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


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Chris
Next: Who are the motivated sellers?

What are Bread & Butter Properties?

Generally, Bread and Butter Properties (B&B) are homes that appeal to the masses: the vast majority of people in our society live in these houses, flats or apartments.

In Malaysia, low cost and medium costs properties would fall under this category of B&B. Properties which are priced in the range of RM25,000 to RM42,000 are considered low cost properties, and the government mandates that 30% of housing development by private sector to be reserved for this category. The properties are normally 5 storey walk-up flats that measure around 650 to 700 sq ft. The Real Estate and Housing Developers Association (REHDA) says that these low cost housing are usually reserved for those with household income of less than RM2500 per month.

Low costs properties are normally leasehold and State/DBKL approval is needed by the owner to transfer the title.

On the other hand, medium costs properties are normally priced from around RM72, 000 and up to RM100, 000. These are normally not subjected to the same restrictions as low costs housing.

What should be noted though is that, although the purchase prices of the low cost property is lower than RM42,000, the price in the secondary market could be much higher. Some low costs flats measuring 650 sq ft (2 rooms 1 bathroom or 2R1B) have been transacted at prices as high as RM70-80,000 in desirable areas. While those with 3 rooms, 2 bathrooms (3R1B), measuring 750 sq ft have transacted at above RM100,000 depending on location, and also condition of the flats.

In actual fact, there is no real hard and fast rule on what constitutes a B&B property: suffice to say that these appeal to the mass majority of people. If you really want to know where to find them, a good place to start would be to just ask around your office: colleagues or people in your work place, where they live? Talk to those who are young executives, or newly married couples, especially those from out-of-town. You would find that most renters live in areas like Cheras, Setapak or Desa Tun Razak and are renting houses or flats that are priced between RM500 to RM800 per month.

Why buy B&B properties for rental?

One of the key criteria of creating passive income from rental properties is that you must be able to rent it out easily. If you have difficulties renting it out, then you will find that it doesn't work so well. A high vacancy rate just means lower yields. Therefore, it's important that there are plenty of renters in the area you choose (i.e. there's high demand for your flat or house). And, they are willing to pay top dollar for living there because of desirable factors like easy transport and others (we will discuss this later on).

Generally, I focus on flats that can rent out for RM500-600 per month (2R1B) or RM700-800 per month (3R2B) (gross). These are the prices that most working people or you small families can afford. As most spend around 25-30% of their income on rent, this would be the range that makes sense. The average income per capita in Malaysia (2008) was US$6970 or RM24,000 per year. That's roughly RM2,000 per month hence, the average Malaysian can afford to spend up to RM600 per month for rent (or up to RM800 per month for a small family).

Segment *	Rent	Value of property
High end (30%)	Above 1,000 p.m.	Above RM150,000
B&B mid (40%)	Between 500 – 800 p.m	Below RM100,000
Low end (30%)	Below RM400 p.m	Below 42,000

*Note that this is how I segment the market for rental properties and is not based on any in-depth research.

Focus on the mid segment (40%) bread and butter properties for reasons explained. At best stay away from the low end segment as they are normally in less desirable areas where the government has put up public housing. And most importantly, a reason to avoid this segment if you planning to generate passive income is that it may be difficult to collect rent from the renters (high possibility of default).

The high-end segment can also be tricky as the renters can have many choices to choose from if they can afford to rent, for example, young executives. Further as they progress in their career, and make more money, most would be encouraged to buy their own property to live in – hence, they move out of renting your unit! The very high end properties (e.g. Bangsar, KLCC or Mt Kiara condos) which tend to attract the expatriate community who are prepared to pay RM5000-10,000 per month rental are subject to fluctuations in market conditions. In good times, it may be easier to rent them out but when crisis hits such as in 1998, or 2008, a lot of the units stay empty as the expats are sent home. So, for this segment of investing for rental it may not be the most appropriate strategy – most who buy, choose to live in it or as an investment (capital gain) or both.

So, stick to the mid segment which can provide more than enough opportunities for you to generate passive income through renting.

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How Did I Get Started (My Story in Brief)

This would be as good a place to start as any, I suppose. How did I started in this business of buying rental properties and why?

Well, I have always been interested in creating passive income, and not so much in the properties themselves. I a little bit weird in that sense, but I have learned from Robert Kiyosaki and all the Gurus on passive income, that it is the cash flow that matters and not so much what the asset is, or how it looks like. Who cares what it looks like if it can create the cash flow that you want? My only criterion really is that it must be legal. And, that is why I have focussed on what you call "bread & Butter properties" which are properties that appeal to the masses. I will define this market as I go along.

Rental properties lend themselves perfectly to creating passive income if you do it correctly. But, how do you buy rental properties correctly so that you can have that positive cash flow coming in, month after month? And, that's what we are going to be talking about in this blog.

How did I start in this?

I started really by accident, when Raymond, a friend of my brother's attended my dad's wake in 2008. We got chatting and after the usual pleasantries, he mentioned that he was busy buying rental properties. I was intrigued and so I inquired a bit more: where was he buying, what was he buying, why was he buying such properties? - all the usual questions.

One thing he said that caught my attention was the word "passive income".

He said he was getting positive cash flow every month from buying flats or what we call apartments. These are what he defined as "bread & butter properties".

The other thing that interest me then was he mentioned that I could also do it.

And, that he could even show me how I could buy with no money down. Wow! that really got my attention. And, so we arranged to meet up after that to talk further about this.

So, that's how it all started. From that one little conversation with a friend and the willingness to learn and to research it further.

Since then, I have acquired more than 20 rental units, one-by-one over a 1.5 year period, and have been collecting positive cash flow every month, after deducting all the instalments and expenses ever since.

The wonderful thing is not so much the number of units which I have bought but the fact is that on aggregate, I have been able to buy them with no money down!

Yes, with no money down. That was the only way I could buy them as I didn't have much money to begin with. My wife and I both have descent jobs but not much savings. But, we have been able to do this by "boot strapping" our cash every month from our salary and also through short term borrowings. Not to mention the fact that Banks are ever willing to loan us money especially if it's for property investing. And, we took advantage of that, and as a result have been able to build up assets worth 6 figures, giving us few thousand extra Ringgit a month (after deducting instalments, etc). One of the prerequisite to buy able to do what we have done is the ability to borrow (or leverage). Even if you don't at this stage, I will show you how to overcome that hurdle.

A few thousand Ringgit a month may not sound like a lot to some people, but hey, it sure goes a long way especially in these tough economic times. Not forgetting the compounded effect when you can invest it into other investments like stocks, or unit trusts. Or, just by leaving it to grow in your fixed deposit account.

What I am going to show you is not about getting rich quick through property investing. That is not the focus here. There will not be any hot tips to point you to the latest property launches where you can make a killing by flipping them. You can call this getting rich slowly as Sumney and Dawson call it in their book "The Weekend Millionaire's Secrets to Investing in Real Estate". It's for people who want to generate, positive cash flow that comes in month after month, while the tenants help to pay off their loans and increase their equity in the property. And in the meantime while you are collecting rental income, those properties are also increasing in value.

Finally, why am I doing all this? Well, I have had many friends who are interested in making passive income and I have showed some of them how to do this one-on-one. It's about time I put this down so that more people can benefit from this.

I hope you will find this blog useful, and that you will support it. And I would love to hear your comments, suggestions and also your successes as you embark on your exciting journey of property investing.

I wish you all the best.

Chris