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
**
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.

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

What if you can't rent out the properties

What if you can't rent out your properties? This is one of the frequently asked questions and it relates to tenant management. I get asked this question a lot, by people that I talk to about this idea of creating passive income from rental properties and  also indirectly by banks. By limiting how much you can borrow, they are effectively saying "hey, we are not sure if you can afford this loan". Sure, you plan to rent them out but "what if" all your tenants either don't pay or worse still, all decide to leave?

Firstly, what if they don't pay? There are obviously ways to mitigate this problem. Firstly, there is the 2+1mths deposit that they pay up front. Normally, if they are late in paying their rent, that is usually a red flag that they are planning to leave; tenants are normally worried that you may delay paying them back their deposits, and would often try to "run-down" their deposits. Hence, they will not pay the last month or if possible last 2 months. You need to be alert, and I normally would just call them and ask if they plan to leave. I don't mind them not paying for 1 month but not for both. And more importanly, I get to quickly look for a new tenant before the existing one moves out. So, in most cases, my flats are never empty for long.

Secondly, what if they decide to leave? Well, then I would just need to find new tenants! That is the name of the game. But, I know what most people mean when they ask this question. What happens if they all decide to leave, at the same time? how then do you service your loans? To answer that:

1) Diversify - there is a saying " If you owe the bank RM100k, and you don't pay, you have a problem. But if you owe them RM1mil, and you don't pay, then THEY have the problem". What it means is: diversify. Think about this: if you have 20 rental properties, what are the chances that they are all empty at the same time? Not likely unless there is a bubonic plaque or SARS hitting the area, right. So, you need to make sure that even if half of the flats are empty (which is unlikely); that the rental from the other half is enough to cover all your bank instalments for that month, while you look for new tenants.

2) Invest in bread & butter properties
Now, which is easier to rent out? A condo at RM1500 per month rental or a flat for RM500 per month. Chances are, they are both easy or difficult to rent out depending on location, etc. But, If you had 3 flats each getting you RM500/mth (or total of  RM1500) - the chances of you not being able to rent all of them out, at same time is pretty slim. Further, as I mentioned earlier in my blog posting, the average wage earner in Malaysia can afford RM500 for rent but there are not many that may be able to afford RM1500/month, and for those who do, normally have more choices to chose from.

3) Do something!
Those who ask the question, what happens if you can't rent them out always assume that you as a landlord would sit around and do nothing. And at the end of the month are surprised by your tenants all deciding to leave at the same time. In reality, you would have warning signs such as late payment, and in some cases, the tenant will let you know in advance they are leaving. So you need to quickly mobilise your agent to find new tenants. In an area which is "hot" for rental, there is usually not much problem finding someone to fill the vacancy. In the worst case scenario, if you reduce the rent a little, you would be able to rent it out quickly; this is an option as less money is better than no money (if its empty for one or two months).

I hope this answers the oft asked question of "what if you can rent them out".

Chris








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

Tenants: Your Jewels or Worst Nightmare?

Having and managing tenants is an important part of investing in rental properties. Bottom line is that by having tenants will ensure that your rental yield is achieved, while an empty apartment or flat will mean disaster.

Take for example, if you are able to have your unit rented out for a whole year at RM750 per month i.e. 12 months. And, you have paid say, RM100, 000 for the flat. Your rental yield is 9% (ignoring costs, for simplicity sake). But, if you leave it vacant for 2 months in the year, your yield drops to only 7.5%. And, you would have had to pay your monthly installments for two months from your own pocket which can be painful. So the key is to try to have it tenanted all the time, and there are some steps which you can take to ensure that this happens. A friend once told me: with residential properties there is not much you can do to attract tenants: you can only re-paint the flat once. But, the one way to bring in a tenant quickly in a worst case scenario would be to drop the rent, to just slightly below what the market is asking. Getting a bit less is better than nothing at all.

Renting: Do it yourself or pay someone
This is an interesting question which only you can answer. Doing it yourself (if you have the time and interest) would obviously save you some money (rather than having to pay an agent, of course). The agent normally charges one month’s rent for his/her service of finding you a tenant. But there are also downsides to doing it yourself: you have to face the tenants yourself!

I prefer to outsource this part to my property agent. If you plan to do the same, I would recommend that you find a good one as there is nothing worst than having to pay someone, but ending up having to deal with tenants yourself. And believe me, there will be a lot of complains especially when you talk about bread and butter type properties.

