Setting Up Your Dream Team

I recently read quite a funny quote: "there is no I in TEAM, only, M and E and that spells ME". well, that's not quite true when it comes to getting results in your property investing. I know it sounds cliché but, you can't do it alone. You really do need a team, and preferably a good one. This is certainly true in my case; as I am working full-time, have a family, and other commitments, it is certainly hard to find time to look for property, arrange the financing, and renting them out. So, I rely on key individuals to help me.

I think the main advantage of having a team of people helping you is that it can leverage your time. In property investing, the key people in your team should be:

·        Real estate agents,

·        Valuers,

·        Bankers,

·        Lawyers,

·        Accountant cum tax advisor, and

·        Handyman.

You will have to go through a few people in each of the category of profession needed before you end up with the right people. It can be a frustrating process, having to deal with the "wrong" people initially, but certainly worthwhile when you find those that can really help you. And, once you find them, be prepared to pay for their services.  I always believe that if you take care of them, they will in turn, take care of your interest, most of the time anyway.

Who are the right people?

The right kind of people are those that you enjoy dealing with. I think that this is paramount. You will be working closely together and there is no greater pain than having to deal with someone you don't like. It's not a job, and you have a choice of who you want to work (and who not to!). So, select the right ones, and create a "win-win" situation, where both parties gain from working together.

Generally, the following qualities are important, whether it's the real estate agent or the lawyers I work with:

• Has integrity: there is no compromise on this, as most of the dealings involve money,
• Reliable: "does what he says he will do",
• Has the necessary skills and knowledge: especially when it comes to legal matters, like S&P agreements, loan agreements, land matters and others. (Find a good lawyer who knows what they are doing),
• Goes the extra mile: this is a bonus. My real estate agent doubles up as my rental agent, and he does small maintenance work for me, which saves me a lot of time (and hassle).

 These are some key points when it comes to setting up your dream team. Remember the main idea is to leverage your time. You can only be at one place, at one time. But having a small army of people like real estate agents will help to multiple your efforts, and get you better results.

Next: we discuss how to pick the "right" real estate agents, lawyers, etc.

**

Chris

--
Chris Gan
http://breadnbutterproperty.blogspot.com/

You Need an Education in Real Estate

When I first started investing in rental properties a few years, I was fortunate that I had a mentor whom I could call and get some advice from. But there was a limit to how far I could go with this: it's not possible to be calling him on every single thing.

The first thing he suggested I do before I even start buying property was to buy a book! And that book was Dolf De Roos' "Real Estate Riches". By reading and applying the principles from that book alone has helped me make a lot of money from investing in properties. So I say: you need an education in real estate before you start investing.

Why do you need an education?

Like in all professions in life, whether you are an engineer or an accountant, you need to learn how to do it, before you are qualified to do it. A good education distinguished the goods ones, from the rest of the pack. Even the char kueh teow man needs to learn how to fry the kueh teow from someone; most of the skill was probably handed down through the generations. The point is: you need to learn. There are a few ways to learn; one can go through "trial and error" (learning from your own mistakes, which can be costly) or learn from someone else's experience and mistakes. I think it is wiser to do the latter.

How can you get one?

Well, there are a few sources to learn from: books, seminars, videos, and mentors.

If you have someone who has done it successfully show you how to do this i.e. how to invest in rental properties, then you are blessed.  A mentor is probably the best way to get started as they have the experience and can point you in the right direction. That would save you a lot of time and money (and headaches!). But, it's not easy to find someone who would want to share with you his "secrets" and spend the time mentoring you, especially if he/she is busy and has no direct interest in your success. Chances are if he/she is successful already, you may not even afford to pay for their time! Imagine trying to hire Donald Trump?

So, the next best thing to do is to invest in books, seminars and videos, by experts in the field. Like any form of commercial endeavors you will need to invest first, before you reap the benefits. It is the principle of "sowing & reaping". I would start by getting some good books on real estate investing and devouring them. Kinokuniya@Suria KLCC probably has the best selection in town. Books are like food for the brain; they feed your mind. As we read, we have time to think through some of the principles from people who have done what we want to do, and then apply them.

