Bread & Butter Properties

Bread & Butter Properties
Generate passive rental income

Monday, September 20, 2010

Some useful property books

An old book is still "new" if you have not read it!
Here are some of the books on property which may find useful. It covers areas such as investing, strategies, renting, flipping, taxes, and negotiations among others.

1. The Richest Man in Town: The Twelve Commandments of Wealth‎, by W. Randall Jones - 2009

2. Trump: Think Like a Billionaire: Everything You Need to Know About Success, by ‎Meredith McIver, Donald J. Trump – 2004

3. Investing in Gold Mine Houses: How to Uncover a Fortune Fixing Small Ugly Houses, by ‎Jay P. DeCima - 2008

4. Building Wealth One House at a Time, by ‎John W. Schaub - 2004

5. Real Estate Riches: How to Become Rich Using Your Banker's Money, by Dolf De Roos - 2004‎

6. Your Tenants, Your Jewels: The Complete, Unpresuming Guide on How to Become the Ultimate Landlord, by ‎Renesial Leong - 2004

7. Commercial Real Estate Investing: A Creative Guide to Succesfully Making Money‎, by Dolf de Roos - 2008

8. The Insider's Guide to Making Money in Real Estate: Smart Steps to Building Your Wealth Through Property, ‎Dolf de Roos, and Diane Kennedy - 2005

9. Think Like a Champion: An Informal Education in Business and Life‎, by Donald Trump, Meredith McIver - 2010

10. 2 Years to a Million in Real Estate‎, by Matthew A. Martinez - 2006

11. Powerhouse Principles: The Ultimate Blueprint for Real Estate Success in an Ever Changing Market, by ‎Jorge PĂ©rez - 2009

12. Trump-Style Negotiation: Powerful Strategies and Tactics for Mastering Every Deal, by George H. Ross - 2006

13. Trump: The Best Real Estate Advice I Ever Received: 100 Top Experts Share Their Strategies, Donald Trump - 2006‎

14. The Weekend Millionaire's Secrets to Investing in Real Estate‎, by Mike Summey, Roger Dawson - 2003

15. Secrets of power negotiating: inside secrets from a master negotiator‎, by Roger Dawson - 1999

16. Buy, Rent, and Sell: How to Profit by Investing in Residential Real Estate‎, by Robert Irwin - 2007

17. 101 Ways to Massively Increase the Value of Your Real Estate Without Spending Much Money, by Dolf De Roos - 2002

18. Real Estate Flipping: Grow Rich Buying and Selling Property‎, by Mark B. Weiss - 2004

19. Be a Real Estate Millionaire: How to Build Wealth for a Lifetime in an Uncertain Economy, by Dean Graziosi - 2009

20. Everything You Need to Know (but Forget to Ask) When Buying Or Selling Property‎, by Mary Smits - 2005

21. Tips and Traps When Negotiating Real Estate‎, by Robert Irwin - 2005

22. From 0 to 130 Properties in 3.5 Years‎, by Steve McKnight - 2010

23. Find It, Buy It, Fix It: The Insider's Guide to Fixer-Uppers‎, by Robert Irwin - 2006

24. Building Real Estate Wealth in a Changing Market: Reap Large Profits from ‎John W. Schaub - 2007

25. Trump strategies for real estate: billionaire lessons for the small investor‎, by George H. Ross, Andrew James McLean - 2005

26. You Can Become Rich in Property, by Peter Yee, 2009

27. 100 Ways to Save Tax in Malaysia for Property Investors, by Richard Thornton, 2009
copyright Chris Gan@2010,

Sunday, September 19, 2010

Financing: things that your banker won't do

I am sure you have all heard the saying: A banker is someone who lends you an umbrella when its sunny, and takes it away when it starts to pour! Well, although we can all laugh about this, but at the back of our minds we all know its true. Look at it from their perspective: most of the bankers are only rewarded with bonuses if they do well but if the loans they give turn bad, they will lose their jobs. So, you can say that their risk -reward ratio is a little skewed towards being conservative.

