Is it time to sell your property?

I have been contemplating this question for a while now. While there is no real impetus to sell any of my rental units, it is always good to review the situation from time to time.

What are some of the pros and cons of selling now?

Pros:
1. the prices of units have increased since I bought them - on average around 25% since 2008, which is not bad returns,
2.  not have to worry about collecting rental and raising rent which can some times be a pain,
3. reduce my gearing so that when (and if) the local property bubble eventually burst, I would have some ammunition to buy some gems, at rock bottom, bargain prices.

Cons:
1. If I sell now, I won't be able to get financing for new property, at higher margins since BNM still imposes the 70% LTV for 3rd property and above,

2. What else can I do with the money raised from the sale of the unit? Invest in shares? - you must be joking. Invest in gold perhaps? - good idea since its a physical asset.  Knowing what the alternatives are out there is important - the last thing you want to do, is to keep $ in FD!

3. Sell the golden goose, and there goes the income stream - question is: whether the capital gains from selling is greater than the property's cash flow (i.e. the excess above your interest payments) if you continue to hold on, longer term?

These are some of the questions I am pondering now; as my Uncle Sam says: "there are no investments SO good that you got to have 100% of"  So, I guess there is no harm selling one or two of these, if the price is right? After all he should know: he made his millions buying and selling rental properties in Birmingham, UK.

Chris
copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

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.

Chris




copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

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?
  
Chris

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


copyright Chris Gan@2011, www.breadnbutterproperty.blogspot.com

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.

Chris

     

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

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!

Chris  


copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

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.

Chris
 

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

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!
Chris


copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

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 7^th) 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 15^th 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 3^rd 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 3^rd 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 1^st and 2^nd 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.

Chris

March 2011

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

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?

**
Chris
Feb 2011




copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

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, www.breadnbutterproperty.blogspot.com

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.

Chris 

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

Regular Income from Property - Edge Personal Money

This October 2010 issue of Personal Money, talks about creating regular income from rental properties. It recommends properties which are below 150k and show you how to calculate the net yield for properties. Certainly, buying properties which are below 150k in the right area is a sound strategy. One of the experts quoted in the article righly pointed out: most people can afford rental of RM800-1000 per month, while those that can afford 2k to 5k per month are much fewer and may be confined to expats. Further the number of such expats in Malaysia have declined over the last few years in line with a lower FDI inflow.

The article also highlights the perils of buying properties which are above 500k and expect to make capital gains only. By not being able to rent them out, you may be faced with negative cash flow every month from the property as you service your loan installment. You can refer to my earlier blog on the rental range of property that would be consider "bread and butter" properties.

** Chris

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

Selling Your Property

This is a difficult one. On the one hand you have the DeRoos Golden Rules of property investing that says: "Never sell", and on the other, "Nothing is so good that you should own a 100% of". The truth is that it is somewhere in between, and that you may end up selling a few of your properties along the way to realise some profit. After all, once you sell, you can still buy some more property when the price is right. So, there is no right or wrong about selling.

I have been looking to sell a few of my own bread and butter properties, and realised that there is a process to this. Many books can give you some guidelines on: how to prepare the property, whether to use an agent, and also how to price the property for sale. One think I learnt is that when selling: Never be a desperate seller, as you will always come out the losing end. Make sure that you know what the market price is, and stick to your price that you want. And if you are not in a hurry, you should always get your price, sooner or later. So, be patient, not desperate.

The other thing about selling is that: you want to make sure your flat is neat, tidy and if possible newly painted. That adds a lot of value, and helps to justify a higher asking price. A new coat of paint always appeal to the buyer (its not that expensive to paint a flat, really). The other part of preparing the property for showing is that you have to decide whether you want to have it rented out during this period. The reason being it is much more difficult to show the flat if you have a tenant in. You have to make arrangement with the tenant to view, and somethimes that can be very tedious. For this reason, you may want to keep it empty while you sell it.

I would prefer to use an agent when selling. Being a busy person, it helps to have someone doing the showing, and assisting you in the negotiations with the buyer. Negotiate the agent fees upfront so that there are no dispute later on. And when appointing an agent, make sure he/she farms in the same areas (i.e. familiar with the properties). That can help to make sure your property gets sold, and at the price that you want. You may also consider having more than one agent to market your property, which will create some healthy competition. But having too many agents also has its downside, and they may not be interested to promote your property to their clients, given the heightened competition. So two agents is probably optimal.

Next we will look at how to price your property for sale, and how to get the price that you want.
**

    


copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

It pays to check before you commit

Recently I was reminded of the importance of doing due diligence (check!) before you commit to a purchase. My friend sent me an article about the perils of not checking before signing the sales and purchase agreement (S&P); if the seller is a bankrupt, you, as the buyer may lose the down payment unless the bankrupt is solvent. Basically if you sign the S&P and have paid the 10% down payment, and then discover this – you are out of luck. You will have to wait your turn, together with all the unsecured lenders to get your money back. In the meantime, the deal is stuck as the seller as a bankrupt does not have any legal standing to consummate the deal in any case.

This brings me to the next point: hire a descent lawyer who knows what he/she is doing. This is one area you don’t want to be stingy on; don’t hire your friend unless he is well verse with conveyance matters. It can save you a lot of money (for example, if it stops you from making a mistake like signing with a bankrupt) and not to mention, a lot of pain, in the long run. Always do your bankruptcy check; and all good lawyers will advise you to do this before they proceed further.

There are all sorts of scams and tricksters out there nowadays. It pays to do your check; and as the saying goes: if it (a deal) is too good to be true, it probably is.

**

“Bankrupt Seller”, T10, The Star, 14 Sept, 2010

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

Some useful property books

An old book is still "new" if you have not read it!

Here are some of the books on property which may find useful. It covers areas such as investing, strategies, renting, flipping, taxes, and negotiations among others.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Financing: things that your banker won't do

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

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

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

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

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

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

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

Chris    

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

How 5% growth every year can make you rich

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

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

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

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

**
copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

What if you can't rent out the properties

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

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

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

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

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

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

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

Chris








copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

Tenants: Your Jewels or Worst Nightmare?

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

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

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

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

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

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

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

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

Chris

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com

Converting Equity to Cash

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

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

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

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

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

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

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

copyright Chris Gan@2010, www.breadnbutterproperty.blogspot.com