There are so many books on real estate that you can pick up:  

• "How to" books from experts like De Roos, Schaub and DeCima and Eldred,
• "Big Vision" books from Donald Trump, like "the Best Real Estate Advice I ever Received" and "Powerhouse Principles" by Jorge Perez.
• "Real Estate for Dummies",
• Negotiations – by Peter Ross who is Donald Trump's senior attorney involved in negotiating all this high profile real estate deals,
• Countless others on more specific topics like flipping properties, managing tenants, how to "buy, renovate & flip", taxation for properties, creating wealth through property, and others.

So, don't hold back, and get as many books you can; remember, you are investing in yourself, by learning from the best minds in the business. It will pay you back many times over: it certainly has in my case. I am still expanding my collection of real estate books, moving into new areas of interest like commercial real estate investing, which has different principles (compared to residential investing).

If you have a chance to go seminars organized by experts, you should also invest in this. The right ones will certainly help to speed up your learning curve. One of the human insights is that we can recall more of what is taught, when a blend of showing and telling is used.

Good luck & happy learning.

Chris

Chris Gan. www.breadnbutterproperty.blogspot.com

 "When I get a little money I buy books; if any is left, I buy food and clothes" – Desiderius Erasmus, Humanist & Scholar

How Much Do You Need to Retire?

So, how much do you really need to retire? If you haven't figured it out, here's a simple seven step to help you.

Seven easy steps to work out how much money you need

Step 1: Determining the number of years you have until retirement:

The first thing you need to do is to determine, how long you have to achieve your retirement plans. In order words, how many more years until your retirement – this can be when you plan to retire (for instance, at age 45), or must retire (for example, age 55 in the civil service), less your current age.

Let's say that you are now 31 years old and plan to retire at age 55. The number of years to retirement would be:

Planned age to retire:            55 years

Less present age:              31 years

Equals number of years to retirement:    24 years.

Step 2: Determining your desired retirement income:

The next step would require you to ascertain how much money you would need when you retire, and no longer working. This is difficult to predict but is not impossible. You can estimate this by considering changes you plan to make to your spending patterns and how (and where) you plan to live, after you retire. Some of your expenses will probably be lower, for example, work-related expenses (like fuel or bus fare), clothing expenses and housing expenses. On the other hand, some other expenses may increase: for example, your travel expenses since you may have more free time. At the same time, your medical expenses may also increase as you get older, and become more susceptible to illnesses. It is often suggested that you would need about 60% to 70% of your last drawn annual income after you retire.

Let's assume your last drawn income is RM200,000 per year:

As such, your desired annual income upon retirement would be RM120,000 (that is, 60% of RM200,000), calculated as:

0.6 X RM200, 000 = RM120,000

Next, we will need to estimate how long this retirement income would be needed. The number of years this income is required is a function of how long you would expect to live. In Malaysia, according to the latest information from the Statistics Department, the average life expectancy is 70 years for males, and 75 for females.

Let's assume that you will live till 80 years old (which is a ripe old age!), and as such would need 25 years of retirement income (from age 55 onwards).

Step 3: Calculating your inflation-adjusted retirement income:

Inflation is one of the most important factors to consider in retirement planning. It erodes the purchasing power of our retirement savings, and thus needs to be taken into account in our planning. Here we need to determine how much your retirement income would be, adjusted for inflation.

In our example, we know that the current value of your retirement income is RM120, 000 (from Step 2), and you have 24 years before you retire (from Step 1) Let us assume that the average inflation rate over the next 24 years will be 5% per annum.

A retirement income of RM120, 000 today at an average inflation rate of 5% would mean that we need to have an inflation-adjusted income of RM387, 011 per annum in 24 years time. This can be calculated as:

 FV    = RM120, 000 x FVIF (24 yrs, 5%)

= RM120, 000 x 3.225 = RM387,000

Step 4: Calculating the total funds needed at retirement:

After we have ascertained the inflation-adjusted income needed for retirement in the future, next we will need to determine the total funds needed, so that we can plan appropriately towards achieving this goal.

Let's assume that the average rate of return (on our investments) that we can expect for the next 25 years until retirement would be 8%. As such, the 'real' rate of return from our savings (given that inflation is 5%) will therefore be 3% (that is, 8% minus 5%).

