Business Times Interviews - Starting Young

[Zelphon]

Hi Melissa, great to have you in this forum..

It appears to me that everyone is jumping into property as the next big thing to get rich..

I wonder is that prudent..

A few years back, there was MLM...
then came financial products (i.e. Financial Consultants) then came property agents...

Seems like there's always some new hot career out there every few years advocating huge money..

[Musicwhiz]

Most property guru understands the power of leverage. There is alw a risk in any investment be it shares or property when it comes to using debt. The wonders of property investment is leveraging on OPM. It is tangible and returns is much higher when buying into the right property.

Hi Chess_gal (Melissa),

I would say that most people on this forum understand the nature of leverage, and how it can magnify returns. The converse is also true - leverage can go very wrong when the market turns and a slump/downturn hits suddenly. You can end up losing >100% of your original invested amount. This is the kind of risk which leverage entails, and it is inherent in almost all property transactions unless you cough up the purchase price fully in cash.

I disagree that property investment on leverage is akin to using OPM. You are simply borrowing a sum of money at a lower interest rate to try to generate a return which is higher than this rate. In this case, you bought 3 Malaysian properties and are renting them out (or planning to rent them out) to cover the cash flow for your installments. Whether or not this can be successful depends on:-

1) Availability of Tenants
2) Interest Rate on Loans (FIxed or Floating)
3) Rental Rates
4) Equity of the property based on valuation

For 1) and 3), it is influenced by the demand side. For 2), it is an economic issue; while for 4), it is influenced by the property market and how much froth there is. 4) can be the riskiest as it may mean a margin call to top up if there is negative equity.

Liquidity is another factor which should figure into property. Too much hype is accorded to property when it is actually an illiquid asset which relies heavily on debt financing (up to 90% in some cases). The risks are often under-stated and the rewards over-stated.

As Kazukirai has mentioned, I can also reap the same returns by using margin to purchase shares in good companies during a bear market and holding on to them as the economy recovers. The returns over the long-term may also trump property, while shares offer much better liquidity.

Cheers.

[Chess_gal]

I like the idea of being a landlord and having people to pay my house installment, secondly I only need to work hard for the first few mths and once rented out, i just hv to deal with the tenant when problem arises. Of course there are also problematic tenant and other misc which is part and parcel of prop investment.

My focus is to buy at the lowest psf in prime area, targeting medium to high end tenant. If you study the kl market and mingle with prop agent in kl, there is a short supply of small units condo. My first purchase wasn't exactly the best deal cause my yield is only 7% which is way below my target of 8% but my cash flow is about S$300 after maintenance and installment. Not too bad for the first time. My remaining 2 are under con, but as I bought from well known developer, chances of default is rather remote.
Before I broke up with my bf, I also helped him to secure another deal, it was suppose to be mine but since the 70% mof kicks in, I couldn't buy at 90%. his deal is better than mine, about 10% yield and was very undervalued as well.
I do my searches through property forums, newspaper classifieds and talking to agents. am thankful cause along the way I met a few successful investor that doesn't mind to share. I'll write more later. Very hard to reply using iPhone.

[natnavi]

Most property guru understands the power of leverage. There is alw a risk in any investment be it shares or property when it comes to using debt. The wonders of property investment is leveraging on OPM. It is tangible and returns is much higher when buying into the right property.

Hi Chess_gal (Melissa),

I would say that most people on this forum understand the nature of leverage, and how it can magnify returns. The converse is also true - leverage can go very wrong when the market turns and a slump/downturn hits suddenly. You can end up losing >100% of your original invested amount. This is the kind of risk which leverage entails, and it is inherent in almost all property transactions unless you cough up the purchase price fully in cash.

I disagree that property investment on leverage is akin to using OPM. You are simply borrowing a sum of money at a lower interest rate to try to generate a return which is higher than this rate. In this case, you bought 3 Malaysian properties and are renting them out (or planning to rent them out) to cover the cash flow for your installments. Whether or not this can be successful depends on:-

1) Availability of Tenants
2) Interest Rate on Loans (FIxed or Floating)
3) Rental Rates
4) Equity of the property based on valuation

For 1) and 3), it is influenced by the demand side. For 2), it is an economic issue; while for 4), it is influenced by the property market and how much froth there is. 4) can be the riskiest as it may mean a margin call to top up if there is negative equity.

