Bread & Butter Properties

Bread & Butter Properties
Generate passive rental income

Wednesday, August 17, 2011

I Sold!

I finally sold one of my bread and butter properties. And, it was not as difficult as I thought, probably because it was to a friendly party - my uncle and aunt.  Actually my mom sort of arm twisted me to sell this to them as she thought it was a good thing to do. They are both retired and recently sold their shop house near Bahau and are renting a house now. With the money they got from the sale, it would be difficult to generate any kind of decent returns otherwise. Here are some options.

Option 1: put it in FD,
RM100,000 in FD today would probably earn you around 3% p.a. so that would be around RM250 per month. A paltry sum really, not even enough to cover their rent which is around RM350 per mth for a small link house in Bahau.

Option 2: Put in stocks
This would be a risky option since they both have no experience, and would probably end up losing all their money, I wouldn't advise my mom to invest for them either!

Option 3: Buy a Flat with good rental yield
The flat I sold to them is a 2bdrm, 500 odd sq ft which fetches RM600/month rental; this is a unit I rented to a company that houses their workers for their Mamak shop chain. They have rented another 3 from me and are excellent paymasters. So my uncle and aunt can be assured of consistent income, and not have to worry about renting out the unit every few months when tenants move.

After costs (such as maintenance RM20/mth, Indah water, cukai etc) they would probably end up with around RM550/mth. The unit cost them RM95,000 in cash (the price my mom wanted) so that means a 6.9% p.a. yield which is not bad at all. Much better than letting the bank use their money. With this, they will at least end up with an asset, not to mention being able to pay for their monthly house rental. And, have some money left over from this little rental unit.

I am sure they would want to buy another unit soon, when they see the nice cash flow, but I doubt I would part with another right unit now..

As for me: well, at 95k you can say I made a descend profit for my efforts; plus, I can always go buy another one right? also, I am quite happy to cash out on this one, as I had accumulated quite a bit of equity in it. All in all, a win-win I guess.


copyright Chris Gan@2010,

Thursday, June 2, 2011

When's the Right Time to Sell

When is it the right time to sell your property? That's a difficult question to answer. If you read Rolf deRoos' 10 Rules on Property Investing, then the answer is Never (or seldom). You just keep accumulating those little green houses, rent them out for income, and never sell. Over time, this would prove to be a good decision, as the property become "free and clear" courtesy of your tenants, and not to mention, the price having appreciated along the way.

Robert G. Allen (author of Multiple Streams of Income, No Money Down) says "don't wait to buy property, buy property and wait" - referring to the power of compounding over time; property prices tend to appreciate, so the longer you hold on to it, the higher its value. Again, don't sell.

But then, as my Uncle Sam says "there's nothing so good, that you've got to own 100% of" - explaining, that sometimes, we don't have to hold on to all our properties like they were family heirlooms. There comes a time when it is right to sell a few of the property and realise some profit. Take some money of the table, so to speak. But, what is the appropriate return on your investment? is it 10%, 20%, 50% or 100%?  That is a difficult question that only you can answer. It all depends on your risk return profile, and what the market can bear, when you sell.

When is a good time to sell some of your 'bread & butter property'? I have written down 3 times that I can think of, and hopefully that will help you decide.

1) At the bottom of the interest rate cycle; all else being equal, as interest starts to climb, the value of property should come down. Of course, knowing when the bottom is crucial. It would normally take one to two years for the interest rate hike to peak - in which case, it's probably a good time to buy some of the properties, as their prices come off.  In our scenario, BNM has raised rates by another 25bps which to me signals that we have passed the bottom of the cycle - time to take some profit?

2) the second time to sell is when the area we have been buying has matured, and perhaps started to deteriorate; there could be some demographic changes in the area attracting a different set of renters, crime could be increasing or the general areas start becoming unkept. These are all signs that you should get out, so the decision to sell is not difficult - just getting the right price that you want.

3) lastly, when you no longer enjoy the "game" of buy, and being a landlord. You are sick of phone calls from unreasonable tenants after midnight complaining that their tap's broken, or the constant late rent payments.  This could also be a signal for you to get out. Always good to listen ti what your heart is telling you.No point to stay in the game if your heart is no longer there.