What are some of the benefits of paying someone to rent out your property?
• You don’t have to face the tenants (I personally have only met one so far in my career! And plan to keep it that way),
• You save time as showing the apartment to prospective tenants can be time consuming, and messes up your schedule if you are also working,
• You can play ‘good cop-bad cop’ with the agent, when negotiating with tenants, which you can’t if you are negotiating directly,
• He/she will do the screening of prospective tenants which can be quite tedious if you have not done this before. It requires a certain kind of skill and experience to sniff out the bad tenants.

In all the books on property investing you will find a section on Renting Out or Tenants, and they often talk about how to screen out tenants, the “undesirables” – those that don’t pay their rent on time (or at all) and also always complaining. Or, those that do damage to your property beyond the usual wear and tear.

So how do you screen the prospective tenants.
• Firstly, you need people skill, when dealing with tenants; most of the time you need to be nice to them, but at the same time, tactful enough in rejecting them if they are not the right people,
• Secondly, there are some basic requirements that prospects need to fulfill before you even consider them as serious candidates.
o They can pay the full deposit (which is 2 months rental & 1st month in advance, plus ½ month for utilities. If they can’t or ask for a reduction, that’s a red flag already,
o Have a job (else how are they going to pay you monthly?) and you can ask for proof of this,
o Preferably have a small family as they are less likely to be moving around so much (vs. a single guy/girl or a set of young working people staying together).

These are some of the useful tips to get you started on renting out your ‘bread and butter’ property once you have acquired them. In the next few blogs, I will address the other issues related to renting such as maintenance, managing the rental every month and also eviction (yes, it does happen sometimes when you need to kick people out!).

Chris

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

Converting Equity to Cash

It is amazing what happens when you read; over the weekend, I grabbed one of the property books that I had on the shelf and started reading. The book "Buy, Rent and Sell: How to Profit by Investing in Residential Real Estate,"2ed is by Robert Irwin, one of America's foremost expert. Although I only read one chapter (as I had read it before), I got some really good ideas on how to convert your equity in your rental properties into cash, and so I thought I would share that with you.

If you have played Monopoly before you would know that the object of the game is to buy as many properties as you can, and build a fortune. The trick of course is how to acquire one property, and parlay that first one into the second, and third and so on. Lenders would be quite happy to loan you money if the property you are buying is owner occupied. For that, they will give you at least 90% of the property value. But if its a rental property, and if you already have a few, the bank may get a little bit jittery. They would often offer a lower MOF of say 70-80% or they may vary the property valuation amount.

After you have managed to financed your rental properties, and over time your equity in them will start to build. Further, these properties may experience some capital appreciation, and then you will be faced with a problem. A good problem, nonetheless as your wealth starts to grow. The difficulty you may experience at this stage is "how do I convert some of this paper equity into cash?" i.e. how to cash out?

The straightforward answer of course is to refinance your existing property. And often banks don't mind if you want to refinance the existing property loan with a new one. But as soon as you want to to pull some money out, in excess of your original financing, that is when you want to cash out - that's when the problem arises. For example if the property has a value of RM150,000 and you still owe RM90,000 - that's an equity value of RM60,000. That's a nice amount of money for you to buy your next property. But banks tend to frown on letting you cash out as they perceive this as weakening their position in the property; and that you would not be as "committed" to it if there was adverse changes in your circumstances like if you lose your job. Of course, what you plan to do with the cashed out money has nothing to do with the Bank; but you will still face obstacles.

So, Irwin suggested two solutions:
1) To take two mortgages. That means, keep the first and get a second mortgage for the property. Or, you can get a new first and second mortgage which has a combined MOF which is higher. Of course, be prepared to pay a higher interest rate on the second charge (for the perceived higher risk), but normally the lender is not as worried that you will pull out.

2) Instead of refinancing your rental, refinance your personal residence.
We all have to live somewhere. If you are renting like me, maybe its a good idea to buy a property. The plus point is that the bank will always give you better rates and higher MOF for owner occupied. But the trick is how do you increase your property holdings through this? Refinance the personal residence, and then after a period of time, move out and convert it into a rental! Effectively, you would have got some cash out, and ended up with another rental property. But, as my wife rightly asked: what do you buy that can later be turned into a rental? Obviously, a landed property would be preferred as a residence but not as a rental as the yields tend to be dismal. And, certainly no where near my target 8% gross yield. On the other hand, if you buy a condo say like in Sri Putramas, you may be able to rent it out but only get a paltry yield of 4 or 5%, but the appreciation may be limited.