In our example, given that the inflation-adjusted income at retirement equals RM387,011 per annum (determined in Step 3), the total funds we would need can be calculated as:

PVA = RM387,000 x PVIFA (25 yrs, 3%)

    = R387,000 x 17.413

    = RM6,738,831

Hence, the total fund needed at retirement, 24 years from today would be approximately RM6,738,831.

Step 5: Estimating funds available at retirement:

The following step is to estimate the funds that will be available when we retire. Again, this amount is difficult to determine accurately and would depend on various factors such as the type of assets we have today, and those that we will accumulate in the future. Some of the sources of funds would include our EPF savings, personal 'compulsory' savings, insurance cash values, and financial assets such as stocks and unit trusts, which can be disposed of. To simplify our analysis, let's assume that in our case, the available funds amount to RM3,000,000 (accumulated from various sources) when we retire.

Step 6: Calculating the shortage (or surplus) of funds at retirement:

Once we have determined the total funds we require, and also the funds available at retirement, we can then plan for any possible shortfall.

Total funds we require (from Step 4):         RM6,738,831

Total funds available (from Step 5):        RM3,000,000

Total shortfall:                    (RM3,738,831)

Step 7: Calculating the savings required to cover shortfall:

Next, to meet the shortfall at retirement which we have identified in the previous step, we need to calculate how much we must save during our working lives.

From above, we know that:

Our total shortfall:                (RM3,738,831)

No. of years to retirement :            24 years

Average rate of return:                8%

Therefore, the amount that we need to save in order to meet the shortfall (which is equivalent to an annuity), can be calculated as:

PMT     = (RM3,738,831) / FVIFA (24 yrs, 8%)

PMT     = (RM3,738,831)/ 66.764

= RM56,000

Hence, in our example, the amount we would need to save is a total of RM56,000 per annum (or roughly RM4666.7 per month), in order to meet this shortfall target.

As demonstrated above you can easily determine how much money you really need to retire, taking into account important factors such as inflation and the rate of return on your investments. However, executing this Plan is another story altogether, as it is not easy to put aside some money every month. Let alone, an extra RM4,000 to RM5,000.

Alternatively, you may want to consider investing in rental properties as a Plan to generate your retirement income (see my earlier Blog on this).

Happy investing!

Chris

**

Retirement Planning Worksheet

NAME:
AGE:		A
	Calculations
Step 1: Determine when you plan to retire:
Planned retirement age:		B
No. of years to retirement:		B – A = C
Step 2: Determine your desired retirement income:
Desired monthly income (RM):		D
Annual income (RM):		D x 12 = E
No. of years income required (from retirement):		F
Step 3: Calculate inflation-adjusted retirement income
Assumed average inflation rate (%):		G%
Inflation adjusted-income (RM):		FV = E x FVIF (C yrs, G %)
Step 4: Calculate funds needed at retirement:
Inflation adjusted income at retirement (RM):		FV
Rate of return (%):		H%
Net return earned (less inflation):		H – G = I%
Total funds needed at retirement:		PVA = FV x PVIFA (F yrs, I %)
Step 5: Project funds available at retirement (RM):
EPF:
Savings:
Insurance (cash value):
Stocks/shares/Bonds/Unit trusts:
Total:		J
Step 6: Calculate surplus/(shortage) of fund at retirement:
Total fund required (step 4) (RM):		PVA
Total fund projected at retirement (step 5) (RM):		J
Total surplus/(shortage) of funds (RM):		PVA – J = K
Step 7: Calculate savings required to cover shortfall:
Total shortage (RM):		K
Savings required per annum (RM):		PMT = K / FVIFA (C yrs, H %)
Savings per month (RM):		PMT / 12

**

Determining How Much to Pay for the Rental Property

Here's what I do to determine how much I would pay for a rental property. And of course, needless to day, I would want to come to a price that is below market price (see my previous Blog on the importance of buying below market price).

