Bread & Butter Properties

Bread & Butter Properties
Generate passive rental income

Wednesday, July 14, 2010

How to find rental properties below market price

I once read that financial guru, Robert T. Kiyosaki of the "Rich Dad, Poor Dad" fame, and his wife owned more than a thousand of those "little green houses" (rental properties in Monopoly game). Yes, 1000 rental properties! That really blew me away so to speak as that's quite an achievement. Today, they collect cash flows from those houses every month, and all of them are fully paid up. Imagine what your bank account would look like? So, I said to myself: even if I collected 100 of these little rental properties in my life time I would be ecstatic. Even if each only gave me RM500.00 per month, that is an extra RM50, 000 per month! Now that's passive income!

With that, I started my journey in collecting "little green houses"; and set a goal in my first year to accumulate 10 units. It was pretty ambitious as I had not set aside much extra cash for this purpose. But, I knew there would be ways I could "bootstrap" my cash flow from my salary to buy the properties. (More on this later).

The key to the whole program of buying rental properties successfully is to be able to buy below market price. As Warren Buffett the great investor says: Price is what you pay, value is what you get". You are trying to find out what the value is, and pay a price lower than the value. In property investing it is similar to other types of investing: it doesn't take much effort to buy at market price. But then, it's more difficult to make money. This is more so in property, where as stated in the DeRoos' 8 Golden Rules: you make money when you buy! So whenever possible, buy below market price.

I am going to split the process down to two parts: firstly, what it takes to find those below market price rental properties, and secondly: how do you know if these owners are motivated to sell (what I call motivated sellers).

Well, once you have identified your area to buy these rental properties, the next step is to get to know it well. That means, getting a map of the area and make a large photocopy of it, so that you can mark down the areas that you wish to buy, and those to avoid. You can even put it up on your wall so that you look at it every day.

To know the area really well, you will need to do some work. You need to go on a walkabout around the area and look out for properties to buy. Sometimes, agents will hang the "For Sale" sign outside the property. If you just want to buy at the price that everyone else is buying at, then just look in the newspaper's classified ad section. Normally the advertised price would be higher than what the buyer is looking for; so, if you've paid that, it would be above market price. So, in short, to get bargains, you need to do legwork!

How do you find out what is the market price for the properties in the area? Remember there may be different unit sizes and also located on different floors. The 3R 2B would cost more than a 2R 1B, and sometimes even for the same kind of property, e.g. a 2R 1B, there may be slight difference in size due to the layout, hence the value. So you need to know all these things before you make an offer. (In short, know everything there is to know about the property).

Also units on different floors command different prices especially if it is a 5 storey walk-up flat. Generally, the lower floors command a slight premium; you don't have to walk up the flight of stairs. So, units on ground floor and 1st floor are desirable. But if you are buying for rentals, don't worry too much about the lower floors. People who rent don't mind walking up a few flights of stairs if they can pay slightly cheaper rent. Same goes for renovation; people who rent are transients so they won't be too concerned about whether the unit has marble or tiled flooring. I generally don't pay for the premium of lower floors or extra renovations.

Well, the best way to find out what the market price is to Ask. That means, ask the agents that "farm" in the area, ask the owners, and ask the people who rent in the area about what the price is. Some will give you some ridiculously high prices but some will be more realistic. Make sure you check on what are the transacted prices too and this is where you need help from the valuers. They will be able to tell you prices transacted usually lagging by about 6 months or so. That would do, as you are trying to get an estimate what the value of the property is. If you are fortunate enough to know someone who also buys in the area like me with my friend, then you can quickly get an idea of pricing.

Another good source of information on the market pricing for properties is in the classified ads, and on-line property portals like They give you an indication of the asking price by owners and agents but these tend to be inflated, so beware. Still, they provide a good rough gauge if you like.

Here's the crux of finding good properties at below market price: it's a Numbers game. Most people look at one or two properties and then they give up; they could not get the price they were asking for, and it's too hard work to look at more. No, property is about Numbers. Dolf DeRoos has a 100: 10:3:1 rule which means that you need to "look at" 100 properties, out of which only 10 you would make an offer on, and try to arrange finance / sort out the details for 3, and may only end up buying 1. At first I thought they were hypothetical numbers, plucked out of thin air but guess what? It works. In own case, I certainly had those odds: usually it would take me looking at 20-30 properties before I came across one or two that were worthwhile to make an offer on. Now, what does looking at property means? It means you are able to evaluate it to the extent that you can say, why you want to buy it, or why you rather pass on it. It is that simple.

This approach is like a funnel: you have to put a lot of properties in at the top before one, comes out through the bottom. After looking at a few of these properties, you will soon recognise, what some of the reasons are that you would pass on it. Usually it's because of the high asking price, or the state of the unit (needing repairs), or the owner does not have the title in his name, and many others. But, once in a while, you will come across a gem: a motivated seller, looking to sell his rental below market price, and you make an offer on it. And when you close it - it is an incredible high. Once you find one, you know you will find many, many more. It is a wonderful feeling knowing it can be done. But, it requires persistence and belief that the numbers 100:10:3: 1 will work for you. Happy looking at properties

Next: Who are the motivated sellers?

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