In any case, we need the bankers, as that's the only way we can get leverage. Otherwise how are you going to acquire millions of ringgit worth of rental properties? certainly not by deploying your own cash. So, we need to know what bankers' rules are and play by or around them.

4 Things Bankers won't do:
1) they won't loan you money when you really need it.
That's a fact. Try going to the bank and asking for a loan when you don't have a job or a pay slip. The banker would smile and promptly show you the door. So, having a pay slip helps: the bank will loan you a percentage of your gross salary and this can range from 60 - 85% depending on their risk appetite (also known as DSR or debt servicing ratio). So if you earn 10k a month, the max in terms of monthly repayments would be up to 8.5k. You can then work backwards and figure out how much properties you can buy.

2) they won't give you 100% of the purchase price
The bank wants you to have some equity in the property; some 'skin in the game', as they say. So it won't be so easy for you to walk away if things turn bad. But sometimes, you do get crazy situations like in the US prior to the subprime crisis where the banks were giving away loans which were way above 100% of the property value, and to people who could never afford it (even if they repaid it in 2 lifetimes!). But in most cases, banks want you to have at least 10% equity if its owner-occupied or 20-30% if its not. So, if you are looking to finance your rental properties 100% - see my earlier blog on "no money down".

3) they won't loan you more if you don't pay your instalments promptly
It is important to maintain a good track record with the banks on your existing loans. Being a little late in paying is acceptable but not behind in your payments. If you don't pay them after 3 months, you get black listed, and the bank may start legal proceedings to recover their loan. You may lose your property if they move to foreclose. But more importantly, this sort of thing may affect your ability to borrow more, to finance your rental properties portfolio in future So, make sure you are on top of your instalment payments - its just good business.

4) they won't make a decision fast enough when you need the money
Yes, if you are looking to buy a really good piece of property, and need to close on it fast, then the bank is not the place to go. The banker is in no hurry to loan you the money; they work at their pace and not yours. I have never met a banker that has the same urgency as I have when faced with a super deal. So, in such situation, you need to have some back up financing. Borrowing from family and friends, or finding other equity partners may be better alternatives. And, then later financing it through the bank. That way, you are more likely to close on  a good deal. Much less stressful than praying for the banker to come through with the loan when you need it!

Well, those are the four things I have experienced with bankers. Let me know if you know of more.


copyright Chris Gan@2010,

Friday, September 17, 2010

How 5% growth every year can make you rich

I was reminded about the importance of this when talking to a friend recently, who had made some pretty descent gains, buying and selling houses. If you are in this business of flipping, then you should be looking at at least 20-30% gains to make it worthwhile, for the time, risk and money it takes.

However, this is not what creating passive income from rental properties is all about. Generally, such rental properties do not appreciate by 20-30% per year unless in exceptional cases. But you can probably expect the value to grow by say around 4-5% per year. And believe it or not, that should be enough to make you rich.

Let's say for example, you bought a flat that costs RM100k, and financed it 100% (i.e. loan of RM100k @6% p.a. interest). The interest & principal repayment is roughly RM620 per month, and assume that this is for 30 yrs. Now, if your property value grows by 5% p.a., it would take approximately 14.4 years to double in value ( Rule 72: where you divide 72/5).  And if the growth is 7%, then it will take you a shorter time - 10.3yrs instead. Note in your monthly instalment, you pay more towards interest intially but over time, your payment towards your principal increases (hence, building your equity in the property).

Now, this interesting because, every month as long as you are repaying your instalment, your equity in the house builds up (see the chart above) and finally after 30 yrs, you would have 100% equity; the total interest paid is RM122k, while the property value is around RM432k. So, selling it at that point would net you RM210k! Not much? Well, if you had 10 units of such flats, that would be a cool RM2.1mil gain (if you were to sell of course, and have not refinanced it along the way). This is not taking into account the positive cash flow (plus compounding interest) that you get along the way if your rental is higher than your monthly repayments. Not a bad deal, right? All this from a simple 5% growth per year.

copyright Chris Gan@2010,

Wednesday, September 15, 2010

What if you can't rent out the properties

What if you can't rent out your properties? This is one of the frequently asked questions and it relates to tenant management. I get asked this question a lot, by people that I talk to about this idea of creating passive income from rental properties and  also indirectly by banks. By limiting how much you can borrow, they are effectively saying "hey, we are not sure if you can afford this loan". Sure, you plan to rent them out but "what if" all your tenants either don't pay or worse still, all decide to leave?

