This article was updated on 23 January 2019.
There is no denying that property remains as one of the most attractive investment vehicles out there, but many have been burned from buying the wrong product or purchasing for the wrong reasons.
‘They say ‘you reap what you sow’ and it’s no different when it comes to real estate investment. Malaysian property speaker and book author, Ahyat Ishak, shares his four principles with those who are looking to jump onto the property investing bandwagon.
Here are the 4 must-dos that every aspiring investor should have on their checklist:
#1 First, educate yourself
Most people spend more time researching things like the latest smartphone or tablet models, as compared to when they’re purchasing property!
Property investment is a war zone and you should equip yourself with proper ammunition before venturing out into the battlefield. Too many people take real estate knowledge and research lightly, and most will be happy enough to depend on word of mouth or plain luck.
If you can spend hours on review blogs comparing the Samsung Galaxy Note 9 and iPhone XS and scrutinising every last detail for a small ticket item, why can’t you do the same or perhaps even more for a property?
The truth is that you cannot earn if you never learn. It is a rule not unlike Newton’s gravitational law. An investor’s first step is to fully furnish himself within these 6 key areas:
1) Enrich your mind – Glean as much knowledge possible; read extensively.
2) Master the basics of real estate.
3) Know how to select your asset – The difference between a good and bad property is the distinction between your failure and success.
4) Keep your personal finances in check.
5) Figure out the best financing option for your property.
6) Study property law and taxes – Take note of the latest Real Property Gains Tax (RPGT) amendment.
#2 Know the reason why you are buying
A guy once told me that he bought a property just because of me – he thought investment gurus like me were cool and believed that my success will rub off on him – that is one of the scariest reasons that I have ever heard!
He’s not the only one – there was a student of mine who bought a property which had a RM3,000 monthly instalment; one which he cannot afford. However, he went ahead with the deal anyway, just because the property was next to an MRT station and somehow, this one detail makes it okay.
What happens when the repayments kick in? Is it any wonder that foreclosures have been steadily rising as of late? We cannot have more unsavvy investors like these two, as they will inevitably weigh down the market.
There are only two reasons for purchasing; for own stay or investment. The latter is either for rental or capital appreciation. Investors must determine their goal before stepping into the property boxing ring. Do not purchase for the sake of purchasing; those who do so might find a money-sucking monster on their hands instead of an asset.
#3 Determine your affordability (EVEN IF you qualify for a loan)
The irony here is that many people do not even know what their monthly expenditure is, but they want to be a millionaire.
Leveraging and borrowing to invest in property is the way to go, but qualifying for a loan does not mean that it is a sure-fire recipe for success.
Investors must take note of the pecuniary risks involved and learn how to manage them. Consider all the things that can go wrong at any point in time. What is your backup plan when something happens to you? To avoid financial predicament down the road, the following prerequisites are a must for every investor:
1) Have an emergency fund. Keep aside 6-9 months of your monthly expenditure for rent, food, family necessities, etc.
2) Keep a medical fund. Remember, it is not if it happens, it is when.
3) Slash credit card debt. No property out there can give you an 18% rental yield. So snip up your cards, do not spend money that you do not have.
4) Manage PTPTN debt. If you cannot even fork out the minimum RM50 each month, do not even think about getting a property.
5) Leave your EPF fund alone! Do not dip into your retirement savings scheme, bear in mind the rising inflation and costs of living down the road.
You might want to explore tapping into existing equity to cover a property purchase costs. This is known as mortgage refinancing where one leverages on an existing property’s capital appreciation by cashing out the (amount of) increase in property value after a certain number of years.
#4 Learn from the past
Past performance does not determine future performance but the greatest failure of humanity is when the current generation does not learn from the previous one.
Learn from mentors who have had loads of experience. They would be the best source for financial tips, lessons learnt and pitfalls to avoid. Also, it is imperative to study economic benchmarks such as the Malaysian GDP Growth – During the economic crises in 1985, 1998 and 2009, these were the best times to buy as there were many property sellers and developers who were willing to offer discounted prices.
Nevertheless, you have to stop for a reality check. Most people who have this ‘get rich quick dream’ fail to neglect that lucrative returns from property investment rely heavily on rapid capital appreciation, which is no longer viable in the current slow market.
Foolish optimists need to remove their rose-tinted glasses and take note of the current economic situation.
Granted, there is a slowdown, but we have not hit a crisis, yet. With global economic uncertainties, there is a chance that markets might take a turn for the worse down the road before the country’s economy improves.
Hence, these next couple of years will be a rough patch for consumers and prices are not going to grow as exponentially as it did a few years back when the property market was on an upswing. With the current market bottoming out, investors will have to be more realistic with capital appreciation growth and rental yields.