So, that gave me some food for thought. If I am able to do this: buy & convert personal residence into a rental, and getting some equity out at the same time, then by doing this over and over again, I'll be acquiring many more properties in the future.
* *
Chris

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

New property rules in Malaysia soon?

Singapore recently announced further restrictions on people buying second homes in a move to cool down the overheating property market. The amount of loan a borrower can have is now reduced from 80% to 70%, thus increasing the amount of equity you need to have in the 2nd home.

Likewise in Malaysia, the central bank (BNM) is contemplating similar measures; after initial signs of a property bubble percolating appear. Some semi-D houses in gated and guarded (G&G) community of Desa Park City now costs nearly RM1m compared to those in nearby Bandar Sri Damansara which are around RM400-500k only. It is often argued that G&G deserves a higher premium compared to those without, hence a higher appreciation. But perhaps a 100% premium is a tad high?

In any case, according to a prominent economist I spoke to, it is likely that the measure by BNM may be targeted say for those property worth RM500k and above, as this is the segment that shows signs of speculative bubble. Hence, it is unlikely to affect "bread and butter properties" such as apartments/flats below RM150k. Which is good news, really as you can still continue to buy rental units with higher margin of finance.

However, the downside of such a speculative bubble brewing in the higher end property market is that it also affects the lower end prices. A 1B 2RM flat I used to be able to get for RM75k (which is about RM5k below market value) is now priced at around RM95k. While I am happy that my own unit has appreciated by c.20% in the last 1 year but it makes it just a little more difficult to buy at a low, low price. In fact, to justify the higher prices, I have started to increase rent by between RM30-50/month to bring it in line with my target gross yield of c. 8%. So, as you can see, any appreciation to your rental property is a bonus, but very often, it also helps to push rental prices up. You gain from both angles*.


*assuming interest rates does not move up rapidly of course.


**
SINGAPORE Aug 30 (Reuters) - Singapore on Monday announced
restrictions on people buying second homes as part of new measures to
cool the residential property market.

These included decreasing the amount of loans a person can take to buy
a second property to 70 percent of the property value, down from 80
percent currently.

The government will also impose a stamp duty on homes that are bought
and sold within three years, increasing the holding period from the
current one year.

"The government's objective is to ensure a stable and sustainable
property market where prices move in line with economic fundamentals.
The property market is currently very buoyant," the Ministry of
Finance, Ministry of National Development and Monetary Authority of
Singapore said in a joint statement.

Prime Minister Lee Hsien Loong said on Sunday the government will
build 22,000 new public homes next year, up from 16,000 this year, in
a bid to ensure housing remains affordable.

"We've acted twice to cool the market -- once last year and once in
February this year -- but prices are still rising, Lee said. "We need
to do more."

Private home prices in Singapore rose 11 percent between January and
June, according to the Urban Redevelopment Authority. (Reporting by
Harry Suhartono, editing by Kevin Lim)

Buying Property with "No-Money Down"

Probably the most commonly asked question is: Can I buy a property with no-money down? The straight answer to this is Yes, technically. However, there are some caveats.

This business of no-money down was popularised by Robert G. Allen, a financial guru who wrote a seminal book on this topic (can't remember the actual title). His mentor is a chap called John W. Schaub who's been in the property line for more than 35 years, and is author of books like "Building Wealth One House at a Time" and "Building Real Estate Wealth in a Changing Market". The truth is that it can be done.

What does no-money down mean?
In the simplest sense, it means that your property is financed entirely by borrowings or loan from the bank. You don't actually put any equity in acquiring it, and allow the monthly rental collections to pay for the instalments. In practice, you would still need to put "some" money down, initially as the down payment, but at the end of the transaction, you should get your money back from the loan, which makes it, "no-money down".

What are the caveats?
An important caveat is that you do need some money to start with, as a deposit, perhaps up to 10% of the property price. But, because you can buy "below market" (see my earlier blog on this topic), and can find a bank that will loan you the full price, you don't come up with a cent (of equity).