• Firstly, I would want to figure out roughly what the market price is: and for this I want to know, what the transacted prices are and also what the owners are currently asking for.
• To find out what the transacted prices are, I would check with a few valuers, but be aware that these prices may be 6 months to 1 year old, as there is a lag in the data they compile. For the asking prices, it's quite easy to find out through checking with a few real estate agents, and also the owners directly. But note that these prices tend to be higher than what's actually transacted eventually as they tend to price it higher their asking price. Plus, owners would normally price in the commission that they pay to the agent, which can be 2-3% of purchase price depending on their arrangement.
• Secondly, I would like to find out what the properties in the area are renting out for. For instance, what would a basic 3R 2B unit be renting out for? What's the difference in pricing for these units on different floors? Are there any particular blocks that are more in demand? (because they are nearer to the shops / public transport like LRT). What about the rental for smaller units? And the less desired units? (could be because it's further away from the basic amenities). You can find out this sort of information out by asking a few agents who farm in the area. Just record down the information you collect in a note book for review later. But, I normally would discount the prices they give by say, 5-10% as agents tend to inflate the prices a little.
• The next thing, now that you have the estimated market price of the property and also what it can rent out for, you can work out what your yield is.
• The yield is calculated as the annual rental income divided by the price. So, let's say that gross rental income for a 3R 3B unit is RM600 per month, and the asking price is RM100k, the gross yield is 7.2% p.a. (assuming that you are able to rent it out, for all 12 months in a year – i.e. no vacancies).
• You should also calculate the net yield – which is the gross yield less the costs related to running the property like, maintenance, quit rent, etc. So, if your costs is RM50 per month, then your net rental income would be, RM550 (or RM6, 600 per year) which gives a net yield of 6.6% instead.
• The next question is: whether you are happy to purchase the property given the yields? In this example, buying a RM100k property for a gross yield of 7.2% per annum? Or 6.6% net yield. Note: that there are some costs which can be controlled (which can improve your net yield) like how much you spend to maintain the property like repainting, and others.
• At this stage I would take stock of how much I can finance my property for also, and hence how much my monthly installment would be. As indicated earlier, your rental income must always more than cover your installment for the deal to be worthwhile.
• Once, I am satisfied with my estimate of the rental income i.e. it can be verified, and more than cover my installments, I work out how much I would pay for that property. I do this by working backwards to arrive at a price which I am comfortable with. So, let's say I want a minimum 8% gross yield, I would need to purchase the property at RM90k (RM7, 200 divided by 0.08). And, if I want a gross yield of 7.5%, then the price would be roughly RM95k. So, effectively I establish a price range for the property I am looking to buy.
• Remember this is the price range I am willing to pay, but not necessary what the market is pricing it at. So, if the market price for the property is RM100k, and I am only willing to pay RM95k, effectively I would need to acquire it at below market price. This is where the numbers game and being able to identify the motivated sellers come in. Hence, this is where the work comes in: looking at least 100 deals, before I end up buying one or two units at below market price. (read my earlier Blog in this topic)
• Of course, the other way to improve your yield is by increasing the rental income; but there are limitations to this, as you don't set the rental, the market does. I would normally err on the conservative side when it comes to estimating rental income, and place more emphasis on being able to buy them at below market price from motivated sellers. You make money in property when you buy, so the lower the price that you pay, the more chances you have of making money, in terms of the yield you get (and also from capital appreciation in the long-run).

**

Next: we will discuss the importance of your Return on Cash in finding the right rental property.

--
Chris Gan
http://breadnbutterproperty.blogspot.com/

Other "Motivated Sellers"

The wonderful thing about Blogs is that you can always add to it, unlike a book, where its difficult to edit once you have published.

Just thought of a few more categories of motivated sellers:
1) People moving out of town: they are usually keen to selll quickly as they don't want to leave the house empty for too long. Thieves and rodents can be a problem. Plus if they are moving far away, for e.g to KK, coming back to tend to a house in KL may be a hassle.

2) Behind on loan instalments
If they are behind on their payments and the bank is chasing them, they will be more open to sell at below market price. Some just want to "breakeven" and get rid of the property. So, if you make them a decent offer, they will probably take it; so aim low.

3) Foreclosure / 'Lelong' coming
The owner would like to avoid this and would be open to negotiations. But just be careful as sometimes they may want to sign the offer to purchase, so that they can buy some time with the bank. Delay tactics. I personally have not bought any property facing foreclosures.

**
Chris

Retire Well by Investing in Rental Properties

Retire rich, retire young? Well, that is the dream for a lot of people but hey, if you can’t, you should at least retire well. What does that entail? To me, it is having a passive income stream which you don’t have to worry about in your twilight years. A bit like my mum having a pension from the government that comes in on time every time. She was a school teacher.

