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”! Thereʼs 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.
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.