Where To Buy Your Rental Properties

How do you decide where to buy your Bread & Butter properties for rental?

Well firstly, it must be an area where people want to rent i.e. there is high demand for rental and there are ample units available for you to buy.

I would suggest you find an area which fits your criteria and stick to buying in that area. While some people may say you should "diversify" your risk by buying units in few different areas, I beg to differ. You should put all your Eggs in One Basket and watch that basket closely!

Another good reason to focus on one area is that it is a lot easier to manage. Imagine having one or two units in Cheras and a few more in Selayang for example. You would waste a lot of time travelling to where your investments are. And you would probably need to travel there if you are later on managing those units yourself.

What to look out for?

I would suggest you take a few hours off during the weekend and drive around some potential neighbourhoods before you decide to buy.

1. Ideally it should not be too far from where you live. My rule of thumb was that it should not be more than half an hour or forty five minutes from where I live; I have to go there often initially to meet sellers, and to learn about the area, so I don't want to waste too much time in the car.
   


2. Also it should not be too far from city centre or commercial hubs like KL, PJ or Shah Alam. It would be a struggle if you were to buy a flat in Bukit Beringin and expect to rent it out easily. Even if you could rent it out you may not be able to collect the rent especially for those low cost flats around that area. So make sure you buy close to where the commercial activities are. A good idea is to ask your colleagues in your office where they stay? And why did they choose that area. A rule of thumb: I draw a 30km radius area from KLCC on the map and will look only within that.
   


3. Look out for a good property agent once you think you have found a good area to help you. I am sure most people have heard about the word "farming" among real estate agents. Basically, what that means is that they specialise in that area and look for properties in those areas. So they would make it their business to know everything there is to know about that area. Talk to them and ask them what's available. It is a fast way to get up to speed and to decide whether you want to buy in this area or not.
   


4. Remember we are looking for bread and butter properties; where most of the working population lives. Don't ask your boss where he lives. Ask your young executives, officers or those with small families. Talk to those that are from outstation and are currently renting. And don't ask them where they would like to live but where they are now! It would give you a pretty good feel of which are the good areas to buy rentals.
   


5. What are some of the criteria that are desirable for the area you plan to buy? Here are some which I have found. You can put them on a list and tick them off as you evaluate each potential area (like a check list).
   

• Near public transport like LRT, Putra or Bus line,
  


• Near shops and eateries,
  


• Has shopping malls like Carrefour and Tesco nearby,
  


• Low rise walk up flats (not high rise) – see photo
  


• Lots of parking available near the flats /house,
  


• Muhibbah community – Malay, Indians and Chinese, easier to rent out vs. where a single race is dominant
  


• More matured area, developed more than 10 years ago. No need to wait for it to grow,
  


• Schools and colleges around,
  


• Middle income – look at the cars tenants drive: Is it Viva, MyVi and Proton, Vios? Or are there motorbikes only?
  


• Are there many Astro dishes in the flats/apartment areas? I still consider this a luxury and shows the income level of occupants,
  


• Safety – ask the tenants and shop owners around the area. Any there many major incidents? Theft or break-ins tend to put tenants off.
  


• General areas are well kept – good maintenance, rubbish disposals, etc.
  


• Well -lighted general areas,
  


• Play ground for kids or a park would be plus,
  


• The building exteriors are reasonably clean i.e. painted and not too much graffiti.
  

I would suggest once you have identified a few potential areas, go and have a few walkabouts in the area to familiarise yourself. You have to feel comfortable with this area before you buy your first property.

Stanley's Law: this was taught to me by a friend who invested in properties years ago and was successful at it. Go and have a look at the place at night – if you don't like it at night, you probably won't like it during the day! The inhabitants are usually home then, so you get a feel of what it's really like. Are there major disturbances at night? Drunks with unruly behaviours are not desirable neighbours.

Some suggested areas to look at (see Personal Money article on Properties below 100k -April 2010 issue): Pandan Indah, Setapak, Taman Miharja, Maluri & Ara Damansara.

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What are Bread & Butter Properties?

Generally, Bread and Butter Properties (B&B) are homes that appeal to the masses: the vast majority of people in our society live in these houses, flats or apartments.

In Malaysia, low cost and medium costs properties would fall under this category of B&B. Properties which are priced in the range of RM25,000 to RM42,000 are considered low cost properties, and the government mandates that 30% of housing development by private sector to be reserved for this category. The properties are normally 5 storey walk-up flats that measure around 650 to 700 sq ft. The Real Estate and Housing Developers Association (REHDA) says that these low cost housing are usually reserved for those with household income of less than RM2500 per month.

Low costs properties are normally leasehold and State/DBKL approval is needed by the owner to transfer the title.

On the other hand, medium costs properties are normally priced from around RM72, 000 and up to RM100, 000. These are normally not subjected to the same restrictions as low costs housing.

What should be noted though is that, although the purchase prices of the low cost property is lower than RM42,000, the price in the secondary market could be much higher. Some low costs flats measuring 650 sq ft (2 rooms 1 bathroom or 2R1B) have been transacted at prices as high as RM70-80,000 in desirable areas. While those with 3 rooms, 2 bathrooms (3R1B), measuring 750 sq ft have transacted at above RM100,000 depending on location, and also condition of the flats.

In actual fact, there is no real hard and fast rule on what constitutes a B&B property: suffice to say that these appeal to the mass majority of people. If you really want to know where to find them, a good place to start would be to just ask around your office: colleagues or people in your work place, where they live? Talk to those who are young executives, or newly married couples, especially those from out-of-town. You would find that most renters live in areas like Cheras, Setapak or Desa Tun Razak and are renting houses or flats that are priced between RM500 to RM800 per month.