Liquidity is another factor which should figure into property. Too much hype is accorded to property when it is actually an illiquid asset which relies heavily on debt financing (up to 90% in some cases). The risks are often under-stated and the rewards over-stated.

As Kazukirai has mentioned, I can also reap the same returns by using margin to purchase shares in good companies during a bear market and holding on to them as the economy recovers. The returns over the long-term may also trump property, while shares offer much better liquidity.

Cheers.

To add to Musicwhiz's point, one of the best thing about owning a part of a company is that there is no need for one to manage anything. When it comes to owning a property, there is still the need for one to handle the taxes and maintenance of the property.

[mrEngineer]

I have given some thought to this equities vs properties debate especially on the financing portion.

One can argue that we can leverage as much as property mortgage 80% LTV with margin. However, I think the significant difference is that brokers usually mark to market more frequent and intensive than banks to property loans, which would result in higher chance for margin calls. This is also partly due to strict enforcement by MAS on force sell on securities. For property loans, usually banks need not worry much on mark to market as it does not impact balance sheets instantly with governments assurance to protect fundamental human needs for shelter.

So thus in other words, property leverage may not be as risky as margin financing. However, this is a qualitative strait and not quantitative.

[Musicwhiz]

I like the idea of being a landlord and having people to pay my house installment, secondly I only need to work hard for the first few mths and once rented out, i just hv to deal with the tenant when problem arises. Of course there are also problematic tenant and other misc which is part and parcel of prop investment.

I do my searches through property forums, newspaper classifieds and talking to agents. am thankful cause along the way I met a few successful investor that doesn't mind to share. I'll write more later. Very hard to reply using iPhone.

I am also currently renting out one room to a tenant who has lived with me for close to 2 years. I am lucky in the sense that my tenant is well-behaved and does not mess up the room/house and is also considerate enough not to bring in unwanted guests and to ask me for permission if she decides to. She is also a punctual paymaster and has not missed or been late for any rental payments. I guess a big reason could be because she is a friend of mine and there is a mutual understanding not to "spoil the friendship" by being difficult.

When you are dealing with a total stranger, it can be a lot tougher to set ground rules and negotiate on various aspects of the rental contract. A property agent friend of mine did warn me of a lot of "unforseen" events which could occur with regards to problematic tenants, and he said I was lucky because about 70% of the tenants he has seen have given various types of problems for their landlords. This post is not to discourage you, but rather just to inform that handling and managing tenants is not as easy as it seems.

The screening of potential tenants should be a very rigorous process which involves both the landlord and the agent; but it's still hard to detect cases where tenants give problems later on, or cases where the tenant colludes with the agent to cheat the landlord. Cases of tenants absconding without paying X months of rental are not uncommon, and one has to be very meticulous in ensuring one does not inadvertently accept such people of dubious integrity.

Successful property investors usually have many decades of experience and also very deep pockets. While I agree that it's important to learn from these veterans, things are somewhat different now compared to "our father's era", and even in Singapore, no one can buy a cheap $40,000 HDB flat anymore as those days are gone forever. So what worked back then may not always work the same way now. Just ensure your leverage is not excessive and that you can tackle the cash outflows should there be 1) no tenants or 2) a rise in interest rates or 3) both.

Good luck!

[Chess_gal]

No doubt there are pros and cons in property investment, like I said, I prefer property investment cause it gives me passive income as compared to share trading, plus I was once an auditor and most of the blue chip companies were my company's client hence it was an hassle for me to dabble into share market. I didnt quite have the time to monitor the shares as well. Whereas I can take my time in property investment cause properties are in nature illiquid, I can afford to view it several times before putting my money down.

Investing in Msia is entirely different as compared to Singapore. Due to strict government control in Singapore, the property game is only reserve for those who are cash rich. Whereas it is entirely different story in Msia. I can only afford one in Singapore as compared to owning 3 in Msia.

