Investors today are flush with choices of instruments, such as fixed deposits, shares, unit trusts, insurance endowment plans, gold bars, bonds and so on. The famous saying, “the higher the risk, the higher the gain” also works in reverse. Before investing, it is important to gauge our risk appetite. This is sometimes influenced by our culture, upbringing, character, age or profession.
Generally entrepreneurs are “risk takers” and bankers or accountants are seen as “risk averse”. The older a person gets, the more risk averse he is likely to be. There are various factors to consider when making an investment. Ask yourself questions, such as:
How much capital do I have to invest?
What is my expected rate of return?
Is it a short-, medium- or long-term investment?
What are the options available to me?
How do these options compare against each other?
Have I considered all possible costs of investment (entry fees, exit fees, taxes and so on)?
The list goes on. By answering these questions, we can narrow down the choices to those that most suit us. This is one method of profiling. It reduces confusion in deciding which type of investments we should invest in. For example, unit trust investments are for people who are interested in medium-to-long term investment.
It is wise not to put all eggs in the same basket. In property investment, diversification can come in the form of various property types, such as residential, commercial and industrial. In shares, it would be investing in different companies involved in different industries. This is a basic investment principle. If one share suffers losses, your overall investment is compensated by investments in other companies that may still be profitable. Diversification is advisable to minimize one’s risk exposure.
Income Potential
There are basically three broad streams of growth for property investments:
Capital growth (buy and hold);
Rental income (cash flow);
And a combination of both.
Some investors look for high-yield properties (for the rental income) while others go for appreciation. Of course, the best bet would be a combination of both. However, such property investments are few and far between.
Before investing, keep in mind the incidental costs involved, such as legal fees, stamp duty, assessment, quit rent, management fees, insurance, valuation fees and so on. There are many methods for investment appraisal and I have just identified the most commonly used, known as Yield.
Say an existing three-storey shop-office is currently tenanted at a net income of RM5,000 per month, and the property is going for RM1mil. Is this a good investment? Let’s find out.
Yield = RM5,000 x 12
---------------------
RM1million
= 6%
Current fixed deposit rates are at 4% p.a. This investment gives you a 2% higher rate of return than placing your money in the bank. The yield should be more than surplus the cost of funds.
As a general rule of thumb, seasoned investors would go for a property investment with a yield of twice the fixed deposit rates, which in this case would have to touch no less than 8%. How can this be achieved? There are only two ways, as per the formula – either increase the rentals or reduce the purchase price. Say, the rental will be revised at the next rent review in a month to RM6,000 per month for a further two-year term, and the seller is willing to consider a price of RM900,000. Your yield now hits 8%.
If current rentals are lower than market rates, there is a strong possibility that you can adjust the rent upwards at the next review, thereby improving your returns instantly. However, the reverse applies. Be mindful of short tenancies if you charge above market rates. The returns may seem attractive in the short term but once the lease terminates, new tenancies may not fetch the same prices and your returns will likewise fall.
It is important to take note of the Tenancy Schedule, the tenant’s standing, past records, duration of tenancy, renewal of lease for rent reviews and so on, as all these will have bearing on the quality of the investment. I know of some investors who are willing to commit on an investment of slightly lower yields, but have solid tenants who pay the rent on time and are, to a certain extent, “hassle-free”.
Yields for commercial properties (shoplots and offices) and, to a large extent, new high-rise residential properties (condominiums and apartments) average in the region of 6% - 9%. Landed residential properties such as single- or double-storey terrace houses return around 3% - 4%.
However, most will agree that traditionally landed residential properties have greater upside in the capital appreciation department. Then again, location is very important. In recent times, we see a trend where the inner-city luxury high-rise is practically doubling up in capital appreciation compared to 2 – 2 ½ years ago. It is a demand and supply issue. Land in certain areas is scarce: the demand would be good. Generally, properties in the central business district fetch the highest returns due to the strategic locality and excellent accessibility.
Conclusion
Here are a few good rules : Always have at least one month’s living expenses in your Current Account; always have three to six months of your monthly living expenses as Emergency funds; you can invest the surplus.
“Property investment is complex and requires a lot of knowledge and experience,” as quoted by a fellow investor. This is good advice. Read extensively, get the facts and do not be afraid to seek professional help before making any decisions.
Chan Ai Cheng is the general manager of S.K. Brothers Realty (M) Sdn Bhd and a registered real estate agent with the Board of Valuers, Appraisers and Estate Agents Malaysia, a council member of the Malaysian Institute of Estate Agents (MIEA), a member of the Institution of Surveyors Malaysia (ISM), and a registered Financial Consultant with the International Association of Registered Financial Consultants (IARFC). If you have any questions or suggestions on property investment or feedback on this article, please write to aicheng@skbrothers.com