The second is that your monthly rental income, must be more than your instalment amount. There's good leverage and there's bad leverage. If you are highly geared, but don't have the means to pay for the instalments, you are looking for trouble. I would also budget in a small "buffer" on top of just covering the instalment, just in case. You could lose the house. But if you can cover the loan instalment, then you are set as essentially your tenant will be paying for your house, adding a little equity every month until its all yours in a few years time.

The third this is. You would probably not be able to buy every single unit with "no money down" in other words, have the bank finance 100% of the property for every unit you buy. But, on aggregate this is possible. So, if you buy 10 units, you may have say 7 or 8 units which you are able to get it entirely financed by buying at below market, while others, you are paying market value, and financing it up to 90% margin, for example. So, the aim is to buy on aggregate, with as little money down as possible. This will just increase your return on cash ratio through the roof.

I will talk more about the actual mechanics of executing this transaction in the Malaysian context in my next blog. In summary, yes, this business of buying with no money down, can be done and has been done, but mind the caveats; the returns are fantastic but there are also risks involved.

Recommended book:

Keeping track of market values and rental rates

In my earlier blogs I discussed the importance of “looking at properties”. Investing in rental properties is a numbers game, especially if you want to buy them at below market values. So, you have to go through quite a number of the ones that you would decline before you end up with a few that you make offers on, and eventually purchase.

But, there is another important reason to be looking at properties all the time; and that is so that you are up-to-date on what the market values are in your area. And also the prevailing rental rates. That would help if you 1) want to sell (which I don’t recommend – see 10 rules on investing in properties), and 2) wish to refinance it, and take out some cash.

Last weekend, I spent sometime looking at properties, and it was an enriching experience, (especially when you are not in the market to buy). With the advent of the internet, and property websites, it is so much easier to know what’s on offer out there. And what prices people are asking for similar properties to mine. Going through the listing, making calls and finding out more about the property was a good way of staying in touch with the pulse of the area. Here are some tips on how to do this.
• Check the Star classifieds or website listings like www.iproperty.com,
• Filter the listings by newness and list those that meet your criteria on a notebook, and start calling the agents,
• Remember you want to get an idea of how much your property is worth, so call those that match your criteria,
• Ask the agents if they have transacted any at the prices that’s advertised. Sometimes, owners just put them up at high prices, hoping that they may get lucky.
• Also, find out if the property is tenanted, and how much is the rental (that would help you to determine whether to raise your own rental rates)
• At the end, scan through the list and you’ll get a good feel of whether your property has appreciated or not. Compare this with the prices you had bought earlier (much easier to do if you have kept a log of the listings!)

I came away from the exercise pleasantly surprised: the price of a 2R 1B flat similar to mine is now 20% higher, and it appears that my rental rate is about 9% lower than what the market is asking. So, that’s some food for thought.

Finding Financing for Your Rental Property

A very important part of investing in rental properties is the ability to leverage. And that means having to borrow from the Bank. There is good debt and of course, not so good debt. As mentioned earlier, leverage is good because you are able to multiply your returns with a small outlay; for example, if you finance a 100k property with a 10% down payment, and if the capital gains when you sell it is say 20k, then your return is not 20% but actually 100%. The cash outlay was 10k and your returns was 20k (100%). But remember, this can work only if your rental income can more than cover your monthly instalments.

As such you need to look for appropriate financing. And, having a group of bankers which you can tap on for funding is important as not all the Banks will be interested or focus on your property segment especially if its 100k or below. Some banks just don't want to do these 'bread and butter' properties - they may think it's too high risk, when in reality its probably not. 

It's often said that "bankers are people who offer you can an umbrella when its bright & shiny outside, but will take it away when it starts to rain!" That's a bit extreme but I would also add that bankers are like everybody else: they are motivated by fear, and also greed. They are in the business of giving loans, and the more loans that they make, the more the banker makes as commission. So, don't be shy to approach them to finance your rental property; they worst thing that can happen is that they say No, in which case, just move on to the next one.

Firstly, check out a few banks -  maybe one or two local and one or two foreign banks to start with. Ask some friends if they have friends who do loans. Referrals are a good way to find the good bankers. Don't assume that all bankers will do loans; some focus on other areas like wealth management only.  Call them up and ask what the bank's offerings are, in terms of rates, margin of finance (MOF), tenor and if there's any special packages like zero cost (for loan agreement and valuer's fee). Next compare, the offerings; not just the cheapest rates but also, the MOF they are willing to give. And also service; there are some banks that I would not take a loan from because they can't get their act together, usually causing me more money in the long-run in terms of delays, etc.

