Friday, November 12, 2010

More restrictions to ease property bubble?

THE rising prices of houses is still one of the hot topics among average Malaysians as the threat of higher inflation is growing by the day.

The fact that Bank Negara had early this month imposed a lower loan-to-value ratio (LVR) for those taking up their third and subsequent mortgage loan shows the central bank also considers the situation quite worrying. Effective from Nov 3, house buyers who have already signed up for two mortgages and are applying for their third loan will only be eligible to get financing of up to 70% of the value of their house.

Although it is largely seen as a timely pre-emptive measure to avert unhealthy speculative activities, some quarters voiced their reservation that the measure is too mild and are asking for “stiffer” measures to rein in rising prices.

Their argument is that people who can afford the higher downpayment for their property purchases will not be affected by the lower LVR although the measure may be effective on those who need financing assistance.

The LVR should be further reduced for those applying for subsequent loans. Those applying for their fourth loan should only be granted up to 60% and fifth loan up to 50%, and so forth.

Since the LVR is now used as the basis to decide on the quantum of mortgage loan that house buyers can sign up for, some properties with “unrealistic” price tags are finding it hard to get financing unless their values are adjusted accordingly. Hopefully, this situation will make developers uphold their responsibility properly and price their project according to the fair value of the property.

Just because there is strong demand for landed houses these days, developers should not take advantage of the situation by pricing their property a few notches higher and burden buyers unnecessarily.

Like some parts of the Klang Valley, the situation is also quite apparent in Penang where basic intermediate terraced houses are being priced close to or beyond RM1mil each. With house prices shooting off the roof, banks should also play a more responsible role and should not over-push their housing loans. The “war” between banks is still evident with some banks trying to outdo their competitors by offering “aggressive” interest rates of up to 2.5% below base lending rate.

In fact, banks are still aggressively pushing their credit facilities to consumers.

Although the market situation may still seem to be under control, it is important for all stakeholders to be vigilant and take note of any fast changing signs of overheating.

Like one observer says: “Bank Negara’s LVR curb is not just about the restriction per se, but more importantly it is about the SIGNAL that Bank Negara has send out, and that is, the central bank is keeping a wary eye on things and more measures could be introduced if the market does become frothy.”

Hence, the psychological impact of such a move is more important in that it will remind developers, potential borrowers, and bankers to be more judicious with their actions, and that is good for the market in the long run.

Otherwise, the central bank may have to impose further tightening measures if the market heats up further.

In fact, various Asian governments are already looking to impose capital controls to curb growing risk of asset bubbles in the region, signalling that the red flag has been raised on the havoc that can be wreaked by the inflow of hot foreign money into the region.

The measures underscore concerns over the US Federal Reserve’s second quantitative easing (QE2) – the printing of money to buy US$600bil long-term government bonds – amid an ‘’extended period’’ of super-low interest rates to support its weak economy.

The side-effect of depressing the US dollar and keeping borrowing costs near zero will cause speculative capital inflow to Asia as investors seek higher yields in emerging markets.

Hence, the environment is highly conducive for asset prices to spiral further leading to asset bubbles. Besides the high liquidity in the system, the low interest rates and inflow of foreign funds are bound to send asset prices soaring if left unchecked. And when these hot money pulls out, it will result in financial destability and a meltdown in the assets market.

Even without the threat posed by these hot-money, governments in Singapore, China and Hong Kong have already imposed a number of restrictions to dampen the rise in property prices and curtail speculative activities in the property sector.

So it won’t come as a surprise if Malaysia also have to resort to more restrictions to ensure the financial and property markets continue to be sustainable.

Sunday, November 7, 2010

Be a property millionaire without investing large sums

Property millionaires, Michael Tan, 34, and Juanita Chin, 39, have proven that “you don’t need large sums of capital to invest.” Both of them have achieved financial independence through property investments in just a few short years.

It is rather easy for one’s self-admiration to balloon out of proportion with a burgeoning bank balance, but Michael and Juanita remain firmly grounded and truly believe in paying it forward by sharing their strategies and success stories in their upcoming seminar.

Property millionaires, Michael Tan and Juanita Chin.
Tell us about your background and how you became involved in property investment.
Michael Tan (MT): My parents encouraged me to be a professional. You know, the likes of a doctor, engineer. I studied engineering and worked for a couple of years and then ventured into a few businesses. It took the loss of a job, two big failures and one near bankruptcy to realise that making money does not equal to keeping money.

