Buying Property with "No-Money Down"

Probably the most commonly asked question is: Can I buy a property with no-money down? The straight answer to this is Yes, technically. However, there are some caveats.

This business of no-money down was popularised by Robert G. Allen, a financial guru who wrote a seminal book on this topic (can't remember the actual title). His mentor is a chap called John W. Schaub who's been in the property line for more than 35 years, and is author of books like "Building Wealth One House at a Time" and "Building Real Estate Wealth in a Changing Market". The truth is that it can be done.

What does no-money down mean?
In the simplest sense, it means that your property is financed entirely by borrowings or loan from the bank. You don't actually put any equity in acquiring it, and allow the monthly rental collections to pay for the instalments. In practice, you would still need to put "some" money down, initially as the down payment, but at the end of the transaction, you should get your money back from the loan, which makes it, "no-money down".

What are the caveats?
An important caveat is that you do need some money to start with, as a deposit, perhaps up to 10% of the property price. But, because you can buy "below market" (see my earlier blog on this topic), and can find a bank that will loan you the full price, you don't come up with a cent (of equity).

The second is that your monthly rental income, must be more than your instalment amount. There's good leverage and there's bad leverage. If you are highly geared, but don't have the means to pay for the instalments, you are looking for trouble. I would also budget in a small "buffer" on top of just covering the instalment, just in case. You could lose the house. But if you can cover the loan instalment, then you are set as essentially your tenant will be paying for your house, adding a little equity every month until its all yours in a few years time.

The third this is. You would probably not be able to buy every single unit with "no money down" in other words, have the bank finance 100% of the property for every unit you buy. But, on aggregate this is possible. So, if you buy 10 units, you may have say 7 or 8 units which you are able to get it entirely financed by buying at below market, while others, you are paying market value, and financing it up to 90% margin, for example. So, the aim is to buy on aggregate, with as little money down as possible. This will just increase your return on cash ratio through the roof.

I will talk more about the actual mechanics of executing this transaction in the Malaysian context in my next blog. In summary, yes, this business of buying with no money down, can be done and has been done, but mind the caveats; the returns are fantastic but there are also risks involved.

Recommended book:

Keeping track of market values and rental rates

In my earlier blogs I discussed the importance of “looking at properties”. Investing in rental properties is a numbers game, especially if you want to buy them at below market values. So, you have to go through quite a number of the ones that you would decline before you end up with a few that you make offers on, and eventually purchase.

But, there is another important reason to be looking at properties all the time; and that is so that you are up-to-date on what the market values are in your area. And also the prevailing rental rates. That would help if you 1) want to sell (which I don’t recommend – see 10 rules on investing in properties), and 2) wish to refinance it, and take out some cash.

Last weekend, I spent sometime looking at properties, and it was an enriching experience, (especially when you are not in the market to buy). With the advent of the internet, and property websites, it is so much easier to know what’s on offer out there. And what prices people are asking for similar properties to mine. Going through the listing, making calls and finding out more about the property was a good way of staying in touch with the pulse of the area. Here are some tips on how to do this.
• Check the Star classifieds or website listings like www.iproperty.com,
• Filter the listings by newness and list those that meet your criteria on a notebook, and start calling the agents,
• Remember you want to get an idea of how much your property is worth, so call those that match your criteria,
• Ask the agents if they have transacted any at the prices that’s advertised. Sometimes, owners just put them up at high prices, hoping that they may get lucky.
• Also, find out if the property is tenanted, and how much is the rental (that would help you to determine whether to raise your own rental rates)
• At the end, scan through the list and you’ll get a good feel of whether your property has appreciated or not. Compare this with the prices you had bought earlier (much easier to do if you have kept a log of the listings!)

I came away from the exercise pleasantly surprised: the price of a 2R 1B flat similar to mine is now 20% higher, and it appears that my rental rate is about 9% lower than what the market is asking. So, that’s some food for thought.

Finding Financing for Your Rental Property

A very important part of investing in rental properties is the ability to leverage. And that means having to borrow from the Bank. There is good debt and of course, not so good debt. As mentioned earlier, leverage is good because you are able to multiply your returns with a small outlay; for example, if you finance a 100k property with a 10% down payment, and if the capital gains when you sell it is say 20k, then your return is not 20% but actually 100%. The cash outlay was 10k and your returns was 20k (100%). But remember, this can work only if your rental income can more than cover your monthly instalments.

As such you need to look for appropriate financing. And, having a group of bankers which you can tap on for funding is important as not all the Banks will be interested or focus on your property segment especially if its 100k or below. Some banks just don't want to do these 'bread and butter' properties - they may think it's too high risk, when in reality its probably not. 

It's often said that "bankers are people who offer you can an umbrella when its bright & shiny outside, but will take it away when it starts to rain!" That's a bit extreme but I would also add that bankers are like everybody else: they are motivated by fear, and also greed. They are in the business of giving loans, and the more loans that they make, the more the banker makes as commission. So, don't be shy to approach them to finance your rental property; they worst thing that can happen is that they say No, in which case, just move on to the next one.