If you don’t work for the government and thus have no pension, how else can you do this? I will show you how you can do this by: 1) investing in little green houses (rental properties) and utilizing some of your EPF money (Employees Provident Fund).

Let’s start with your EPF fund
Most people work hard all their lives, building up their nest egg for retirement, but seldom spend time planning for what to do with the money when they eventually retire. I mean, they know they will have a lump sum of money in their bank account when they turn 55 years old, but how many know what to do with it? Most likely two things will happen: firstly, they will put the money in fixed deposit which earns a paltry return that is not enough to pay for their upkeep, or 2) they (or someone else) will spend the money for them. Fact: those who withdraw EPF at age 55 will have exhausted 70% of their savings after 10 yrs . These are scary thoughts: at retirement you will either live poorly or be broke, before you kick the bucket.

So what can you do this solve this dilemma? It was also reported that Malaysian’s will need to have at least RM1.4mil to 2.8mil in the bank to live comfortably in their retirement . How they figured this out was that with RM1.4mil, earning a fixed deposit rate of say 3% p.a. will give you at least RM3, 500 per month in income, to live on. Well, how easy is it to save up RM1.4mil in your life time?

Investing in little green houses to retire well
Rental properties may not look like an exciting vehicle but it can work quite well. It can help secure your retirement income, with some help from your EPF funds.

Here is how it works: let’s say you invest in a medium cost flat which cost you RM100, 000. And you get bank to finance it up to 80% (i.e. RM80, 000 loan), for 25 year tenor, at 4.3% p.a. (current base lending minus 2.2%).

Your monthly installment is RM422.0 or roughly RM5k per year. This amount goes towards paying off the bank’s interest, and also reducing your principal outstanding. Initially, a large portion goes towards servicing interests, and this gradually reduces as we go along. If you are 35 years old now, you should finish paying off your loan when you are 60 (when you own the unit outright).

Next, let’s assume that you can rent this unit out at RM600 per month. And maintenance charges, quit rent, Indah water, etc sets you back RM80 per month. That leaves you RM520 per month; after paying installment to the bank, you are left with RM100 per month. Hmm, that’s not a lot of money left over in this day and age, is it? But, something is better than nothing, right?

But, what if you had 10 of such units? that would mean an extra RM1, 000 in your pocket at end of the month (yes, I know, assuming we can rent them all out, and it’s not empty, burnt down, etc right?). But, that’s not what we are talking about here, though. Assuming worst case scenario, your rent only covers the installment; you would still be building up massive equity in the units. In any case, you won’t need the extra income until you retire.

EPF + Little green houses = retire well
This is where your EPF money comes in. By investing in your rental properties now, you are effectively leveraging on your EPF, and in a sense, have determined how you will be investing the lump sum that you’ll receive at retirement.

Here’s what I mean. Let’s assume that you are:
- Now 35 years old.
- Have RM100,000 in your EPF account now, and earn RM5,000 per month (from salary),
- EPF pays 5%p.a. dividends (which is the long term average over 10 years),
- Your salary increases 3% p.a. and you make normal contributions (12% employers, 11% employees).

At age 55, when you retire, you should have RM950, 000 in your EPF (assuming no withdrawals along the way for unit trusts, medical etc). And of course, you are gainfully employed till you retire.

From the loan amortization schedule, your original RM100k owing should be around RM22, 000 (at end of yr 21) which coincides with age 55 when you retire. At this stage what you can do, is to use your EPF lump sum to pay off your loans as you don’t really want to service your loans after you stop working. So, if you had 10 units you would need to fork out RM220, 000 (and you’ll still have RM730k left).

But, more importantly from the cash flow perspective: you will now have RM520 per month /unit as you no longer are paying for the loan. That would mean RM5, 200 per month of passive income from your 10 units which are now fully paid up. That would certainly a better return on your EPF money, right? RM220, 000 to generate RM5, 200 per month!

Of course in this example, we are assuming that
- there’s no increase in property value,
- you do not refinance the property,
- interest rates and rental rates remain unchanged,
- and the “excess” (diff between rental and installment) is not used to reduce the amount outstanding.