There are always undervalued properties around KL due to inefficient market, in contrast with Singapore URA, Msia dont update their database as often as they should be, hence despite the crazy prices published on classified and on iproperty, it is always negotiable.

For myself, I always look for the cheapest/oldest property in prime area. Especially when there are a few parcel of empty land around your targetted area is launching soon, the price of the new development is always higher than the older ones. At the moment, a lot developers in Msia tend to build mix development (retail podium + condo at the top). When this happens, obviously the property around the area would go up as well.

So, using that new price as a gauge, you can easily refinance your property at the new psf prices (at a slight discount) despite your property is much older but within the prime area. That's one way to recash out your money for the next development. I have not done this though but I know a lot ppl who did.

Secondly, I stretch my installment to the maximum age. (40 years is the maximum in Msia), despite paying more interest but I get the positive cash flow earlier. And once my lock in period with the bank expires, I would refinance to cash out or sell it for capital again.

Within my network of people, I personally know 5 people who owns more than 5 properties within 2 years, all below 30 years old. 3 of them are financially free, one pursue his interest in real estate, two are setting their own real estate consultancy firm.

One of their secret is that, they bought studios apartment around KLCC area two years ago. Back then, a lot ppl were skeptical of studios apartment which is nothing more than 400sf. Older investors calling them pigeon holes, but there were surge of single expats and deep pocket students from India, Middle Eastern and Korean looking for small units. They bought it at RM150K-RM200K, renting it out about RM1.4k-1.6k a month, that's 11% gross! Now all these studios are asking for RM300k and short term rental can go as high as RM2k. It was crazy. I didnt quite buy the idea when I first bought my 3 rooms condo, but I see it for myself when my friend's unit were easily rented out within days when his last tenant moves out. It took me 2 months to secure a tenant for my bigger unit, but of course bigger unit tend to have stable tenant (Family) as compared to smaller units (Singles). But yield for smaller apartments are better than bigger units cause you can play short term rental which commands a premium.

Of course all these only happens in KL prime area. Those who invested in JB cant get such yield unless they buy into low cost properties.

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This post is not to discourage you, but rather just to inform that handling and managing tenants is not as easy as it seems.

I totally agree with you, that's the inherent risk of property investment. My initial plan was to target students, but eventually gave up after viewing units occupied by students. I have very good agents that deals with Corporate client, hence the rental is paid for by the company. Less hassle, prompt payment and quality of tenant is usually better. And my units are signed for 2 years.

---

This post is not to discourage you, but rather just to inform that handling and managing tenants is not as easy as it seems.

I totally agree with you. That's the inherent risk of property investment. My initial plan was to target students, but after viewing the unit occupied by students, I doubt I have the patient to deal with them hence opted to buy into medium to high end condo. I am lucky that I have good agents that deal with corporate client where the rental is paid for by the company. Prompt payment, better quality tenant, less hassle and signed on for 2 years.

[flinger]

HI Chessgal,

Have you planned for the risk? All these is happening during the property boom time.

However, if the market were to tank for some reason and you are not able to rent out the apartment or if you are able too but the yield is very low , do you have the reserves to cover for your leverage?

[Jared Seah]

Hello Chessgal,

You go girl! What's the worst that can happen? Youth is your greatest asset. Can always start over if you fall down. Better now than "trying" at 55 or 65 years young.

Hmm... I think I must look see look see in Penang and KL next year. I like Penang a lot. But I think I have to overcome my bias and check-out KL

Cheers!

[kazukirai]

Hi Chess_gal,

That's great, it sounds like you really know your stuff as far as selecting properties within KL and managing tenants is concerned. Earning in SGD and investing in RM makes things much more attractive too.

Like Flinger, I'm wondering how are you monitoring the downside? For e.g. Are there certain stats you're monitoring for signs of overheating in KL property or Have you a plan in place if there is a general economic slowdown leading to a prolonged period without tenants? I'm not familiar with property (much less those in KL) so I'm just tossing out what seems like plausible examples.