Very recently, I’ve been shopping around for property for my own stay. This reminds me of the time I looked for my first investment property over five years ago. I’m still holding on to that property at a loss – both in cash flow and unrealised capital losses.
As a friend once said, things that happen to us could either be a blessing or a lesson.
This loss-making investment has given me three very important lessons that I hold close to my heart when it comes to property purchases.
1. Avoid new developments
As a professional real estate lawyer friend once told me, “Buy certainty when you are looking at investment property”.
The allure of a new development is apparent – minimal to no upfront costs (i.e. affordable), a lot of incentives, looks new and nice, etc.
However, every new development that we buy into is a bet. A bet that the developer will not fail, a bet that the future market is bright so that the value goes up, a bet that it has a market for good rentals.
When I bought mine, it was going to take three years to finish building. It was a mixed development that was supposed to come with a mall right in the middle (the second mall in that area). But, it didn’t happen.
The (prominent) developer decided to take out the mall from the development, SECRETLY! I only found out about it after it was completed in three years.
The mall just disappeared from the plan altogether as if it never existed.
Furthermore, more high-density properties started to pop up around that development. Causing supply to skyrocket around that place. Naturally, the value of my property dropped significantly.
As a result, I’ll be avoiding all new developments, even for my own stay. Nothing’s stopping them from delivering the property to you hastily or taking forever to fix the defects in the property.
Or building up the commercial space, which they promise will be vibrant, but end up becoming a dead place with only a few tenants.
Rather than buying something so uncertain, it would be better to buy into an existing property, where I can clearly evaluate how good or bad the place actually is.
2. It’s all about the maths
From the get-go, it’s all about the calculations when it comes to property investment. I got suckered in by the sales pitch for my first property and being a newbie then I didn’t do my own calculations.
The obvious part is that the rental income has to be higher than the mortgage payments and management fees.
The not-so-obvious part is the indirect costs – agent fees, maintenance fees, assessment tax, income tax, etc. These will eat into the income and hence reduce the net income that we would get.
Which means, we’d require a bigger margin in order to cover all these costs so that it’s profitable in the end.
– Mortgage + management fees = RM1,500
– Rental Income = RM1,700
– Indirect costs = RM140 (RM1,700 / 12 being the agent’s first month fee) + RM200 (miscellaneous fees)
– Loss = RM140 per month (= RM1,700 – RM1,500 – RM140 – RM200)
Don’t hope for capital gains because it’s uncertain. Ask anyone who bought a new property five years ago at the peak of property prices. Most, if not all, are suffering from capital losses now.
Get the profit maths right before any investment. If it’s cash flow negative, forget it. It’ll be a pain somewhere down the road.
The saying of, “at least partially it’s being paid by someone” or “It’s breaking even!” is nonsense at best. Nobody enters an investment to break even!
3. Property investment is semi-passive
When we talk about property investment income, mostly we talk about renting out to tenants to collect rental income. The passive income part is when tenants pay rentals on time throughout the tenancy.
That’s about it.
There is a whole other side of property investment, which demands active participation. Some examples:
– Getting a tenant in involves liaising with the property agents on and off (every month it’s not tenanted is a loss to the P&L)
– In between tenancy, there is a period where the property needs to be “cleaned up” and ready for the next tenant. The degree of work (and costs) required depends on how well the previous tenant took care of the place
– Tenants with issues can create headaches during their tenancy. This could be delayed payments, pests, broken things, etc. We won’t know any of these for sure until the start of the tenancy
Some investors, especially those with a big portfolio of properties tend to engage property managers to manage the portfolio to get the headache off their minds.
This will bring down the returns but at least it’s converted into a mostly passive income portfolio. However, for most of us, this can take up significant brain juice, time, and effort to handle.
However, it’s all good as long as the profits from the investment better justify the effort required. Refer to lesson no. 2.
My first property was a headache. Students are potentially one of the worst tenants ever, in my experience.
In contrast to my trading and other investments, I’d rather put in more of my efforts there. The rewards in property can be huge, no doubt, but it isn’t one that I prefer.
It might be obvious for many but hope this reaches those of you who are looking into your first property for investment. It may help you in your journey!
About the Author
This article was originally published at betweenthemoney.com, a personal finance website by Jason Loh that focuses on money matters and investment topics for Malaysians