Buying your first property

farm-land

“Buy land, they’re not making it anymore” Mark Twain

When people ask me about how i started out in the hostel/hotel industry, one popular question that always pops up is, “When is the right time to buy property?”
The ideal answer is “When its cheap”! Of course if life was that perfect, we wouldn’t have to hustle so hard.
There are many factors/aspects that you need to study before you come to a conclusion of weather it is the right time to buy. Try answering these questions;

  1. Home, Investment or Business ? Will the property you are buying be a home? Are you planning to rent it out? Are you planning to sit and wait, and sell it when the price is right? Or are you planning to develop it into a business?
  2. Cash Flow 1. What is your commitment level? Is your family expecting a baby? How many kids do you have? Is your wife working? Have you got money saved up for emergency days? i.e Hospital, Children’s Education, etc.
  3. Cash Flow 2. How much cash do you have now? If you are taking a loan, are you able to service the loan amount in the future, should the economy go to recession, and you lose your job? (Sorry to bring this up, but this is one of the worst case scenarios that I see happen to most people nowadays.

The answers above are more of gauging how ready you are financially. Then we need to move on to the “RIGHT TIME to buy”. Here’s my own personal check list.

  1. What type of property are you planning to buy? Landed Property, *Multi-home, High-rise, or Land?
  2. Check around the city and nearby areas of how many types of similar development are there? What are their occupancy levels like? Are they all sold out, rented out? What are their selling/rental prices?
    **If there are similar developments around, that are left empty, then chances are there is over-saturation. This will lead to competition of prices, so you may possibly score a deal.
    **If they are rented out, are they rented out monthly or daily? If a market has a high daily rental rate, then this location enjoys high business/tourist volumes. Then this is a good location to buy.
  3. Situation of the countries economy. When the countries economy is good, everybody has money, and therefore most likely all the good buys will all be taken. This is a good time to sell your property if you have any. If the economy is going into recession, chances are that most people will also be jobless and have less disposable income. If you have strong financial background, then this is the time to buy.

*Multi-home is a term that they use in the US, where you buy up a building or a home, and you split it into many rooms, allowing you to rent them out as separate entities. 

Before we continue, do understand that, buying a property as a HOME isn’t the same as buying a property as an investment. When people buy a home, the primary reason is for providing shelter. One of the most basic factors that makes an investment an investment is your ability to control the timing of your ownership. That means that you can buy it and sell it at times and under circumstances that are likely to maximize your investment return. We can think of traditional investments, such as stocks, bonds, mutual funds — even rental real estate — as providing this ability.
Since a your house is your personal residence, you will have little control over the purchase and sale from an investment perspective. You’ll purchase the house when it is needed for shelter purposes, and sell it only when it no longer serves that purpose, and it’s time to move on.
The lack of control over the timing of buying and selling a house had a major negative effect on houses as investments during the financial meltdown. Many people bought houses at the top of the market because that was the time that they needed a home for their families. But still others were stuck having to sell after the market collapse, due to a negative change in their own personal financial situations.
That forced them to buy high, and sell low. That’s not unusual when it comes to residences, and largely disqualifies a house as an investment.

Making money from buying and selling? “Flipping”

Flipping is defined as “Profits from flipping real estate come from either buying low and selling high (often in a rapidly rising market), or buying a house that needs repair and fixing it up before reselling it for a profit (“fix and flip”)”


My first Property
My story starts something like this. Coming out fresh from University, I landed my first job working as an Engineer in a Factory. My first pay was around RM 2800 (750 USD) a month. I came from a middle class family. Dad worked as a Valuer, and Mum was a housewife. I thought that my dad being a land valuer, would have trained me or imparted his knowledge of property investing to me. Sadly this did not happen.
I lived with my parents to save rent, as many of us would do. However things started getting expensive when i had a girlfriend, and we started staying at hotels. (Yeah, we were enjoying their breakfast buffets*). My parents place only had nasi lemak.

My monthly expenses soared. Obviously i couldn’t cope. So i decided to buy a house. Fortunately for me, the house prices was still very stagnant at that time. So i bought my first beach-view property for RM 180k.