Robert Irwin says - The two best days in your life as a real estate investor are the day you buy your first property, and the day you sell it!

So, you have enjoyed one of those times by buying, perhaps this is the time to enjoy the other?

next article: what you need to do to prepare the property for sale

copyright Chris Gan@2011,

Friday, May 27, 2011

On commodity boom, OFWs and property prices

Over the last two months, I have been travelling around the country, doing talks (as part of my job) - hence  the long silence in blog postings. But, visiting towns which you would not normally go to for a holiday, has been an enriching experience, as you get to meet the locals and also assess for yourself, what is happening on the ground. This time, the roadshows have taken me to places like Taiping, Kuala Selangor, Ipoh, Miri, to name a few.

Some of the more interesting observation I made on people and property are as follows:
- Property prices are rising almost everywhere. Most people I talked to would acknowledge it if you asked them if their property has gone up in price. A small shophouse in K. Selangor is now selling for 600k (vs. 400k when first launched 1.5 yrs ago); and there is now a Tesco and also a 24hrs drive-thru McDonald's in K Selangor! Speaking to a developer in Ipoh, she also said the same thing - the shop houses she sold are now 50% higher. What is this attributed to? Well I suppose a lot has to do with input prices increasing (steel, cement, petrol, etc have gone up) but I guess it has to do with the rising affluent in smaller towns. Most of those involved in commodity related trades like palm oil,swiflet farming, fisheries have made tons of money in the last few years. And, where else to invest if not in physical assets like houses, and shops? some even tend to buy outside their own hometowns like in Bdr Utama or Puchong - for their kids when they study in KL?
- Secondly, a lot of the buyers for residential properties especially condos, tend to be Malaysians working overseas. Those that work in HK or Singapore have higher purchasing power due to the higher wages and more favorable exchange rates. And as a result, they like to buy a place for themselves to retire to, in addition to buying one for their parents to live in. So, condos and also house prices tend to get pushed up by the strong demand from this segment. The talent drain has its downside but the upside is the repatriation of money back from these MOFW (Malaysian overseas foreign workers). Incidentally, the term OFWs is used in the Philippines. Over there, they are a powerful lot - there are around 8-10mil workers worldwide, that remitted around $19bn in remittances (2009) to their country and is the largest contributor to its GDP! In addition to this, of course, is the higher spending on properties. It looks like Malaysia is no different in that sense.
- the last observation is probably quite obvious - residential properties here have very low yield. We are looking for a place (condo) to rent now and its amazing how many of them are empty or recently vacated. It appears that even the Japanese expats are now a rare lot; the Tokyo quake has caused some disruption to a few industries for example, auto, and a large number of executives have been recalled back to HQ. So, that has affected the rental market here too. The European expats are now lower in numbers after the 2008 financial crisis, and that hasn't helped. But the surprising thing is that - developers are still building! and the prices are astronomical. Take a drive round Mt Kiara at night and KLCC and count the number of units with light on - you will be surprised. Well, maybe "its different this time" or in "Malaysia, property prices don't fall"? Let's hope so.



copyright Chris Gan@2010,

Sunday, March 27, 2011

Retire Young without being Rich

You can retire young without being Rich. All you need is positive cash flow.

28 February 2011 was a memorable date for me and the kids, as this was the day my wife Ee Ran retired from her job at the bank.  Yes, left work for good. Clocked out for the last time. Cashed in the chips, so to speak. And she is not even at the usual retirement age of 55! She has worked a good 10 years and now has the choice whether to work or not to. Now, she spends most of her time doing yoga and hanging out with our two boys. The younger one who is now only 13 months is probably too young to wonder why his mummy is home all day long? While the older one is probably glad that mummy drops and picks him up from school everyday (and not me cos I am always late!).

A lot of our friends think that she is able to retire young because of my high paying job! no such luck I am afraid, as you all know in corporate Malaysia, the pay is not that fantastic especially if compared to Singapore or HK!Some think that she would have to take a "pay cut" in order to be able to stay at home. That's not very much fun in my opinion, especially if you are used to having your own income for such a long time.

