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
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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.

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