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