Next, once you have identified a few bankers you want to deal with, ask them what they need. Normally the documents required are:
- copy of yr IC,
- Bank statements for latest 3 months,
- Salary slips for latest 3 months,
- your tax return (sometimes),
- details of property i.e. copy of the offer to buy & sales and purchase agreement, if you have.

I would always make many copies of these, and submit applications to two or sometimes three banks for the same property. It doesn't take much more work than submitting just one application. That way, I am always sure that I will get financing for the property as time is ticking; you only have 90 days to sort this out from date of signing your S&P. So you don't want to be left hanging with no financing; it's better that you reject 2 offers than having to accept the one and only, with terms which are not favorable to you.

In order to leverage my time, I would usually ask the bankers to come to see me, rather than the other way round. That way it saves me travel time and also tells me that they are serious about doing my business. Other ways of saving time would be to use faxes and also courier (Poslaju) to send some of documents: meet face to face when its absolutely necessary.

Lastly, know this - not all of bankers would want to do your loan, for one reason or another. Sometimes, it's because of bank's policy for example, not wanting to finance properties below 100k, and so the rates offered may not be attractive. Other times, the banker is not interested to do "small" loans. Don't be disappointed if you don't get a quick reply (or no reply at all) on the status of your loan. Often I wonder if they were even submitted in first place! That is why, you should have a few bankers you can call on, and submit more than one application for loan for each property.

Once you have done a few loans, and dealt with a few bankers, you will be able to identify those that can be part of your team.

**
Chris


  

How to find a good property agent

The property agent is probably one of the most important members in your team. Finding the right agent can help leverage your time considerably. So, take the time to go find them.

The things that are important in the process of investing in rental properties are:
- finding the right property,
- negotiating and making an offer,
- arranging financing, and
- rental (or property management).

Out of these, finding the right property, and negotiating (plus making an offer) probably takes up the most time. So, leveraging on property agents to help you is a smart move; although you have to pay commission but I believe it's probably worth it, if you get the right service.

What I look out for in an agent
He/she must:
• Have integrity – this is non-negotiable,
• Be competent - knows the area you are looking to buy well,
• Have the experience to negotiate successfully - try and avoid newbies, and look for someone who's been in the profession for at least a few years,
• Be able to deal with people (i.e. have people skill) - very often they have to deal with difficult owners, and if they are not able to manage the negotiations, it may blow the deal for you.
Before engaging them, you need to ask the right questions, for example:
• How long have they been doing this?
• Are they licensed?
• How long have they been with the property agency?
• You can call the agency’s principal and run a check on the particular agent if you are unsure.
Another good way to find good agents, apart from asking for referrals from friends or people who also buy/sell properties is to take a walk around the area. Look out for the “for sale/let” signs; the agent that “farms” the area would normally have the most listings. Take the phone number down, and the property details and give them a call to find out more. Keep a listing of the agents in the area as you will probably come across them again if you are actively looking at property in the area. Sometimes they also use more than one mobile phone number, so its important to keep track of that too.

But, one thing to watch out for is that sometimes the agents who display the signs don't actually have listing. Some will leave the signs up after the property is sold, to generate more the leads. Normally you can quickly figure them out by asking a few simple questions, and asking them to view the specific property advertised.

Negotiate the commission but pay them
The agents earn a commission for their services; and this is set by the Act that regulates property agents. For property below RM100,000, it is 3% of the purchase price. But, this is usually negotiable especially if you are going to be buying many properties – I normally agree up front on a flat fee of 2%. It’s important to pay agents well; a good agent takes care of a lot of related matters for you in the process, from helping to negotiate with the owner, checking on documents like titles are in order, helping to settle the maintenance fees, and others. Sometimes the really good agents will even go as far as making sure the property is in good order before the final handover is done, and that can save you a lot of work. Thus, a good agent is certainly worth its weight in gold.

**

Wangsa Maju - Section 4, Setapak

5 storey walk up flats, located near Wangsa Maju Lrt station. Setapak.

Popular place for rental as near to TAR college.