No, the answer is none of the above. The truth is not that we are better than anybody else but we decided a few years ago to replace her income through investing in rental properties. And that the cash flow from those little bread and butter properties would pay her every month instead of the bank. When I look back it wasn't all that long ago when we had zero properties in our names. But right after April 2008, I started investing - initially with the advise of my friend Raymond. And I never looked back: from there we built up a portfolio of rental units by leveraging on both our incomes. It didn't really take that long to put it all together; from start to end, it probably took us 3 years. And a lot of the time was spent waiting around for the land office to approve the land transfers as they are all leasehold properties. But once all that was done, and we rented out the units, the cash flow started coming in. The hard work of searching for the right properties, negotiating and arranging financing probably took a solid 1.5 years. Not all that long if you think about it.

I am telling this you story because all I did was follow some simple principles which I have outlined in this blog. And with a lot of good fortune, perseverance, and God's favor, it all came together this year. If we can do this, so can anyone.

Retirement is about choice -having the choice whether to work or not to work. You decide. And I always believe it is a function of cash flow and not number of years. So, now that the missus is free, I have to work doubly hard to retire I guess. Which means focusing on acquiring more positive cash flow properties.

Happy investing!


copyright Chris Gan@2010,

Sunday, March 20, 2011

Why Buy When You can Rent?

What do you know? The day after I posted about the PM's My First Home Scheme, the Edge Financial Daily reported on a couple of smaller developers who are likely to benefit from building these below RM220k homes. But unfortunately, these homes are not going to be in Klang Valley but in places like Rawang and Sg Buloh area. Well, I suppose the land is probably cheaper and they can afford to build these homes for that price, and still make money. Looks like there is something for everybody - bigger developers to be benefit from their land prices going up next to the new Klang Valley MRT and now, smaller developers from My First Home scheme. What about you and me? well, if you are below 35 years old and have not bought a home, you should take advantage of the government's election year generosity - see my previous blog on how.

As some of you know I believe in renting vs buying. And can't figure why I should pay a premium to own when renting is cheaper in comparison. For example, I heard that you can rent a house in Bdr Utama for less than 2k per month while in Desa Park City, the super links are also going for the same price. I am tempted to live in Desa Park for the facilities and amenities but would never pay the RM1.3m asking price even if I could afford it. By the way I heard that the maintenance fee is around RM800 per month! yes, it costs a lot of money to keep the place looking so nice, and of course there is the man-made lakes and club house too to maintain. At 2k a month, I think its a steal but am not so sure for the owners, though. I suppose there is the possible appreciation that will compensate them for the super low yields? One of my good friend told me about a brilliant idea his friend had - he rented out his high end condo at Mont Kiara for RM12k per month and went to rent at Desa Park for 2k. Not a bad deal if you think about it eh? An extra RM10k in the pocket each month to make the swap.

Happy investing! and have a good week ahead.


copyright Chris Gan@2010,

Tuesday, March 15, 2011

My First Home Scheme - a great opportunity

Well what do you know? The central bank, BNM has left its overnight policy rate (OPR) unchanged at 2.75% in its latest Monetary Policy Committee meeting last Thursday. This means that the banks won't be raising their Base Lending rate (BLR) this round; well, I suppose that's what can happen when its an election year! So, house owners, here is some reprieve from having to pay higher installments. However, BNM did raise the SRR or statutory reserve requirements for banks from 1% to 2%- this is the amount of the bank's deposit have to keep with the central bank (w/o any interests). It's basically a way for BNM to mop up some liquidity in the market and force the banks to work harder in order to make money from their lending: so, watch out, banks will be lining up to get your cheap deposit in light of this development. In any case, in my view rates will likely to move up, perhaps 0.5% this year but probably not until after June.