Before we all get too excited on what happens in this Sub Sale, Beach View, 890 ft2 Resort Condominium. Lets take a moment to discuss this. I will be taking property prices in Penang, Malaysia as a reference point because this was where i started off. So i bought the property in 2006 ( 180k) and then in 2015 the price went up to 500k (Economy Peaked). This property saw a 177% increase in 10 years. Meaning to say, around 17.7% per year. Of course this all Capital Appreciation. If I sold it off right now, i wouldnt get Property Tax by the government because I have already held it for over 5years. Read also: RPGT will hurt your pocket.
It is now 2017. Malaysia’s Economy is suffering from many  factors aside from the Global Economical Slowdown. The last i checked the asking price for my Sub Sale, Beach View, 890 ft2 Resort Condominium is priced at 400k. Last recent transaction is 370k.
But then again, remember what i said before, a home is not an investment!
This is a good example of why a home isn’t an Investment. Right now, the market value of my Beach View home is lower than the peaked price. If it was an investment, i would only sell it at a high price. Now what if I am facing some financial difficulties, and i needed to scale down. I would have to be forced to sell off this property even though the price is low.
Therefore A HOME IS NOT AN INVESTMENT.
Read: Asking price VS actual Selling Price
Read: How Property Valuation is done in Malaysia

So lets do a quick recap of what we have discussed today. Double check this checklist, before you proceed to buy your FIRST PROPERTY, or ANY PROPERTY for that matter.

1. Get Finances in Order

This one seems obvious, but it can be more complicated than you think. Investing in an income property isn’t like purchasing a house; it can be much more risky. With an income property, you never know exactly how your tenants will treat the property and how much work will need to be completed throughout the year. For that reason, it’s extremely important to have financial stability and a low-interest loan.

To begin with, ensure that you have enough money to handle the ups and downs of a rental property. The first rule of financial stability in the rental business is ensuring you can afford the payments on a house without the rental income. You may not always have renters, and when you don’t, the bank still expects you to make payments on the house.

You will also need a healthy sum set aside for emergencies. When the pipes burst and cause thousands in property damage the insurance won’t cover, you need to be prepared to take care of the cost.

Finally, remember that when you run a rental property business, you are not running a home; you’re running a business. Therefore, it’s wise to have an account separate from your business dealings for your spending related to the care of your income property.

2. Understand the Market

The real estate market is one of the most malleable markets in the country. It can change at the drop of the hat, and it’s difficult to predict when it will go up again, unless you’re thoroughly immersed in the market.

If you truly understand the real estate market, you know when it’s smart to purchase a property and when it’s best to wait for a better price. You can also gauge the proper times to raise rent prices. Overall, you’ll receive better returns if you can predict the market.

3. Begin with the Right Property

Almost every prospect requires that you start out low and work your way up, and real estate investments are no different. It’s important to begin with a solid property before finding a challenge.

A feature article published on Fox News gives several suggestions for the type of rental properties beginners should consider purchasing. Some of their tips include:

  • “Buy a property that you love.”
  • “Skip the prize properties.”
  • “Buy as a personal residence and change to rental.”
  • “Buy properties in good shape.”

Each of these options are excellent suggestions for those joining the business. Once you’ve mastered the simpler income properties, you can move on to another challenge, such as flipping a dilapidated property.

4. Plan for the Care of the Property

Managing a property isn’t easy. If you choose to be the landlord, it’s your responsibility to collect rent, keep the books, file taxes, screen tenants, handle maintenance, work out the insurance plans, write the contracts, and more. Many feel that they’re up to the challenge and try to handle the work themselves.

For others, the task is daunting to say the least. If that sounds like you, you’ll probably want to look into hiring a property management company. A property management company can cost anywhere from 5-10 percent of a month’s rent, which decreases your return, but can be well worth the investment.

This article from Green Residential of Houston points out there are many benefits of hiring a property manager including local knowledge, low turnover, legal knowledge, marketing expertise, and expertly handled maintenance. It’s not the right option for everyone, but many have found the time and money saving benefits to be worth the monthly fee.

5. Screen Tenants Properly

Finally, once you’ve take care of the basics, it’s time to rent out the property. However, it’s not wise to use a first come first serve basis with tenants. You need to be sure that they’ll pay the rent every month and treat your property respectfully. This requires a certain screening process, which will allow you to find great tenants.

Furthermore, be prepared for the tenant to screen you, in a sense. The best tenants will be prepared with the right questions. An article previously published on Inc.com outlines some of the most popular questions tenants ask before signing a lease. Make sure you have the answers ready, and take these questions as a sign of their dedication to the property.