Many blocks. Section 1, 2 and 4

Rental around 550 for 2 bdrms. And 750 for 3 bdrms.

Leasehold.

Cost varies from 80k to 120k depending on location and floor.

Near Wangsa walk shopping center.

This is My Current GPS Position:
Latitude: 3.201748
Longitude: 101.741964
Google Maps link

Chris Gan. www.breadnbutterproperty.blogspot.com

Rampai Court, Setapak

4 storey walk up flats in Setapak area.

A number of blocks - phase 1 and 2.

Located near shops and makan places, and soon to open LRT station (Putra line)

Rental around 500 to 600 per month. And 3 rooms priced around 90 to 100k.

But some units quite prone to terminate problems.

Freehold.

This is My Current GPS Position:
Latitude: 3.194399
Longitude: 101.732666
Google Maps link

Chris Gan. www.breadnbutterproperty.blogspot.com

Setting Up Your Dream Team

I recently read quite a funny quote: "there is no I in TEAM, only, M and E and that spells ME". well, that's not quite true when it comes to getting results in your property investing. I know it sounds cliché but, you can't do it alone. You really do need a team, and preferably a good one. This is certainly true in my case; as I am working full-time, have a family, and other commitments, it is certainly hard to find time to look for property, arrange the financing, and renting them out. So, I rely on key individuals to help me.

I think the main advantage of having a team of people helping you is that it can leverage your time. In property investing, the key people in your team should be:

·        Real estate agents,

·        Valuers,

·        Bankers,

·        Lawyers,

·        Accountant cum tax advisor, and

·        Handyman.

You will have to go through a few people in each of the category of profession needed before you end up with the right people. It can be a frustrating process, having to deal with the "wrong" people initially, but certainly worthwhile when you find those that can really help you. And, once you find them, be prepared to pay for their services.  I always believe that if you take care of them, they will in turn, take care of your interest, most of the time anyway.

Who are the right people?

The right kind of people are those that you enjoy dealing with. I think that this is paramount. You will be working closely together and there is no greater pain than having to deal with someone you don't like. It's not a job, and you have a choice of who you want to work (and who not to!). So, select the right ones, and create a "win-win" situation, where both parties gain from working together.

Generally, the following qualities are important, whether it's the real estate agent or the lawyers I work with:

• Has integrity: there is no compromise on this, as most of the dealings involve money,
• Reliable: "does what he says he will do",
• Has the necessary skills and knowledge: especially when it comes to legal matters, like S&P agreements, loan agreements, land matters and others. (Find a good lawyer who knows what they are doing),
• Goes the extra mile: this is a bonus. My real estate agent doubles up as my rental agent, and he does small maintenance work for me, which saves me a lot of time (and hassle).

 These are some key points when it comes to setting up your dream team. Remember the main idea is to leverage your time. You can only be at one place, at one time. But having a small army of people like real estate agents will help to multiple your efforts, and get you better results.

Next: we discuss how to pick the "right" real estate agents, lawyers, etc.

**

Chris

--
Chris Gan
http://breadnbutterproperty.blogspot.com/

You Need an Education in Real Estate

When I first started investing in rental properties a few years, I was fortunate that I had a mentor whom I could call and get some advice from. But there was a limit to how far I could go with this: it's not possible to be calling him on every single thing.

The first thing he suggested I do before I even start buying property was to buy a book! And that book was Dolf De Roos' "Real Estate Riches". By reading and applying the principles from that book alone has helped me make a lot of money from investing in properties. So I say: you need an education in real estate before you start investing.

Why do you need an education?

Like in all professions in life, whether you are an engineer or an accountant, you need to learn how to do it, before you are qualified to do it. A good education distinguished the goods ones, from the rest of the pack. Even the char kueh teow man needs to learn how to fry the kueh teow from someone; most of the skill was probably handed down through the generations. The point is: you need to learn. There are a few ways to learn; one can go through "trial and error" (learning from your own mistakes, which can be costly) or learn from someone else's experience and mistakes. I think it is wiser to do the latter.

How can you get one?

Well, there are a few sources to learn from: books, seminars, videos, and mentors.