The other interesting piece of news was PM Najib's announcement on the government’s My First Home Scheme. Launched last week, this scheme will enable young adults aged up to 35 and earning less than RM3,000 to get 100 per cent financing to buy houses worth between RM100,000 and RM220,000 with a repayment period of up to 30 years. This is certainly good news for those of you below 35 (too bad I am not!) but it got me wondering on a few things. But firstly, I figured that at 5% interest rate, for a 200k loan, for 30 years, the repayment would be around RM1k per month, right?

- But, what could you buy for RM220k in Klang Valley today? certainly not a descend link house; maybe not even a descend condo in P.J area, which prices now run way pass RM300k,
- so where could you buy a house like that? perhaps in Rawang?or in Selayang? 
- Does that mean you don't buy one? Certainly not! if the bank is willing to fund the whole property, take risks and in addition, the government is throwing in its guarantee for free, you certainly must not decline. You don't even have to come up with a down payment!  I mean it would be foolish if you don't take this kind of opportunity- it would be like throwing away free money.

What can you do? Well even if you don't want to live in a RM200k house, there are plenty of people who would - so, the answer is to buy a rental property. Yes, why not? It is not likely the government will come and check if you are really living there?

So, what you could do is to find a rental property that fits the price range in a good area, buy it with 100% funding from banks, and then proceed to rent it out. Of course, you gotta make sure that the rental at least cover your installment of RM1k per month. Even if you had to subsidize it a  little bit, it may still be worth it. In the end you walk away with a house, fully paid which hopefully would have appreciated somewhat. 

In the meantime, well, you can always rent somewhere cheaper to stay in or do what I did when I was 30 and single - stay at home with your parents! It's a great way to build up your funds, and you get to enjoy your mum's cooking.

Happy investing!

copyright Chris Gan@2010,

Monday, March 7, 2011

Is it difficult to collect rent?

One of the most frequently asked question when I talk to people about rental properties is: Isn’t it difficult to collect rent? I suppose the answer to this is relative; if you only have one rental property and that tenant gives you a headache when he doesn’t pay up, then I suppose it is difficult. But if you have more than one then you have economies of scale, whereby you don’t collect the rent yourself but can outsource the task. I prefer the latter, relying on my trusted agent and friend Mr. Lim to do the leg work. 
But even Mr. Lim is not bogged down by the tedious task of collecting rent. In today’s technological age, everything is accessible at the end of your fingertips - online. My tenants bank in their rental my bank account before the agreed date every month (usual around the 7th) and then SMS to let me know. I will usually scan through the list using e-banking facility and can quickly tell who has paid and who hasn’t. It is also a good idea to split the payments into different bank accounts – it can be confusing especially if the amount is the same e.g. RM550 per month. The other way I can more or less know who has paid is through the different payment methods, whether it is through cash at the CDM or cheque. Companies tend to prefer cheque while individuals bank in cash.  
If the tenant is late in paying, I will send them an SMS reminder. If they still do not pay the rent by the 15th of the month or so, I would then get Mr. Lim to give them a courtesy call and find out what’s happening. He would normally ask if they want to vacate the flat because that is usually one of the reasons they don’t pay: most owners are so hopeless in refunding the tenant’s rental deposit that they prefer not to take the risk. Most would ask that they stay the last 2 months by running down their deposit money. I usually would not allow this unless it’s exceptional case; I tell them that I will let them stay till end of the present month and pay them the 1 month refund owed. Mr Lim usually has a waiting list of prospective tenants for me that I don’t have to worry about getting them out immediately and be able to fill it in a few days time.
Well, I would be lying if I said that I have never faced any difficulties in collecting rent, but they are an exception rather than the norm. Usually if you have screened the tenants properly upfront, you won’t have to pay the price later on. But sometimes it just happens. Let me relate two real life examples which I have encountered recently.
Funnily most would think that companies would be better paymasters. But, both these incidents relate to companies and not individuals that rented my properties. The first property (let’s call it B3) was rented to a local restaurant that housed their workers in the unit a few years ago. The manager signed the tenancy and I have been getting the rental on time via cheques payments. Until recently I though everything was going fine. Then one day, a prop agent called me and asked if I wanted the new tenant in B3 to sign a rental agreement. I thought I already had a tenant. What I didn’t know was the manager has since resigned from his employment at the restaurant but before that, he had “rented” it out to 3rd party when the restaurant’s workers had moved out. The company continued to pay me the rent, and he had been happily collecting rent from the 3rd party for a couple of years. His scam unravelled when the new tenant moved in – they paid the previous tenant the 2+1 month deposit and promptly moved in. When I confronted the restaurant owner they had absolutely now idea of the scam. So, they terminated the rental contract and I ended up with a new tenant who says she has been cheated by the previous tenant of B3 as she had paid them the deposit. Cut a long story short I ended up with a tenant who had no deposit with me, and I did not want. I told her she could stay as long as she paid the rent promptly. But, it turned out she was not a good paymaster by being late with rent a on a few occasion and giving all sorts of excuses; best thing to do is to move them out, which is what Mr Lim is doing right now. But, here is a case of how you can lose one or two month’s rental income due to scams that can happen.  
Another troubled tenant also relates to a company (A12) – the security guard company rented a 3R2B unit to house its staff. The accounts side is so hopeless that the payment is always delayed and I have often time reminded them, going to the extent of sending the 1st and 2nd reminders. In the end I just wanted them out, and have told them so. But it is not so easy if they continue to pay you the rent, albeit late. So, this is still on-going but Mr. Lim is working hard to get them out. 
Well, as a final word, not all corporate tenants are bad paymasters; I have one unit which is rented out to a bookstore and they are a professional lot – payment in on time, all the time. Plus, they keep the property in good condition. At the end of the day, it all comes back down to screening your tenants well – if you invest time up front, you don’t have to pay later.