I then decided to pursue property investment. Now, I have 12 properties valued at approximately RM2.9million.

Juanita Chin (JC): I was a bank teller earning RM400 per month. I have no degree and I only finished Form 5. But I had big dreams to be successful despite my lack of education. I first started investing in year 2003 because I wanted more time with my children. Working for long hours wasn’t getting our family anywhere. My husband, Ignatius, and I wanted a better life and not be stuck in the rat race.

After attending two life-changing seminars, we took action within a month. To date, we have 13 properties valued at RM5.6million. We now have the freedom of time, and my husband is able to pursue his passion in options trading.

How did you get to know each other?
MT: I attended a seminar that Juanita was co-sharing and spoke with her on the last day of the seminar. I consider her as my sifu (mentor) and I am very inspired by her story. Against all odds, she and Ignatius managed to be financially free.

So, is this the first collaboration between both of you?
MT: No. The first collaboration was in December 2009, for a charity event. I called Juanita to participate and she readily agreed. The second would be an upcoming seminar on 20th and 21st of March 2010.

Tell us about your first investment.
JC: We attended a RM57 property preview and learned that we can invest with little money. So we decided to try the strategy and negotiated with a property developer. We signed the SPA (Sales & Purchase Agreement) for RM5,000 for a property in Gurney Drive. The property’s lease was priced at RM450,000 and it has appreciated to approximately RM570,000 to RM580,000.

It is rented for RM3,000, while the monthly installment is RM1,800. Minus the service charge (maintenance fee) of RM200, we get a passive rental income of RM1,000.

MT: Also, mind you, she has four kids.

JC: Yes, it is important to mention that I have four kids. When we started investing, we already had two kids. The worse thing that could happen is losing money, but at least we tried. We then bought two more units on the lower floors at the same block with the same method.

MT: Also, I would like to mention that the units are not prime units or the nicest ones.

Juanita, where are your other properties located?
JC: All in Penang.

Michael, which was your first investment?
MT: As a business person, I wanted to do different things. I took a more conservative approach. I paid RM6,000 for a low cost unit and made RM18,000 back. I shared my money-making skills with my staff as well. One of them (at his mortgage broking company) paid RM1,180 as downpayment and she made RM14,000 after three months.

JC: It is possible to start with not much and achieve great success despite limitations. Educate (yourself) and take actions. It is not always a breeze. There are obstacles but it is worth it.

So, it is safe to say that the biggest myth in property investment is that you need large sums of capital.
JC: Yes, that is the biggest myth.

Juanita, what are these obstacles?
JC: Some of them include raising cash. We have to convince the banks. If you are determined to reach your objectives, you won’t let it stop you. I live in Penang and travel to Kuala Lumpur very often. Not many people would take the trouble to travel.

MT: Tell them about your furniture shopping trip!

JC: Oh! Ignatius and I would drive all the way from Penang to KL to buy furniture. Pack it all up in our car, tie things to the roof and then drive all the way back, on the same day.

MT: I have known her for only two to three months, but I see her in KL very often. I am blessed to have met and known her.

Wow! Where do you find the energy and drive?
JC: It’s just like a mother loving a child. I don’t mind not resting. As a mother, the saddest thing is not having time for them, (or) providing more for them.

What are the essential traits or qualities to be a successful investor?
JC: The person must love property. (He/she) Must be literate about real estate or finance.

MT: Financing can be a headache. One must be able to balance financing well enough, to pay loans well. Bear in mind, our properties might be worth millions, but we also have millions in debt.

Juanita has written a book titled “Inspired To Change”. Michael, any plans to follow suit?
MT: Yes. I am planning to release my book in October this year. Soon… soon, I will start writing.

What are the key things to look out for when investing?
JC: Be practical. You need to decide on a particular location and who you are targeting. For example, if you are targeting expatriates, then buy (property) in the area where they usually are.

MT: You could identify a fixed area and buy in the same area over and over. For me, I focus on good deals in Kiara only and areas where I can attain a rental yield of 8%.