What I have shown here is a simple plan to retire well: by investing in rental properties, and setting aside some EPF money when you retire to secure your retirement income. All you have to do is to find 10 rental properties, with rental income that can at least cover their installment, and watch your equity build up. And, at retirement pay off those properties with your lump sum money from EPF and take over the rental income stream of RM5, 200 per month. What if this is not enough for you to retire on? Your retirement income is only limited by the number of little green houses that you have, so go out and find a few more!

*Read the rest of this Blog to find out how.

Chris

100k and below rental properties - Personal Money, March 2010

Here's a recent article that appeared in Personal Money published by the Edge, March 2010 issue.

Some of the areas that have properties below 100k: Desa Tun Razak, in Cheras, Rampai Court in Setapak and Taman Sri Muda in Shah Alam.

I personally prefer the low rises (5 storeys walk up) vs. the high rise. Less maintenance problems; if the lift breaks down, you will have a lot of walking to do if you are on the 10th floor! Not a problem if its a walk up. Be careful with Rampai court, although its priced attractively, watch out for the white ants! the area is very prone to this problem.

Happy hunting. Email me if you want to read the full article in pdf.

Chris

Who are the Motivated Sellers?

I only want to buy from motivated sellers. Period.

Who are they? They are the people who really want to sell their properties; not those who say "well, maybe if I can get the right price" or " actually, sell also can, but it's okay if I don't." No. These are not the people I am looking for. That is why, you need to go through the numbers (as I mentioned in my earlier post) - so that you can find the motivated sellers. They are usually the ones who tend to sell below market price.

So, what are some of the types of people that I have bought from, that were motivated to sell? I use the word motivated but sometimes, the people were actually desperate to sell their property, for whatever reasons. If you are looking to be acquire a few rental properties in the area, it is also important to remember to be fair in dealing with these sellers. Although they may be desperate to sell, you don't want to have a bad reputation, as someone who "takes advantage" of their predicament or bad fortune. It's always better to have a win-win deal.

Motivated sellers:
1. People who are going through a divorce. Both parties don't want to keep the house, and neither one wants to pay for the instalment. They are usually quite happy to sell it quickly and get out of this mess. So, you are doing them a favor. 

2. They have just bought a new house. With another mortgage payment for new house coming up, they usually just want to sell their old place, and move. Sellers like these are usually quite happy to take a lower price, as long as it closes quickly as they don't want to incur interests on their loan while still paying for this one.

3. Gambling problem. It is the usual story where they may be pursued by Ah Longs and need to settle their debt like yesterday. Sometimes, the house may have been left empty for a while as they fled to hide, so may be in "as is" condition. You can find some good bargains, but make sure the seller's title and documents are in order before you buy.

4. Terminal illnesses. It is sad but sometimes the seller needs money for medical expenses, like for cancer treatments. The house is most likely to be fully paid up. They would want a quick sale, for obvious reasons, and normally would take a discount to the market price. In this situation, you are also helping them but be fair when it comes to pricing.

5. They don't know the market price. yes, it happens but not very often. In a mature area, the owner may have lived there since day one, when he bought it at RM30k, for example. He doesn't comprehend that prices have moved up a lot, and is happy to sell for double the original price? But the market price could be RM90k? Happens when the owner sells the property himself (without an agent's help).

6. He/She is an investor. I have bought a few units from people who are like me, investing for rental income. They may have lived in the area, and subsequently rented it out to others. After a few years of collecting rent, they may have moved on to investing in commercial properties, for example. They are quite happy to see another investors take over, and these transactions usually are quite smooth, and the pricing, a win-win.

In all these cases, the only way to find motivated sellers is to go through the numbers. You will find them. And another important point is, always ask. If the price is stated as X, it does not mean that it has to be that. You can always offer a lower price; and sometimes, they may be motivated to sell to you. You'll never know what their circumstances could be. It always pay to Ask.

**
Chris    

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 1^st 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 www.iproperty.com. 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


**
Chris
Next: Who are the motivated sellers?

I Love Dolf's 8 Key Rules of Property Investing

I just love the simplicity which Dolf explains things when it comes to investing in properties. I keep these 8 rules, on a piece of paper stuck up on my wall so that I always remember them. And, it has helped me greatly when I was aggressively buying my rentals last year. I helped me to focus and I hope it will help you too.