March 2011

copyright Chris Gan@2010,

Tuesday, March 1, 2011

Rent vs Buy; You decide

Recently, I visited my friend William at his house in Kota Kemuning, Shah Alam for Chinese New Year. He lives in in a very nice super-link house (double storey, 28 x70') in a gated & guarded community, right next to an idylic lake. He and his family have lived there for about a year now and he was thinking of buying it instead of renting. The prices being quoted astonished me although I have been reading about escallating prices of landed properties in the newspaper of late. Property experts have been advising potential buyers to look at the potential price appreciation of such properties to justify the high prices (instead of the low rental yields).

Here is what the buy vs. rent scenario looks like - you make your own decision whether its better to buy or to continue renting.
- At launch, the house was sold by the developer for RM515k, and,
- according to my friend, the last transacted price of a similar house around the corner, was RM650k a few months ago.
- the offer he made to the current owner was RM850k! and this was rejected.
- owner wants a cool RM1.0m for the super link house!

Here's how the numbers look like:
- Assuming property is transacted at RM1.0m, the down payment would be RM100k (90% LTV). Loan amount is RM900k,
- Your instalment would be RM5,002.49 monthly (@4.5% interest rate, for 25 years).
- After 10 years, loan amount still outstanding would be: RM653,926. And, you would have paid RM354, 166 in interests and principal (or your equity in the house) is RM246,074.

Now, get this, the rental for this superb property is RM2k per month only! yes, cheaper than the repayment to service a brand new BMW 3 series car. And, that's with the RM180 / mth maintenance fee included. I think this is an absolute bargain and wouldn't mind living there (but my wife thinks it's too far away from KL - approx 30kms). The gross yield on the property is 2.4%! (calculated as 24,000 divided by RM1.0m)

In any case, the rental paid after 10 years would come up to RM240k (assuming there is no increase in rent, of course). And, if you could afford RM5k per month for loan repayment in the first place, you would have saved RM360k -- which you could have invested in other investments like shares or buying other rental properties. And, hopefully this yielded higher returns than the 2.4% yield on the Kota Kemuning million ringgit house.

Now, lets assume that the property experts are correct and there is massive appreciation - e.g the price of the house doubles to RM2.0m in 10 years -- the return on this would be 7.2% p.a. (Rule of 72) which is pretty reasonable. But, the big question is: can it double in 10 years?