Why buy B&B properties for rental?

One of the key criteria of creating passive income from rental properties is that you must be able to rent it out easily. If you have difficulties renting it out, then you will find that it doesn't work so well. A high vacancy rate just means lower yields. Therefore, it's important that there are plenty of renters in the area you choose (i.e. there's high demand for your flat or house). And, they are willing to pay top dollar for living there because of desirable factors like easy transport and others (we will discuss this later on).

Generally, I focus on flats that can rent out for RM500-600 per month (2R1B) or RM700-800 per month (3R2B) (gross). These are the prices that most working people or you small families can afford. As most spend around 25-30% of their income on rent, this would be the range that makes sense. The average income per capita in Malaysia (2008) was US$6970 or RM24,000 per year. That's roughly RM2,000 per month hence, the average Malaysian can afford to spend up to RM600 per month for rent (or up to RM800 per month for a small family).

Segment *	Rent	Value of property
High end (30%)	Above 1,000 p.m.	Above RM150,000
B&B mid (40%)	Between 500 – 800 p.m	Below RM100,000
Low end (30%)	Below RM400 p.m	Below 42,000

*Note that this is how I segment the market for rental properties and is not based on any in-depth research.

Focus on the mid segment (40%) bread and butter properties for reasons explained. At best stay away from the low end segment as they are normally in less desirable areas where the government has put up public housing. And most importantly, a reason to avoid this segment if you planning to generate passive income is that it may be difficult to collect rent from the renters (high possibility of default).

The high-end segment can also be tricky as the renters can have many choices to choose from if they can afford to rent, for example, young executives. Further as they progress in their career, and make more money, most would be encouraged to buy their own property to live in – hence, they move out of renting your unit! The very high end properties (e.g. Bangsar, KLCC or Mt Kiara condos) which tend to attract the expatriate community who are prepared to pay RM5000-10,000 per month rental are subject to fluctuations in market conditions. In good times, it may be easier to rent them out but when crisis hits such as in 1998, or 2008, a lot of the units stay empty as the expats are sent home. So, for this segment of investing for rental it may not be the most appropriate strategy – most who buy, choose to live in it or as an investment (capital gain) or both.

So, stick to the mid segment which can provide more than enough opportunities for you to generate passive income through renting.

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How Did I Get Started (My Story in Brief)

This would be as good a place to start as any, I suppose. How did I started in this business of buying rental properties and why?

Well, I have always been interested in creating passive income, and not so much in the properties themselves. I a little bit weird in that sense, but I have learned from Robert Kiyosaki and all the Gurus on passive income, that it is the cash flow that matters and not so much what the asset is, or how it looks like. Who cares what it looks like if it can create the cash flow that you want? My only criterion really is that it must be legal. And, that is why I have focussed on what you call "bread & Butter properties" which are properties that appeal to the masses. I will define this market as I go along.

Rental properties lend themselves perfectly to creating passive income if you do it correctly. But, how do you buy rental properties correctly so that you can have that positive cash flow coming in, month after month? And, that's what we are going to be talking about in this blog.

How did I start in this?

I started really by accident, when Raymond, a friend of my brother's attended my dad's wake in 2008. We got chatting and after the usual pleasantries, he mentioned that he was busy buying rental properties. I was intrigued and so I inquired a bit more: where was he buying, what was he buying, why was he buying such properties? - all the usual questions.

One thing he said that caught my attention was the word "passive income".

He said he was getting positive cash flow every month from buying flats or what we call apartments. These are what he defined as "bread & butter properties".

The other thing that interest me then was he mentioned that I could also do it.

And, that he could even show me how I could buy with no money down. Wow! that really got my attention. And, so we arranged to meet up after that to talk further about this.

So, that's how it all started. From that one little conversation with a friend and the willingness to learn and to research it further.

Since then, I have acquired more than 20 rental units, one-by-one over a 1.5 year period, and have been collecting positive cash flow every month, after deducting all the instalments and expenses ever since.

The wonderful thing is not so much the number of units which I have bought but the fact is that on aggregate, I have been able to buy them with no money down!

Yes, with no money down. That was the only way I could buy them as I didn't have much money to begin with. My wife and I both have descent jobs but not much savings. But, we have been able to do this by "boot strapping" our cash every month from our salary and also through short term borrowings. Not to mention the fact that Banks are ever willing to loan us money especially if it's for property investing. And, we took advantage of that, and as a result have been able to build up assets worth 6 figures, giving us few thousand extra Ringgit a month (after deducting instalments, etc). One of the prerequisite to buy able to do what we have done is the ability to borrow (or leverage). Even if you don't at this stage, I will show you how to overcome that hurdle.

A few thousand Ringgit a month may not sound like a lot to some people, but hey, it sure goes a long way especially in these tough economic times. Not forgetting the compounded effect when you can invest it into other investments like stocks, or unit trusts. Or, just by leaving it to grow in your fixed deposit account.

What I am going to show you is not about getting rich quick through property investing. That is not the focus here. There will not be any hot tips to point you to the latest property launches where you can make a killing by flipping them. You can call this getting rich slowly as Sumney and Dawson call it in their book "The Weekend Millionaire's Secrets to Investing in Real Estate". It's for people who want to generate, positive cash flow that comes in month after month, while the tenants help to pay off their loans and increase their equity in the property. And in the meantime while you are collecting rental income, those properties are also increasing in value.

Finally, why am I doing all this? Well, I have had many friends who are interested in making passive income and I have showed some of them how to do this one-on-one. It's about time I put this down so that more people can benefit from this.

I hope you will find this blog useful, and that you will support it. And I would love to hear your comments, suggestions and also your successes as you embark on your exciting journey of property investing.

I wish you all the best.

Chris