Some of the strategies include focusing on low and medium cost projects. For those who are younger and do not have much cash, start with that. There is still a demand for such units. Some people prefer commercial, so go with what works for you.

Any advice for aspiring property millionaires?
MT: Be real. Be yourself. Be grounded.

JC: Believe that it can be done. One of the other things that we hope to impart from the seminar is, “Who are you going to be when you reach your financial goals?” Success is not just about money. We take a holistic approach. We want to get there (be successful) in the right way.

Being rich is about who you have beside you at the end of the day. Surround yourself with good people.

MT: It is fulfilling as a person, to see the changes in people, to see how their lives have improved. I hope to share my knowledge and affect 10 million people. We also do charities from time to time and are currently supporting a home for the underprivileged, House of Joy, in Puchong.

Make your millions safely and quickly from real estate

In my journey to help individuals achieve their financial independence through educated investment in real estate, one of the things that worry me most is the way some newcomers invest in property. I have received plenty of feedback from young investors about their methodology and views on how they invest. As much as I respect and admire their zest and energy, I also feel that they are naive and lack understanding of real estate investments. The urge to succeed, impatience and lack of direction in property investment can be very dangerous and potentially put them in a monetary-losing position.

“How does one start investing in real estate and why?” If your answer to that question is ‘new projects because it is simple and straightforward’, then you might fall into a potential property investor trap. Now, I have nothing personal against new developments or developers. Personally, I have invested in new projects and continue to do so. But for the life of me, I will not say that it is “simple and straightforward”! There╩╝s nothing “simple and straightforward” about property investment. True, it can become easier as time goes by, when you have more experience, but it is never simple.

So how do you know whether a property is a ‘good buy’ or not?
In a secondary market, it is quite easy to determine if a property is a ‘good buy’. Secondary market is the most organically driven market of all. What drives the secondary market is the fundamental law of economics—demand and supply. Deals are made where there is a willing buyer and a willing seller, willing landlord and willing tenant. Prices of properties are also influenced by rental returns. There are many avenues on how you can determine the true value of properties, i.e. from the banks, valuers, NAPIC (National Property Information Centre) and professional map makers such as Ho Chin Soon.

This gives you a realistic picture of the past and present developments in that market. With these data, you can easily extrapolate the future value and make a rational decision on whether to invest or not.

Now, what about buying from developers?
What is the driving force in determining whether it is a ‘good buy’ from developers? Most information is provided by the developers themselves and it can be true or it could have been made “marketable”. The question is, how do you, as a newcomer, determine the true value of what is said by the developers or make a good judgement on which projects to invest in? Apart from attending courses such as Juanita Chin’s ‘Breaking the Code: Secrets of buying from property developers’ to discover how to assess new projects, the answer lies in the secondary market!

You can find a lot of information from the secondary market—the current selling prices, rental returns, take-up rates and even vacancy rates for existing properties. You can also find out about other factors such as the area’s target market, its population growth and potential tenant mix. Using all these information is fundamental in determining your best development project, no?

So, in order to make good decisions, when buying from developers, one needs to master the fundamental rules of buying in a secondary market first. Like in every good game, there are always levels to play. In the game of real estate, the first basic level should be the secondary market. Knowing and understanding the secondary market is vital for newcomers. It is the stepping stone to becoming a good investor for new projects. Therefore, it is my opinion that one must first understand and invest in the secondary market prior to entering new project markets.

Please note that the opinion above is only limited to my own experience. I am sure that there are many successful investors who are big fans of new project investment strategies. I acknowledge your successes. My main intention of sharing is to assist anyone who enters into the world of property investment and help them thrive and become success safely.

Let’s look at the overall picture. Instead of asking which is better, primary or secondary market, ask yourself, “How many properties or how much in total value (RM) do you need to acquire before you can safely retire?” You should decide on your finish line before starting the race.

Once you’ve determined your finish line, e.g. the total value of property you would like to acquire, then decide how long you would like to take to achieve this number. How much time do you give yourself to acquire that total amount? Ideally, you shouldn’t take longer than five years. Now that you’ve got these two numbers, congratulations, you now have an achievable goal, both in total value (RM or number of properties) versus the deadline to complete your acquisition.

Ok, this is the part where we turn up the heat. How do you do it quicker, safely?

"How many properties do you need to buy in order to achieve your financial goals and how quickly do you want to do it?"