So, what's the house like that worth? this is a difficult question to answer, but I decided to search for some guidance on this. In the UK, rule of thumb for a house's worth is calculated as 15 times its annual rental (not sure why its 15 times? - but, prob the houses don't last as long as they are made from timber?) but lets say our super link house is 25 times, similar to our average loan tenor.  The value should be closer to RM600k (25 x 24,000 per year rental) now, which is a far cry from RM1.0m asking price.

In summary, the decision really comes down to:
- do you think the property can appreciate (in this case, doubling in the next 10 years) to justify the higher price you are paying? and,
- if you could afford the RM5k / mth instalment, would you be better off investing the extra RM3k to get higher yields, while continue to rent the house at RM2k/mth instead?

Feb 2011

copyright Chris Gan@2010,

Monday, February 7, 2011

Will the New MRT Line Increase Property Prices Significantly?

I was at Chinese New Year gathering yesterday and my host, who is  a successful, and well-respected developer posed this question to a few of us: 'Will the much talked about new MRT line increase property prices significantly?'

At first I thought it was a rather strange question to ask, since the RM30bn project has been much talked about, and received much attention in the media. The new 55km line which runs from Kajang in the south to Sungai Buloh in the north is expected to bring much new business to the areas which it runs through. In the discussion sessions with the authorities though, some groups have been lobbying to have the station in their develeopment area like in Damansara Uptown, while others like the residents of Taman Tun Dr Ismail (TTDI) are arguing against having the station in their area. The detractors argue that the new line unless its underground would be unsightly and may bring down property value (instead of improving it!). According to my friend who is well versed on infrastructure project: going underground would increase the construction costs (by many folds) - but the advantage, of course is that, it is less disruptive & less unsightly especially in highly densed areas like in Bukit Damansara (yes, its not just because many prominent people live there, incl ministers, who do not want to see the property values affected by noisy trains!).

So, I started giving this question some serious thought. Will having the new MRT line running through your area really increase the value of your property?

I guess, it all depends. When was the last time you took a ride on the current MRT? I mean not just for short ride but to get to work or even to go shopping? I have to admit that most of my MRT rides have been from Bandaraya station to Masjid Jamek (1 stop) or sometimes to KLCC (3 or 4 stops), for lunch. That's simply because- I have a car and drive. The sad fact is that most Malaysians especially in KL drive, and those that take public transport tend to be middle to lower income earners, who may not have cars. And of course, there are the retirees who find it convinient to travel during off peak hours, and enjoying senior citizen discounts. And oh, yes the foreign workers also use the MRT.

For residential areas - my opinion, is that the new MRT line will improve the value of property around the area - provided the development is targeted at the middle-to-lower income segments. In which case, link houses, and flats which are affordable, near the new stations would benefit (below 250k). We have seen examples of this phenomenon in established areas like Taman Miharja, Cheras (LRT line), Wangsa Maju, and Taman Melati. The flats and houses are in high demand - rental in these areas tend to exceed the other areas due to the proximity to the station. People who work in the city and have no cars don't mind paying a little bit more for convinience.  Of course, other factors like access to amenities like shops, food courts, and schools also play a big part in their appeal. But, I feel that the over riding factor is that that the property around the MRT area need to be affordable and within their reach.

This brings us to the situation we are in today:  the new MRT line will run through TTDI, The Curve, Bukit Damansara, Ara Damansara which can be regarded as well established areas, and where property prices are already high compared to other areas.  How much more can it go up? It is unlikley that people with cars and drive to work will suddenly be keen to take the MRT now the new line is there. Also, even less likely would be people who are earning less than 5k a month (and having less than 1k to spend on housing) would suddenly be buying or renting condos in Mutiara Damansara, just because the MRT station is next door. 

And given that land prices in these areas have skyrocketed, a 250k link house would be a dream. It is just not going to be profitable to developers who own land around the future MRT stations to be building link houses costing 250k and below.  The high land prices would just not permit this to happen. So in the end, we will probably (for residential) see more high end condos, and super link or semi detach houses being built to justify the high land prices: probably not what is demanded by the likely users of the new MRT line. But in any case, developers and the agents will be  carrying on, promoting the merits of having the MRT station next door to your new property. And that prices will escallate once its built.  Of course, some of us will be tempted to buy these new property, but be warned: remember, who will be main users of the MRT?

