The primary reason for investing in property is that it enables leveraging or gearing for the investor. Leveraging simply means using other people’s cash (typically that of banks or other lending organizations) to allow an investor to make a purchase using less of his or her own money. Investors can borrow up to 90% of the property’s value and get a tenant who technically covers the mortgage payments. This is typically the margin that an investor looks at, less upfront and higher margin of financing. However, the recent 70% margin cap for third mortgages in respect of residential properties makes it somewhat more difficult now and investors would have to reconsider their intended purchases as more upfront monies is required.

Having said that, while property has always been a major investment sector, particularly for the large-scale institutional investors such as pension funds and insurance companies - for the small investor (apart from owning your own home), property has for long, been overshadowed by the various investment opportunities offered by banks, building societies, pensions, unit trusts and stocks and shares.

With this in mind, let us take a moment to remind ourselves of some factors favouring property investing:

1. Markets are Cyclical - prices go up as well as down

Investment markets of all kinds are cyclical in nature (they rise and fall over time).

2. Inflation and interest rates
It's hard to find decent returns on cash investments

3. Volatility in the stock markets
Has led investors to think twice about putting more money there

4. House price inflation
We have seen some quite dramatic rises in property prices over recent times.

5. Increasing job mobility
More single households and rising property prices have been a boost to the demand for rented accommodation.

6. Increasing affluence
There are now many more people with second homes and funds available for investment.

Many small and medium size private investors and landlords will stick with property investments through thick & thin, through good and bad times, and will reap the long-term benefits. People have always appreciated the benefits of owning property (bricks and mortar) over the long-term, particularly with regards to capital appreciation. But the boom years of the recent past have shown the real potential of property as an investment, though clearly and  more recently, we are beginning to see that there are risks as well.

So, is it still worthwhile to consider property for an investment?

Investment Returns

Back to Basics

Different types of investment can be compared both in terms of their overall risk, and their potential rewards (yield).

Investments give you two kinds of reward: interest (income) and capital growth (increase in value).

The safest forms of investment may only give one of these. For example, a bank investment will give you a guaranteed interest of about 3% with absolutely minimal risk - you are guaranteed to get your capital back, but the capital will not appreciate in value.

At the other extreme, a high performance share in a smaller company may give a low income (dividend payouts minimal or zero) but a high capital appreciation (growth in share price).

This is obviously a more risky investment because you could lose some or all of your capital if the company goes bust, although you could also make a lot if the share price multiplies, say by 10 folds, in 12 months.

These two examples are at two extremes of the risk/reward spectrum:

For investors who have owned a property for a considerable period of time, it is often possible for them to refinance the property and take out the initial funds invested while at the same time having the advantage of the property and its continuing increases in value. Considered as one of the major advantages of investing in property, this allows investors to take out a bigger mortgage after the property’s value has gone up. The increased rents to be had a number of years after the initial purchase will continue to cover the increased mortgage.

When a slump in values occur, it presents a "knock on" effect on rents as they then go up, and rental yields increase even more to reflect property values that have gone lower. The idea behind smart property investment is to wisely take advantage of other people’s money (as mentioned earlier) to fund a property investment. While not everyone will be happy with taking on debt in order to fund property purchases, it is however, seen as beneficial to take on debt in order to acquire assets that will appreciate in value and could make substantial profits over time.

Will 2011 be a good time to sell or buy property?
 
The question of whether to purchase property still goes back to the fundamentals, which is firstly to determine what is the purpose of the purchase.  This is still the key question. 

Investors/buyers need to be clear on these 3 matters:

Different properties would suit the different purpose and criteria of purchasers.

In good and bad times, there are always opportunities available to us. Even in good times, some make bad decisions and businesses go under or investments go sour. Likewise even in bad times, there will be opportunities for some to benefit in far-from-ideal conditions.

Some may choose to cash out on their investments at a “compromised profit” to ensure that they ride through this period without incurring too heavy commitments on mortgages, and etc. Property investors could pick up these properties that would normally fetch higher market prices.

Those who are able to should hold on to their property investments with a buffer of 1 -2 years to service the mortgage even in the absence of rental. These investors are on a safe path to sail through this global economic crisis. 

It will be worthwhile to keep the investment especially if they have been purchased at good prices (e.g. KLCC condominiums for RM700 – RM900 psf ) as it is highly unlikely that they would be able to pick up similar units at these prices except in “fire sale” situations (which we normally just hear about and seldom have the opportunity laid before us).

The important thing to note is NOT to jump in and purchase any property that is perceived to be below market price. We need to do our SWOT analysis and do the necessary research and preparations that should accompany a substantial investment such as property. You should view your investment strategy as a lifetime's occupation, based on savings and hard work, not a 12-month rush to become an overnight millionaire, which will be the road to ruin for many.

Remember that unlike shares and savings, there is no quick way to get your money out when investing in property. Investments in property can go down as well as up in value and property can sometimes take a long time to dispose of. Never invest money in property when you may need the cash in the short-term. You may have to wait some time if you need to sell and get your money back. Invest with a long-term perspective and get trustworthy professional advice.

You can also take advantage of the packages and offers offered by developers i.e. DIBS – Developer Interest Bearing Scheme and low up-front easy entry packages. However, do check on the track record of the developer and also the pricing. Though the package can be very attractive, you must count the cost and weigh the potential of capital appreciation when the property is completed as well as its rental potential. It is quite easy to get carried away and follow a ‘herd-like’ mindset and buy on impulse.

What to do as landlords of properties to have your properties rented out?

In times when you are competing with many others for tenants, it may be wise to go easy on the rents and have the tenant occupy your premises than to hold on to high prices and wait months while your property is unutilized.  

Always work out your yearly returns as opposed to focusing on the monthly rental.  It may be well worth your while to rent your unit at, say RM12,000 for 12 months, than to wait to get RM15,000 for only 9 months of the same year.  The longer a property or unit is vacant, the less attractive it becomes.

Regardless of what you actually believe, the fact is you will need to consider the ongoing cash flow of the property in order to be fully prepared for all cycles in the property market.

And in conclusion…

Chan Ai Cheng
General Manager, S. K. Brothers Realty (M) Sdn Bhd
Certified Residential Specialist, NAR USA
Registered Financial Consultant, IARFC
For comments and feedback on article, please email aicheng@skbrothers.com