1. Put no or as little money down as possible.
This is important especially if you are on a blitz to acquire many properties. Try asking for a 2 or 3% earnest money instead. You will find you will have more money to buy other properties. How do you do this? just tell them that's what you always pay, and most times the agent/owner will agree.

2. You make money when you buy
So, make sure you pay attention to the price you pay. Always know what is the market price and strive to buy at below market price. How do you do this? I will cover this later on in the blog, and is probably one of the most important steps in creating positive cash flow from yr rentals.

3. Don't sell unless you have to
Well, don't sell ever would be too strong, hence I said unless you have to. Why kill it if it's the Golden Goose? Of course, if its dud and you are sure that it will not change, then you may want to sell it. If the property is appreciated, then you may want to consider refinancing it, every few years to get some cash out. (to buy more properties?)

4. Fall in love with the deal, not the property
Ah, this is a very important rule: Most times you won't be living in the place anyway, so why fall in love with it? What you need to know is this: someone wants to live in it, am willing to pay rental for it, and you want to get it at a bargain price, if possible. So, negotiate based on facts, not emotions.

5. Be countercyclical
I am a contrarian by nature. If people say the economy is bad, I tend to think otherwise. Why waste a crisis? there are plenty of opportunities to be found. In a bad market, there are still bargains to be found, so do not despair. It is probably easier to find a bargain in a bad market than when the price of properties are sky-rocketing!

6. There's a deal of the decade every week.
It's true. Never get hung up if you make an offer on a unit, and the deal falls through. There is another one just round the corner which may be even better. But, you do need to work the numbers, and "see" many, many properties before you find one that makes a good deal.

7. Never be the first to name the price
If you name the price, you lose. You could have got it cheaper, and in negotiating, naming the price is always a bad move. So, you have to encourage, or persuade or do whatever to make the other side to name the price. Then, we can negotiate from there. The asking price is never the final price, in any case.

8. Always buy from a motivated seller
This is a critical rule to stop you from wasting time. I never want to buy from someone who says " Well, I would like to sell but, if I don't get the right price, I won't" Then he is not motivated, and so I will move on. Later I will tell you about how to spot a motivated seller; and how that can help you buy below market price, all the time.

Have a good one.

Chris

Seri negri sembilan flats, Bdr Baru Sentul

Here's the Lrt station directly opp the flats. Wonderful if these are available for secondary sales.

This is My Current GPS Position:
Latitude: 3.178986
Longitude: 101.695654
Google Maps link

Chris Gan. www.breadnbutterproperty.blogspot.com

Seri Negri Sembilan flat, Bdr Baru Sentul

These walk up flats are located right opposite the sentul LRT station. Ideal for people who work in the city area.

However not sure if one can buy them as it looks like low cost housing by Dbkl. Did not see any 'for sale' signs by property agents around the place.

There are two mid range condos located nearby which are quite in demand as it's also opposite the Lrt stop. Worth checking them out (sorry can't recall the names!) If you don't mind higher rise units.

Here's the location:

This is My Current GPS Position:
Latitude: 3.178986
Longitude: 101.695654
Google Maps link

Chris Gan. www.breadnbutterproperty.blogspot.com

Jalan Union flats, Sentul

This is my GPS position. 

Latitude: 3.175425
Longitude: 101.692619
Google Maps link

Chris Gan. www.breadnbutterproperty.blogspot.com

Why is Property So Good

A lot of people know that property is a good investment but they normally can't figure out why. They see a lot of successful people owning many properties but often wonder how they do it. A latest report by a global private bank shows that their high net worth individuals (those with at least $5 million and above) have one third of their wealth in properties (residential and commercial). Asian HNWIs have even more of their wealth in properties (50-60%). What is it that these HNWI or "smart money" know about properties that the average Joe doesn't?

Somehow we have been conditioned to think that in order to invest we need a lot of money to begin with, and so that normally puts the average person off. And hence we think that property investing is only for the rich. I also thought like that until I read the book "Real Estate Riches: How to Become Rich Using Your Banker's Money' by Dolf De Roos.

I have invested in different investments like stocks and unit trusts but never really figured out why property was such a good investment, until I read this book. I would recommend everyone to read this before you start investing in property. You can visit his website: http://www.dolfderoos.com/ and there are some really good stuff available on-line. But, nothing beats reading and digesting what's in the book.