If you have someone who has done it successfully show you how to do this i.e. how to invest in rental properties, then you are blessed.  A mentor is probably the best way to get started as they have the experience and can point you in the right direction. That would save you a lot of time and money (and headaches!). But, it's not easy to find someone who would want to share with you his "secrets" and spend the time mentoring you, especially if he/she is busy and has no direct interest in your success. Chances are if he/she is successful already, you may not even afford to pay for their time! Imagine trying to hire Donald Trump?

So, the next best thing to do is to invest in books, seminars and videos, by experts in the field. Like any form of commercial endeavors you will need to invest first, before you reap the benefits. It is the principle of "sowing & reaping". I would start by getting some good books on real estate investing and devouring them. Kinokuniya@Suria KLCC probably has the best selection in town. Books are like food for the brain; they feed your mind. As we read, we have time to think through some of the principles from people who have done what we want to do, and then apply them.

There are so many books on real estate that you can pick up:  

• "How to" books from experts like De Roos, Schaub and DeCima and Eldred,
• "Big Vision" books from Donald Trump, like "the Best Real Estate Advice I ever Received" and "Powerhouse Principles" by Jorge Perez.
• "Real Estate for Dummies",
• Negotiations – by Peter Ross who is Donald Trump's senior attorney involved in negotiating all this high profile real estate deals,
• Countless others on more specific topics like flipping properties, managing tenants, how to "buy, renovate & flip", taxation for properties, creating wealth through property, and others.

So, don't hold back, and get as many books you can; remember, you are investing in yourself, by learning from the best minds in the business. It will pay you back many times over: it certainly has in my case. I am still expanding my collection of real estate books, moving into new areas of interest like commercial real estate investing, which has different principles (compared to residential investing).

If you have a chance to go seminars organized by experts, you should also invest in this. The right ones will certainly help to speed up your learning curve. One of the human insights is that we can recall more of what is taught, when a blend of showing and telling is used.

Good luck & happy learning.

Chris

Chris Gan. www.breadnbutterproperty.blogspot.com

 "When I get a little money I buy books; if any is left, I buy food and clothes" – Desiderius Erasmus, Humanist & Scholar

How Much Do You Need to Retire?

So, how much do you really need to retire? If you haven't figured it out, here's a simple seven step to help you.

Seven easy steps to work out how much money you need

Step 1: Determining the number of years you have until retirement:

The first thing you need to do is to determine, how long you have to achieve your retirement plans. In order words, how many more years until your retirement – this can be when you plan to retire (for instance, at age 45), or must retire (for example, age 55 in the civil service), less your current age.

Let's say that you are now 31 years old and plan to retire at age 55. The number of years to retirement would be:

Planned age to retire:            55 years

Less present age:              31 years

Equals number of years to retirement:    24 years.

Step 2: Determining your desired retirement income:

The next step would require you to ascertain how much money you would need when you retire, and no longer working. This is difficult to predict but is not impossible. You can estimate this by considering changes you plan to make to your spending patterns and how (and where) you plan to live, after you retire. Some of your expenses will probably be lower, for example, work-related expenses (like fuel or bus fare), clothing expenses and housing expenses. On the other hand, some other expenses may increase: for example, your travel expenses since you may have more free time. At the same time, your medical expenses may also increase as you get older, and become more susceptible to illnesses. It is often suggested that you would need about 60% to 70% of your last drawn annual income after you retire.

Let's assume your last drawn income is RM200,000 per year:

As such, your desired annual income upon retirement would be RM120,000 (that is, 60% of RM200,000), calculated as:

0.6 X RM200, 000 = RM120,000

Next, we will need to estimate how long this retirement income would be needed. The number of years this income is required is a function of how long you would expect to live. In Malaysia, according to the latest information from the Statistics Department, the average life expectancy is 70 years for males, and 75 for females.

Let's assume that you will live till 80 years old (which is a ripe old age!), and as such would need 25 years of retirement income (from age 55 onwards).

Step 3: Calculating your inflation-adjusted retirement income:

Inflation is one of the most important factors to consider in retirement planning. It erodes the purchasing power of our retirement savings, and thus needs to be taken into account in our planning. Here we need to determine how much your retirement income would be, adjusted for inflation.

In our example, we know that the current value of your retirement income is RM120, 000 (from Step 2), and you have 24 years before you retire (from Step 1) Let us assume that the average inflation rate over the next 24 years will be 5% per annum.