Firstly, what if they don't pay? There are obviously ways to mitigate this problem. Firstly, there is the 2+1mths deposit that they pay up front. Normally, if they are late in paying their rent, that is usually a red flag that they are planning to leave; tenants are normally worried that you may delay paying them back their deposits, and would often try to "run-down" their deposits. Hence, they will not pay the last month or if possible last 2 months. You need to be alert, and I normally would just call them and ask if they plan to leave. I don't mind them not paying for 1 month but not for both. And more importanly, I get to quickly look for a new tenant before the existing one moves out. So, in most cases, my flats are never empty for long.

Secondly, what if they decide to leave? Well, then I would just need to find new tenants! That is the name of the game. But, I know what most people mean when they ask this question. What happens if they all decide to leave, at the same time? how then do you service your loans? To answer that:

1) Diversify - there is a saying " If you owe the bank RM100k, and you don't pay, you have a problem. But if you owe them RM1mil, and you don't pay, then THEY have the problem". What it means is: diversify. Think about this: if you have 20 rental properties, what are the chances that they are all empty at the same time? Not likely unless there is a bubonic plaque or SARS hitting the area, right. So, you need to make sure that even if half of the flats are empty (which is unlikely); that the rental from the other half is enough to cover all your bank instalments for that month, while you look for new tenants.

2) Invest in bread & butter properties
Now, which is easier to rent out? A condo at RM1500 per month rental or a flat for RM500 per month. Chances are, they are both easy or difficult to rent out depending on location, etc. But, If you had 3 flats each getting you RM500/mth (or total of  RM1500) - the chances of you not being able to rent all of them out, at same time is pretty slim. Further, as I mentioned earlier in my blog posting, the average wage earner in Malaysia can afford RM500 for rent but there are not many that may be able to afford RM1500/month, and for those who do, normally have more choices to chose from.

3) Do something!
Those who ask the question, what happens if you can't rent them out always assume that you as a landlord would sit around and do nothing. And at the end of the month are surprised by your tenants all deciding to leave at the same time. In reality, you would have warning signs such as late payment, and in some cases, the tenant will let you know in advance they are leaving. So you need to quickly mobilise your agent to find new tenants. In an area which is "hot" for rental, there is usually not much problem finding someone to fill the vacancy. In the worst case scenario, if you reduce the rent a little, you would be able to rent it out quickly; this is an option as less money is better than no money (if its empty for one or two months).

I hope this answers the oft asked question of "what if you can rent them out".


copyright Chris Gan@2010,

Thursday, September 9, 2010

Tenants: Your Jewels or Worst Nightmare?

Having and managing tenants is an important part of investing in rental properties. Bottom line is that by having tenants will ensure that your rental yield is achieved, while an empty apartment or flat will mean disaster.

Take for example, if you are able to have your unit rented out for a whole year at RM750 per month i.e. 12 months. And, you have paid say, RM100, 000 for the flat. Your rental yield is 9% (ignoring costs, for simplicity sake). But, if you leave it vacant for 2 months in the year, your yield drops to only 7.5%. And, you would have had to pay your monthly installments for two months from your own pocket which can be painful. So the key is to try to have it tenanted all the time, and there are some steps which you can take to ensure that this happens. A friend once told me: with residential properties there is not much you can do to attract tenants: you can only re-paint the flat once. But, the one way to bring in a tenant quickly in a worst case scenario would be to drop the rent, to just slightly below what the market is asking. Getting a bit less is better than nothing at all.