Dolf answers the question; Why is Property So Good by asking his four magic questions. It's in Chapter One so it must be important! By the time you finish reading this, you will nod in unison, and say "Aha, now I know why property is so much better than stocks or other investments".

Let's assume you have RM100,000 to invest:

• 
  
  First question: How many RM worth of stocks can you buy with RM100,000? And, how many RM worth of properties can you buy with RM100,000?
  
  
  
  
  
  • 
    
    No, this is not a trick question. If you had RM100,000 you could possibly buy only RM100,000 worth of any stock (yes, some brokers do allow you margin financing but usually not at very high percentage). For properties, with generous financing from the Banks, you could borrow up to 90% of the value of the property. So, with RM100,000 and some clever financing you could well own a property worth RM1.0m or more. Of course, all you need to worry about is to have consistent rental income from it that can cover the monthly loan repayments.
    


• 
  
  Second question: The moment you buy RM100,000 of stocks like Maxis, or CIMB using RM100,000, how much is your stock worth? And the moment you buy RM1.0m property using RM100,000 cash and a mortgage of RM900,000, how much is your property worth?
  
  
  
  
  
  • 
    
    Again this not a trick question. When you buy a stock like Maxis it is worth what the "market" (based on supply and demand) says it's worth; and normally it's not too far off what you paid for it: RM100,000. But with property, it could be worth RM650,000 (if you have been conned by the seller/agent) but at the same time, you could have found a bargain, and it could well be worth more, say RM1.5mil. Someone could have thought it was a dud and sold it cheap or perhaps they were in a hurry to leave town. Either way it is possible, as the property market is probably not as efficient as the stock market.
    


• 
  
  Third question: When you buy your RM100,000 worth of stock for price of RM100,000, what can you personally do to increase the value of your stocks? And, when you buy RM1.5m property for a price of RM1.0m, using RM100,000 cash and RM900,000 mortgages, what can you personally do to increase the value of the property?
  
  
  
  
  
  • 
    
    Well, for stocks, there's not much you can do to increase the value unless you are part of a syndicate. Or, an analysts with extraordinary ability to talk up the share price of a company stock. But for property, there are tons of things you could do to increase the value, like repainting it, or adding an extra room, or an extension. Or something as simple as mowing the lawn and repairing the fences to increase the value: as they say "perception is reality". You can use your imagination to the fullest extent when dealing with trying to increase the value of property, and there are various books which can give you great ideas.
    


• 
  
  Fourth and final question: You bought RM100,000 worth of stocks, with RM100,000 cash – it has doubled to RM200,000, what must you do to enjoy the increase in value? And, you bought RM1.5m worth of property, for a contract price of RM1.0m, using RM100,000 cash and RM900,000 mortgages. It has doubled in value to RM3.0m, what must you do to enjoy some of the profit?
  
  
  
  
  
  • 
    
    Notwithstanding the time frame it takes to double its value, what do we have to do to realise some of the profits? In the case of stocks you will certainly need to sell it if you want to enjoy the gains. But, that's like killing your golden goose, right? What about property that has doubled in value? Do you need to sell it? Well, there is the option to Refinance it with another bank loan. If the Property has increased in value, and it often does over time, you can realise the value without sacrificing your golden goose: refinancing let's you take some equity out, while still being able to continue to own it.
    

In summary, the wonderful thing about property over other investment is that, you can have fantastic leverage. With RM100,000 you could own property up to RM1.0mil or more (provided your rental income can cover the instalments of course). It also allows you some flexibility and creativity to help increase the value like doing renovation or repainting the property. Not to mention, with property where the market is not so efficient like the stock market, there are plenty of bargains out there to be found, from willing sellers. Finally, property investing allows you the option to cash some money out, while continue owning, as the value goes up, through the ability to refinance it.

All these reasons (and more) make property so good.

**

More photos - J Union

Flats in J Union, Sentul

I was on my way to Kuantan and stopped for breakfast. Found these walkup flats just off the main road of jalan Sentul.

Called Jalan Union it is predominantly Chinese occupied in an Indian area. Looks interesting. There is a Ktm station nearby. And is not too far from Sentul East by YTL.

Not sure what the rental is like but worth to check it out?