A retirement income of RM120, 000 today at an average inflation rate of 5% would mean that we need to have an inflation-adjusted income of RM387, 011 per annum in 24 years time. This can be calculated as:

 FV    = RM120, 000 x FVIF (24 yrs, 5%)

= RM120, 000 x 3.225 = RM387,000

Step 4: Calculating the total funds needed at retirement:

After we have ascertained the inflation-adjusted income needed for retirement in the future, next we will need to determine the total funds needed, so that we can plan appropriately towards achieving this goal.

Let's assume that the average rate of return (on our investments) that we can expect for the next 25 years until retirement would be 8%. As such, the 'real' rate of return from our savings (given that inflation is 5%) will therefore be 3% (that is, 8% minus 5%).

In our example, given that the inflation-adjusted income at retirement equals RM387,011 per annum (determined in Step 3), the total funds we would need can be calculated as:

PVA = RM387,000 x PVIFA (25 yrs, 3%)

    = R387,000 x 17.413

    = RM6,738,831

Hence, the total fund needed at retirement, 24 years from today would be approximately RM6,738,831.

Step 5: Estimating funds available at retirement:

The following step is to estimate the funds that will be available when we retire. Again, this amount is difficult to determine accurately and would depend on various factors such as the type of assets we have today, and those that we will accumulate in the future. Some of the sources of funds would include our EPF savings, personal 'compulsory' savings, insurance cash values, and financial assets such as stocks and unit trusts, which can be disposed of. To simplify our analysis, let's assume that in our case, the available funds amount to RM3,000,000 (accumulated from various sources) when we retire.

Step 6: Calculating the shortage (or surplus) of funds at retirement:

Once we have determined the total funds we require, and also the funds available at retirement, we can then plan for any possible shortfall.

Total funds we require (from Step 4):         RM6,738,831

Total funds available (from Step 5):        RM3,000,000

Total shortfall:                    (RM3,738,831)

Step 7: Calculating the savings required to cover shortfall:

Next, to meet the shortfall at retirement which we have identified in the previous step, we need to calculate how much we must save during our working lives.

From above, we know that:

Our total shortfall:                (RM3,738,831)

No. of years to retirement :            24 years

Average rate of return:                8%

Therefore, the amount that we need to save in order to meet the shortfall (which is equivalent to an annuity), can be calculated as:

PMT     = (RM3,738,831) / FVIFA (24 yrs, 8%)

PMT     = (RM3,738,831)/ 66.764

= RM56,000

Hence, in our example, the amount we would need to save is a total of RM56,000 per annum (or roughly RM4666.7 per month), in order to meet this shortfall target.

As demonstrated above you can easily determine how much money you really need to retire, taking into account important factors such as inflation and the rate of return on your investments. However, executing this Plan is another story altogether, as it is not easy to put aside some money every month. Let alone, an extra RM4,000 to RM5,000.

Alternatively, you may want to consider investing in rental properties as a Plan to generate your retirement income (see my earlier Blog on this).

Happy investing!

Chris

**

Retirement Planning Worksheet

NAME:
AGE:		A
	Calculations
Step 1: Determine when you plan to retire:
Planned retirement age:		B
No. of years to retirement:		B – A = C
Step 2: Determine your desired retirement income:
Desired monthly income (RM):		D
Annual income (RM):		D x 12 = E
No. of years income required (from retirement):		F
Step 3: Calculate inflation-adjusted retirement income
Assumed average inflation rate (%):		G%
Inflation adjusted-income (RM):		FV = E x FVIF (C yrs, G %)
Step 4: Calculate funds needed at retirement:
Inflation adjusted income at retirement (RM):		FV
Rate of return (%):		H%
Net return earned (less inflation):		H – G = I%
Total funds needed at retirement:		PVA = FV x PVIFA (F yrs, I %)
Step 5: Project funds available at retirement (RM):
EPF:
Savings:
Insurance (cash value):
Stocks/shares/Bonds/Unit trusts:
Total:		J
Step 6: Calculate surplus/(shortage) of fund at retirement:
Total fund required (step 4) (RM):		PVA
Total fund projected at retirement (step 5) (RM):		J
Total surplus/(shortage) of funds (RM):		PVA – J = K
Step 7: Calculate savings required to cover shortfall:
Total shortage (RM):		K
Savings required per annum (RM):		PMT = K / FVIFA (C yrs, H %)
Savings per month (RM):		PMT / 12

**