Renting: Do it yourself or pay someone
This is an interesting question which only you can answer. Doing it yourself (if you have the time and interest) would obviously save you some money (rather than having to pay an agent, of course). The agent normally charges one month’s rent for his/her service of finding you a tenant. But there are also downsides to doing it yourself: you have to face the tenants yourself!

I prefer to outsource this part to my property agent. If you plan to do the same, I would recommend that you find a good one as there is nothing worst than having to pay someone, but ending up having to deal with tenants yourself. And believe me, there will be a lot of complains especially when you talk about bread and butter type properties.

What are some of the benefits of paying someone to rent out your property?
• You don’t have to face the tenants (I personally have only met one so far in my career! And plan to keep it that way),
• You save time as showing the apartment to prospective tenants can be time consuming, and messes up your schedule if you are also working,
• You can play ‘good cop-bad cop’ with the agent, when negotiating with tenants, which you can’t if you are negotiating directly,
• He/she will do the screening of prospective tenants which can be quite tedious if you have not done this before. It requires a certain kind of skill and experience to sniff out the bad tenants.

In all the books on property investing you will find a section on Renting Out or Tenants, and they often talk about how to screen out tenants, the “undesirables” – those that don’t pay their rent on time (or at all) and also always complaining. Or, those that do damage to your property beyond the usual wear and tear.

So how do you screen the prospective tenants.
• Firstly, you need people skill, when dealing with tenants; most of the time you need to be nice to them, but at the same time, tactful enough in rejecting them if they are not the right people,
• Secondly, there are some basic requirements that prospects need to fulfill before you even consider them as serious candidates.
o They can pay the full deposit (which is 2 months rental & 1st month in advance, plus ½ month for utilities. If they can’t or ask for a reduction, that’s a red flag already,
o Have a job (else how are they going to pay you monthly?) and you can ask for proof of this,
o Preferably have a small family as they are less likely to be moving around so much (vs. a single guy/girl or a set of young working people staying together).

These are some of the useful tips to get you started on renting out your ‘bread and butter’ property once you have acquired them. In the next few blogs, I will address the other issues related to renting such as maintenance, managing the rental every month and also eviction (yes, it does happen sometimes when you need to kick people out!).


copyright Chris Gan@2010,

Monday, September 6, 2010

Converting Equity to Cash

It is amazing what happens when you read; over the weekend, I grabbed one of the property books that I had on the shelf and started reading. The book "Buy, Rent and Sell: How to Profit by Investing in Residential Real Estate,"2ed is by Robert Irwin, one of America's foremost expert. Although I only read one chapter (as I had read it before), I got some really good ideas on how to convert your equity in your rental properties into cash, and so I thought I would share that with you.

If you have played Monopoly before you would know that the object of the game is to buy as many properties as you can, and build a fortune. The trick of course is how to acquire one property, and parlay that first one into the second, and third and so on. Lenders would be quite happy to loan you money if the property you are buying is owner occupied. For that, they will give you at least 90% of the property value. But if its a rental property, and if you already have a few, the bank may get a little bit jittery. They would often offer a lower MOF of say 70-80% or they may vary the property valuation amount.

After you have managed to financed your rental properties, and over time your equity in them will start to build. Further, these properties may experience some capital appreciation, and then you will be faced with a problem. A good problem, nonetheless as your wealth starts to grow. The difficulty you may experience at this stage is "how do I convert some of this paper equity into cash?" i.e. how to cash out?

The straightforward answer of course is to refinance your existing property. And often banks don't mind if you want to refinance the existing property loan with a new one. But as soon as you want to to pull some money out, in excess of your original financing, that is when you want to cash out - that's when the problem arises. For example if the property has a value of RM150,000 and you still owe RM90,000 - that's an equity value of RM60,000. That's a nice amount of money for you to buy your next property. But banks tend to frown on letting you cash out as they perceive this as weakening their position in the property; and that you would not be as "committed" to it if there was adverse changes in your circumstances like if you lose your job. Of course, what you plan to do with the cashed out money has nothing to do with the Bank; but you will still face obstacles.