Unlike Hong Kong and Singapore which are high income nations, and riding public transport such as MRT is the norm, in Malaysia, the likely winners of the development may be areas that have affordable housing already in place - and existing property that will be enhanced by the new MRT line. This is a more plausible scenario compared to the "new" property developments having high potential gains because of the MRT.

Finally, perhaps the "smart/ old money" in TTDI or Damansara know something the rest of us don't? That the new MRT line is not necessary a boon to all that it pass through. And in some cases, it may even be a bane to them due to noise pollution, indiscrimate parking or perhaps just drawing in the "wrong" crowd to the right neighbourhood? Food for thought. Happy CNY.


copyright Chris Gan@2010,

Friday, January 7, 2011

Impact of 70% cap on third housing loan on rental properties

Happy 2011! It has been a while since my last update. I have been meaning to write on this issue but proscrastination over the Christmas and New Year's period got the better of me. Plus, I have been trying to analyze the impact on this whole business of acquiring rental property for income.

On 3 Nov 2010, Bank Negara Malaysia (BNM) announced , that it was imposing a 70% loan-to-value (LTV) ratio on third housing loan for banks. This was done in an effort to cool down the housing market that was perceived to be "bubbling" especially in high end developments. What it means is that if you have 2 housing loans already, for the third the LTV will only be up to 70% - so, this would affect investors who purchase more than two properties. While this was targeted at those speculating in high end bungalows and condos, unfortunately it also includes all other residential properties like our "bread and butter" ones, which cost between RM80k to RM150k. This measure does not distinguish between a third loan on a RM1.0m bungalow in Setia Eco Park and a third loan on RM100k flat in Setapak. It all gets tarred with the same broad brush.

So, what's the impact on acquiring rental property for income?
- For one, its now much harder to buy with "no money down" (except on the first 2 properties, of course); the lower 70% LTV combined with banks being more cautious on its valuation of property means it is difficult to get away with buying a property and it being totally financed by the bank.
- But then again, on the positive side is that you don't need to shop around the banks to see if any of them would give you better financing on your 3rd, 4th or 5th rental properties; it should now be 70% (or less).
- secondly, it is now more tedious to refinance existing rental properties; like me I have some loans which are abiout 3 to 4 years old, which I managed to get at high LTV but now, if I were to refinance it with another bank - it's only going to be 70%, which is not attractive. Further, the prices of these property haven't gone up that much, that I am able to withdraw some descent equity (at 70% LTV).

Given the above, its no wonder that BNM reported that housing loan approvals were down 10% in Dec 10 vs. last year, as the market adjusts to these new guidelines.

So, what can you do, in light of this new guideline?
- well, if you already have some rental properties, and you can't refinance it, there's always the option of increasing your rent. Yes, why not? Since the price of everything from a bowl of noodles, cotton, cooking oil to RON 97 petrol has gone up, why shouldn't rental also go up. Since late last year, I have increased rental by about 10%. A 2R1B unit which used to rent for RM550/mth is now RM580/mth, for 3R2B rental is now RM750/mth (vs. RM700/mth previously) and tenants don't complain. They just pay.  That helps to maintain your margins; making sure you get enough positive cashflow every month, and as a buffer, when BNM eventually increase interest rates some time later this year.        

- the second thing one can do with the 70% cap on third housing loan is just to put up more equity into the property. Hence, the amount borrowed would be much lower than if you had financed it at 80 or 90%. As such, given rates are still at low levels, you will experience higher positive cash flow every month. This would hopefully compensate you for the opportunity cost of having more money "tied up" in the property.

I believe this measure would be temporary and BNM will likely revise or at least fine tune it; as it stands currently, the banks will find it even more difficult to grow their residential loans book. Already most are now turning to focus on commercial properties instead. So, keep yourself updated on the developments as the landscape of the real estate market changes rapidly.

Happy investing in 2011.


copyright Chris Gan@2010,