Getting a handle on the income property business will likely be more challenging than you think, but once you’ve mastered these basics, you’ll be ready for the next important business step: making a profit.

1.  Know your budget

If you’re thinking of investing in property, it’s important to first set out a clear budget. Make sure you take into account the purchase price, stamp duty, legal costs, mortgage insurance (if needed) plus any extra funds you may need for renovations.

Once you’ve done the numbers, and have a better idea of what the real cost of buying might be, ask your bank for a pre-approval on your loan so that you know approximately how much money you may be able to borrow before you start hunting for properties.

2.  Seek advice

When borrowing to purchase your investment property, there are different loan options for you to consider. Whether you choose interest only repayments for a period of time or pay principal and interest, or whether you choose a fixed interest rate or a variable rate loan, will all depend on your personal circumstances – consider your options carefully before you decide.

Structuring your loan correctly is vital for long-term financial health, so seek advice from a reputable financial adviser, accountant and conveyancer.

3.  Research locations

It’s important to buy in an area where there is strong demand for rental accommodation – so research the local demographic.

Apart from rental return, you are also looking for capital gain. Each individual property market has its own growth cycle – this can be due to local supply and demand, economic climate and consumer confidence.

The idea, if possible, is to invest in a suburb (town or region) that has just been through its cyclic downturn and is poised for a growth phase. Choosing an ‘upcoming’ area can pay dividends.

Look for suburbs undergoing gentrification – signs include; the arrival of young people with good incomes, new homes and renovations springing up, plus new infrastructure like schools and business centres.

4.  Know the market

Once you decide on a location, do your research. Talk to locals, real estate agents and council to get a feel for the area, then check out recent sales to get a good idea for what property in the area is worth.

5.  Be objective

When purchasing a property for investment purposes, it’s important to buy with your head and not with your heart.

As an investor, you’re making a business decision and should be looking for property that is well presented and functional with potential for good rental return and capital growth in the future.

6.  Get an inspection

If purchasing an older property, making major repairs in the first few months of ownership could make a significant dent in your cash flow which is why obtaining a professional Building Inspection before purchasing might be a very smart move.

Prior to signing the purchase contract, take time to understand the building inspection report to avoid expensive repairs down the track.

7.  Freshen it up

You’ll attract better tenants if you have a well-presented property, so it pays to spend a bit of time and money polishing it up.

Paying tradespeople to renovate your investment property is costly. If you’re prepared to get your hands dirty you can save money and increase your profit margin by doing some of the work yourself. However you should stick with professional tradespeople for things such as electrical and plumbing work.

Keep colours neutral to appeal to a wide market and make sure your kitchen and bathrooms are in good condition. A lick of paint and some new carpet can do wonders for freshening up a property.

8.  Beware of costs

Once you have bought a property you need to be aware of the ongoing costs involved in maintaining it. Apart from interest charged on your mortgage, there will be other outgoings including council rates, land tax, property management fees, strata fees (if applicable) and insurance.

As a landlord, you will also be up for any maintenance repairs needed on the property. You will of course receive rent and you may be eligible for tax deductions to offset these costs but it’s a good idea to have all your incomings and outgoings set out in a budget so you know exactly where you stand.

9.  Employ a property manager

An investment property manager (PM) is usually a licenced real estate agent who will keep things in order for you and the tenant. They can:

  • Help locate and place a tenant
  • Undertake reference checks to ensure you find the right person
  • Advise on market rental for your property
  • Negotiate with a prospective tenant to get the best possible return on your investment.

A good PM can also advise on the rights and responsibilities of landlords and tenants.   (You can also visit the Office of Fair Trading for information and consumer advice on home ownership, tenancy and property management)

They’ll also take care of any maintenance issues, manage rent collection, run regular property inspections and act as the point of contact between you and your tenant.

The fee you pay your PM is usually a percentage of the rent.

10.  Think long-term

Remember that property investment is a long-term strategy and you should not rely on property prices rising in the short term.

The longer you can afford to commit, the better – and as you build up equity, you can consider purchasing further property.

Note: While these top 10 tips for property investing are intended as a guide only, your individual circumstances should naturally be taken into consideration. This is why we also recommend you obtain independent professional advice relevant to your financial circumstances.

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