Bread & Butter Properties

Bread & Butter Properties
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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,