Firstly, check out a few banks -  maybe one or two local and one or two foreign banks to start with. Ask some friends if they have friends who do loans. Referrals are a good way to find the good bankers. Don't assume that all bankers will do loans; some focus on other areas like wealth management only.  Call them up and ask what the bank's offerings are, in terms of rates, margin of finance (MOF), tenor and if there's any special packages like zero cost (for loan agreement and valuer's fee). Next compare, the offerings; not just the cheapest rates but also, the MOF they are willing to give. And also service; there are some banks that I would not take a loan from because they can't get their act together, usually causing me more money in the long-run in terms of delays, etc.

Next, once you have identified a few bankers you want to deal with, ask them what they need. Normally the documents required are:
- copy of yr IC,
- Bank statements for latest 3 months,
- Salary slips for latest 3 months,
- your tax return (sometimes),
- details of property i.e. copy of the offer to buy & sales and purchase agreement, if you have.

I would always make many copies of these, and submit applications to two or sometimes three banks for the same property. It doesn't take much more work than submitting just one application. That way, I am always sure that I will get financing for the property as time is ticking; you only have 90 days to sort this out from date of signing your S&P. So you don't want to be left hanging with no financing; it's better that you reject 2 offers than having to accept the one and only, with terms which are not favorable to you.

In order to leverage my time, I would usually ask the bankers to come to see me, rather than the other way round. That way it saves me travel time and also tells me that they are serious about doing my business. Other ways of saving time would be to use faxes and also courier (Poslaju) to send some of documents: meet face to face when its absolutely necessary.

Lastly, know this - not all of bankers would want to do your loan, for one reason or another. Sometimes, it's because of bank's policy for example, not wanting to finance properties below 100k, and so the rates offered may not be attractive. Other times, the banker is not interested to do "small" loans. Don't be disappointed if you don't get a quick reply (or no reply at all) on the status of your loan. Often I wonder if they were even submitted in first place! That is why, you should have a few bankers you can call on, and submit more than one application for loan for each property.

Once you have done a few loans, and dealt with a few bankers, you will be able to identify those that can be part of your team.

**
Chris


  

How to find a good property agent

The property agent is probably one of the most important members in your team. Finding the right agent can help leverage your time considerably. So, take the time to go find them.

The things that are important in the process of investing in rental properties are:
- finding the right property,
- negotiating and making an offer,
- arranging financing, and
- rental (or property management).

Out of these, finding the right property, and negotiating (plus making an offer) probably takes up the most time. So, leveraging on property agents to help you is a smart move; although you have to pay commission but I believe it's probably worth it, if you get the right service.

What I look out for in an agent
He/she must:
• Have integrity – this is non-negotiable,
• Be competent - knows the area you are looking to buy well,
• Have the experience to negotiate successfully - try and avoid newbies, and look for someone who's been in the profession for at least a few years,
• Be able to deal with people (i.e. have people skill) - very often they have to deal with difficult owners, and if they are not able to manage the negotiations, it may blow the deal for you.
Before engaging them, you need to ask the right questions, for example:
• How long have they been doing this?
• Are they licensed?
• How long have they been with the property agency?
• You can call the agency’s principal and run a check on the particular agent if you are unsure.
Another good way to find good agents, apart from asking for referrals from friends or people who also buy/sell properties is to take a walk around the area. Look out for the “for sale/let” signs; the agent that “farms” the area would normally have the most listings. Take the phone number down, and the property details and give them a call to find out more. Keep a listing of the agents in the area as you will probably come across them again if you are actively looking at property in the area. Sometimes they also use more than one mobile phone number, so its important to keep track of that too.

But, one thing to watch out for is that sometimes the agents who display the signs don't actually have listing. Some will leave the signs up after the property is sold, to generate more the leads. Normally you can quickly figure them out by asking a few simple questions, and asking them to view the specific property advertised.

Negotiate the commission but pay them
The agents earn a commission for their services; and this is set by the Act that regulates property agents. For property below RM100,000, it is 3% of the purchase price. But, this is usually negotiable especially if you are going to be buying many properties – I normally agree up front on a flat fee of 2%. It’s important to pay agents well; a good agent takes care of a lot of related matters for you in the process, from helping to negotiate with the owner, checking on documents like titles are in order, helping to settle the maintenance fees, and others. Sometimes the really good agents will even go as far as making sure the property is in good order before the final handover is done, and that can save you a lot of work. Thus, a good agent is certainly worth its weight in gold.

**

Wangsa Maju - Section 4, Setapak

5 storey walk up flats, located near Wangsa Maju Lrt station. Setapak.

Popular place for rental as near to TAR college.

Many blocks. Section 1, 2 and 4

Rental around 550 for 2 bdrms. And 750 for 3 bdrms.

Leasehold.

Cost varies from 80k to 120k depending on location and floor.

Near Wangsa walk shopping center.

This is My Current GPS Position:
Latitude: 3.201748
Longitude: 101.741964
Google Maps link

Chris Gan. www.breadnbutterproperty.blogspot.com

Rampai Court, Setapak

4 storey walk up flats in Setapak area.

A number of blocks - phase 1 and 2.

Located near shops and makan places, and soon to open LRT station (Putra line)

Rental around 500 to 600 per month. And 3 rooms priced around 90 to 100k.

But some units quite prone to terminate problems.

Freehold.

This is My Current GPS Position:
Latitude: 3.194399
Longitude: 101.732666
Google Maps link

Chris Gan. www.breadnbutterproperty.blogspot.com