Now, this is a very technical question that involves financing the deals. Assuming that you are not an heir or heiress to a multi-billion dollar empire, most newcomers would need to take a loan to finance their deals. Assuming that you’ve determined your financial freedom number and have decided on the number of properties you can buy, the next question is, “How fast do you want to be financial free?” The answer would usually be, “The shortest possible time.”

Leverage on loans
The secret is to make the banks your best friend. For the life of me, I cannot understand why people do not leverage on loans. My key to financial freedom is through leverage. So, in terms of investing into property, a lot will depend on how much you can borrow. Do you know that the total amount of loan you can borrow is dependant on how much you earn as well as how much existing loans you have?

There’s two parts of this equation. How much you earn versus How much are your borrowings? These two parts will determine how fast you can go in terms of property investment. Just think of it like a scale. Neither side should be too heavy, otherwise the scales will tip. If it’s heavy on the income side, it just means that you’re not investing enough. If the borrowing side becomes too heavy, it means that you may not be allowed to obtain new loans.

To understand this further, let me explain what income and borrowing is. Your income is derived from your salary, commissions, dividends, rental and so forth. Your borrowings include credit cards, personal loans, car loans and housing loans. So technically speaking, you can go as fast as you can, so long as the scale do not tip to one side too much. For most banks, the ratio is about 0.4. This means that your borrowing must not be more than 40% or your income. Some banks allow up to 0.8 these days. Please check with your friendly neighbourhood banker for more up-to-date information regarding these ratios.

Primary vs. Secondary market
What has income and borrowing got to do with primary and secondary market properties? Let me elaborate:

• Primary market properties, i.e. purchase off the plan or from developers, adds solely to the borrowing.
• Secondary market properties, i.e. purchase from third party buyers or auctions, adds to both borrowing and income via rental.

Therefore, the secondary market has more potential to balance the scales, allowing more purchases to be made.

Most newcomers have relatively low income from salary and/or commissions. Therefore, it is advisable to stretch the loans as much as possible and look for properties that give rental returns i.e. the secondary market. If you were to purchase a project that has yet to be built or is under construction, this would tie-down your credit because the property is not ready for rental yet. You would have to wait for two to three years before you can invest again. If you are highly geared and cannot purchase anymore, then you’ll have to sit out on all the good deals and opportunities that come along. Trust me, that’s no fun.

However, do learn how to pace yourself throughout the journey. This should be a marathon, not a sprint. There are only two ways to profit from property — capital appreciation and rental returns. Learn to master both strategies to get you to your finish line faster and safely.

Capital first
My advice is to always start with capital first. Like all investments, property is capital intensive. The best way to get capital is from income sources. Cultivate good saving habits by saving your salary, bonuses and/or commissions. Ideally, start investing in property only when you have RM3,000 to RM5,000.

Then focus on cash flow. Why? Because it is good for you and the banks. Look into properties that give you good rental returns. Anything from 6% to 10% is good. My average investment portfolio stands about 8.5% p.a.

Once you get the hang of it, you can start investing for capital returns. Use investment strategies like No-Money-Down, flipping (buy-to-sell) through auctions, or buying from developers and selling upon completion. There’s no hard and fast rule to it, but I try to keep my developer profile to only one a year. The rest of the year, I invest in secondary market only. I seldom purchase auctioned properties. It’s just my personal preference.

Alternating strategies takes time and experience. Be patient and learn from both your successes and mistakes. It is important to go easy on yourself. Learn to roll with the punches. So if you make an error, learn how to correct it, learn from it and move on. It only becomes a failure when you give up.

Take care of your investments
Always seek professional advice to deal with your property matters. Hire accountants, tax consultants, good lawyers, bankers and so forth, to help you develop a healthy profile. Some people like to look for opportunities to get rich quickly. My advice? Don’t. Declare and pay your taxes, get consultants and pay them well and set up a proper structure to manage your portfolio wisely. Understand that you are in this for the long-term. If you take care of your investments now, they will take care of you for life. If you want drama or excitement instead, might I suggest jumping off a bridge with a rope around your ankle. Keep property investments safe and boring.

These days, the market is “hot”. I hope and wish that all investors make tonnes of money. Please invest wisely and avoid getting burnt.