appealing to me
personally. It is actually property flipping in
a niche market.
This investment strategy is capital
intensive. The most successful people I
know who employ this strategy buy their
properties in cash. So you should have
capital but there’s a way around this. You
can gather a group of friends and pool your
capital.
I feel it’s better to focus on medium-cost
properties because there is a larger market
of buyers and therefore, the turnaround
period is shorter. Time is money and the
faster you can complete a buy-sell cycle,
the better.
How is this strategy optimally employed?
You will need to be actively seeking
auction properties. Some of the auction
houses in Malaysia have websites with a
For RM40,000, you could have it fully
furnished and make it look amazing. Add
to this your closing cost of about RM5,000,
and your total cost to buy and makeover
the property is RM165,000.
You can then advertise to sell the
property at RM220,000. Being a property
that is fully furnished, spanking new, with a
beautiful look, this shouldn’t be too hard to
do. Especially since the new buyers would
not have to spend any further money on
the property.
Your profit? A cool RM50,600 after
deducting a 2% real estate agent fee. You’ll
have to pay RPGT of 30% on this profit
though (if you’re selling in less than 4
years), which is a bummer. However, there
are ways around it. For example, if you
operate as a company and do this regularly,
you could pay corporate tax instead of
RPGT which can be as low as 17%.
Assuming you can get away with 17%
in tax (please consult a tax expert for this),
your net ROI on the aforementioned deal
would be about 25% in less than 6 months.
If you repeat the process again within the
year (and assuming everything is the same),
that’s a 50% per annum return. Pretty darn
good eh?
The downside to this strategy is that it
is very hands-on. You need to know very
good tradesmen to beautify and renovate.
You cannot simply use contractors as the
renovation cost will balloon. To keep it low,
you’d have to assemble your own team.
There’s also the possibility that you may
have to evict the owner from the property.
You would need a court order. This takes
time and can set you back.
Are you a passive income person?
I personally think passive income is a
misnomer but you may like the next
strategy...
The Cash Flow Strategy
Many investors believe that building
positive cashflow is the primary goal of
property investment. Some subscribe to
the understanding that if your property
is costing you money to keep, it’s not an
investment but a liability.
While this is not entirely true, there’s no
denying that positive cashflow has strong
Here are some pointers if you choose to
adopt the cashflow strategy:
First, you can technically make your
cashflow positive on most properties
simply by reducing your borrowing from
the bank. If you take a 50% loan from a
bank, your cashflow could most likely be
positive but your ROI when you sell will
drop significantly.
You should, therefore, ensure that
you can get positive cash flow from your
property with a 70% to 90% margin of
financing. The best way to do this is to look
for below market value properties.
Second, you must be very clear on how
you want to maximise your rental income
for positive cashflow. If you choose student
accommodation for example, then your
location should be close to universities.
In addition to that, your pricing strategy,
furnishing, expectations and amenities
should match your student-customers.
This requires that you have very deep
knowledge of the particular niche you’re
getting into.
The downside to this strategy? If you
don’t understand the market you’re getting
into, you may not be able to generate the
cash flow you projected.
In addition to that, sometimes
properties that generate good cash flow,
do not have good appreciation. In fact, this
could be one reason why the cash flow on
a property could be so good - because the
rate of capital appreciation has been low
relative to rent.
high net worth individuals (HNIs). It’s quite
hands-off, can be applied in different
countries and carries relatively low risk.
Many years ago, I was speaking to an
Indian national who was a heavy property
investor. He despised borrowing from the
banks to buy residential properties. I told
him that leverage would give him a better
ROI. He agreed but preferred the peace of
mind that came with being debt-free.
To him, if a property is bought in cash,
he’d never have to worry whether the
property was tenanted or not. He’d never
have to worry too much about cash flow
from the properties and his holding power
would be solid.
He viewed property investment as a
means of wealth preservation. It’s like this:
if he had RM10 million in cash, he could
keep it in a fixed deposit that paid him
4% every year or he could buy and hold
property in Kuala Lumpur where the long-
term appreciation has averaged 7.5%.
Over time, his RM10 million would
multiply faster.
HNIs usually have a diversified portfolio.
Property investment is not where the bulk
of their investment goes. They’re usually
invested in equity markets too. Hence,
property is part of a broader strategy and
as long as their wealth is growing through
it or at the very least, preserved, they’re
happy.
If you like this approach, you should
have strong capital because you would be
buying with cash or a very small mortgage.
Your focus should be on properties that
appreciate well over time. You need to have
a very long-term approach.
Over the long-term, the appreciation of
condominiums can plateau. This is where
the difference between well-managed and
poorly-managed condominiums get stark.
Luxury condominiums that are very well
maintained can continue to appreciate well
even after a long period. The Four Seasons
and St. Regis are prime examples.
Freehold landed properties in prime or
mature locations also tend to do well over
the long run.
Essentially, the primary concern is
sustained capital appreciation. Since you’re
not limited to Malaysia, if the medium to
long-term appreciation rate in Phnom Penh
or London is better, you can move your
capital to these cities, provided the financial
framework is ideal.
With the wealth preservation strategy,
you will be very picky about potential
tenants. You don’t have mortgage
repayments to be worried about and
therefore more concerned about getting
quality tenants who keep your properties
pristine. Rental income helps cover costs
like taxes, insurance, and maintenance but
is not sought for passive income.
The only major downside to this
approach is that you need a lot of capital.
The ROI is small, but the strategy is wealth
preservation after all so it’s of minor
significance.
There You Have It...
This list of strategies is not final. There
are other variations and hybrids. Some
investors employ a combination of 2 or
more of these strategies. For example, your
strategy could be to buy auction properties
for cash flow.
I hope this opens you to different
options that you have available. However,
do not jump into anyone strategy without
seeking out people who already have
experience doing it and learning from
them. The most successful people I’ve met
are refreshingly open with their experience.
They’re happy to share what they know and
contribute to your success. It’s your job to
find them.
n First published on Ikhram Merican’s blog
at www.livingspace.com.my.
n Ikhram is a blogger, property enthusiast
and author of The Ultimate Guide to
Buying Property.
What if you’re rich and managing
students is not your thing? There’s this
strategy...
The Wealth Preservation Strategy
This strategy is quite common among
The Wealth Preservation Strategy means you never have to worry whether the property is
tenanted or not. You’d never have to worry too much about cash flow from the properties
and your holding power would be solid.