So, Irwin suggested two solutions:
1) To take two mortgages. That means, keep the first and get a second mortgage for the property. Or, you can get a new first and second mortgage which has a combined MOF which is higher. Of course, be prepared to pay a higher interest rate on the second charge (for the perceived higher risk), but normally the lender is not as worried that you will pull out.

2) Instead of refinancing your rental, refinance your personal residence.
We all have to live somewhere. If you are renting like me, maybe its a good idea to buy a property. The plus point is that the bank will always give you better rates and higher MOF for owner occupied. But the trick is how do you increase your property holdings through this? Refinance the personal residence, and then after a period of time, move out and convert it into a rental! Effectively, you would have got some cash out, and ended up with another rental property. But, as my wife rightly asked: what do you buy that can later be turned into a rental? Obviously, a landed property would be preferred as a residence but not as a rental as the yields tend to be dismal. And, certainly no where near my target 8% gross yield. On the other hand, if you buy a condo say like in Sri Putramas, you may be able to rent it out but only get a paltry yield of 4 or 5%, but the appreciation may be limited.

So, that gave me some food for thought. If I am able to do this: buy & convert personal residence into a rental, and getting some equity out at the same time, then by doing this over and over again, I'll be acquiring many more properties in the future.
* *

copyright Chris Gan@2010,

Friday, September 3, 2010

New property rules in Malaysia soon?

Singapore recently announced further restrictions on people buying second homes in a move to cool down the overheating property market. The amount of loan a borrower can have is now reduced from 80% to 70%, thus increasing the amount of equity you need to have in the 2nd home.

Likewise in Malaysia, the central bank (BNM) is contemplating similar measures; after initial signs of a property bubble percolating appear. Some semi-D houses in gated and guarded (G&G) community of Desa Park City now costs nearly RM1m compared to those in nearby Bandar Sri Damansara which are around RM400-500k only. It is often argued that G&G deserves a higher premium compared to those without, hence a higher appreciation. But perhaps a 100% premium is a tad high?

In any case, according to a prominent economist I spoke to, it is likely that the measure by BNM may be targeted say for those property worth RM500k and above, as this is the segment that shows signs of speculative bubble. Hence, it is unlikely to affect "bread and butter properties" such as apartments/flats below RM150k. Which is good news, really as you can still continue to buy rental units with higher margin of finance.

However, the downside of such a speculative bubble brewing in the higher end property market is that it also affects the lower end prices. A 1B 2RM flat I used to be able to get for RM75k (which is about RM5k below market value) is now priced at around RM95k. While I am happy that my own unit has appreciated by c.20% in the last 1 year but it makes it just a little more difficult to buy at a low, low price. In fact, to justify the higher prices, I have started to increase rent by between RM30-50/month to bring it in line with my target gross yield of c. 8%. So, as you can see, any appreciation to your rental property is a bonus, but very often, it also helps to push rental prices up. You gain from both angles*.

*assuming interest rates does not move up rapidly of course.

SINGAPORE Aug 30 (Reuters) - Singapore on Monday announced
restrictions on people buying second homes as part of new measures to
cool the residential property market.

These included decreasing the amount of loans a person can take to buy
a second property to 70 percent of the property value, down from 80
percent currently.

The government will also impose a stamp duty on homes that are bought
and sold within three years, increasing the holding period from the
current one year.

"The government's objective is to ensure a stable and sustainable
property market where prices move in line with economic fundamentals.
The property market is currently very buoyant," the Ministry of
Finance, Ministry of National Development and Monetary Authority of
Singapore said in a joint statement.

Prime Minister Lee Hsien Loong said on Sunday the government will
build 22,000 new public homes next year, up from 16,000 this year, in
a bid to ensure housing remains affordable.

"We've acted twice to cool the market -- once last year and once in
February this year -- but prices are still rising, Lee said. "We need
to do more."

Private home prices in Singapore rose 11 percent between January and
June, according to the Urban Redevelopment Authority. (Reporting by
Harry Suhartono, editing by Kevin Lim)