Monday, 28 July 2014

Sustainable Property Investment

Investors in property are required in general to take a long-term view of the market. Property unlike stocks or unit trusts are very illiquid. It will take time to search, purchase, transfer or dispose a unit. Sometimes, it may be necessary to hold a property through a downtrend of the market cycle.

How then to successful property investors so heavily invested can sleep sound at night?

The secret is sustainable cash flow.

A property investor who is forced to sell his/her property due increase interest rates or margin calls from banks due to negative equity would have no choice but to top up the mortgage or increase their installment payments.

Those that are unable to do so suffer as a consequence. The heavy gearing on property as high at 90% could easily set an investor back many years of investment opportunities.

Cash flow calculations are simple, no more complex than primary school math.

Start by calculating your estimated monthly Income that you will receive. The income is typically the base rent of the unit. Sometimes however, there may be additional fees, for example the tenant agrees to pay an additional amount for furniture and fixtures, or perhaps an agreed amount for utilities or maintenance charges.

Next, determine the estimated monthly Expenses that your unit will incur. These typically include the installment payments for bank loans, monthly management fees and repairs. Don’t forget to also expenses that are incurred annually like insurance, property agent fees, property and income taxes.

The Cash Flow is simply the amount of money left over after all the expenses are paid.

So, for a property investment to be sustainable, it should be cash flow positive. This will help buffer for any unexpected increase in cost such as interest rate increases, unexpected repairs, hike in insurance premiums or rises in management fees.

Till date, I am glad to say, I have managed to make sure all my properties are cash flow positive. The left-overs are now prudently stored away awaiting the next investment opportunity.

Monday, 14 July 2014

The Middle Income Trap

In the past 3 decades, Asia witness the rise of the middle income families. Due to a booming economy, massive job creation and raising salary levels, the major Asia economies created a burgeoning middle class. These middle-income earners had stable careers, high spending power and plenty of disposable income.

These gave rise to a mushrooming commerce of premium lifestyle products and services to supplement the insatiable demand and appetite of these middle-income earners. Everything from soap, coffee, bread, noodles have all gone “artisan” and “premium”! In Singapore, a local coffee would cost about $0.80 to $1.00. Coffees sold at these “artisanal” lifestyle coffee joints cost anywhere from $4.50 to $7.00 a cup!

The fast food generation demands instant gratification, with the disposable income they have, they want the advertised lifestyle now. These middle-income earners today are spoilt for choice and indulge in lifestyle products and services, simply because they can afford it!

In the Asian culture, well meaning parents have always thought their children to spend only what they can afford and save their extra for a rainy day. The truth is, these middle-income earners are doing precisely what their parents thought them. They are saving up some money for emergencies, while spending within their means.

As their income rise, they raise their living standards to match their income. Instead of raising their savings rate, they raise their expenses in an effort to show they have made it. While they have a fair amount of savings, they are oblivious to the fact that the buying power of their money is constantly being eroded through inflation.

The Asian education system in general has also neglected to teach this fast food generation the management of their personal finances. The importance of maintaining a prudent lifestyle, constantly increasing savings, putting those hard earned savings to work for through investment and reinvesting the profits to achieve compounding returns have little emphasis in the secular education system.

True financial freedom can only be found through hard work and delayed gratification. If you are prepared to do the hard investment work now, the hard investment work will pay you back for years to come.

T. Harv Eker in his book, Secrets of the Millionaire Mind best summed up this concept in a quote:

“If you are willing to do only what is easy, life will be hard.
But if you are will to do what’s hard, life will be easy.”

Do you really need to upgrade to that new property now? Do you really need a new car? Do you really need do that renovation now? Do you really need that $6 cup of coffee?

Saturday, 5 July 2014

How to Buy the Property You Can’t Afford



I have heard friend tell me that they have just spotted their dream property. It was located in the ideal neighborhood, close to amenities, conveniently located, had spectacular views of skylines and highly assessable via major roads or public transport. There was only one problem; they couldn’t afford the asking price.

They told me that they would keep that in view and try to save up for the down payment. Maybe after a year or 2 of additional savings, they will be able to afford it.

Would you do the same if you were in their shoes?

I wouldn’t.

In fact, I offer a simple strategy that you could use to afford to buy that dream property.

The key is to find properties that you can comfortably afford to invest in. These properties should provide high potential capital appreciation, easily rented out with a high yield.

Over a period of time, the investment grade property that you bought should in theory experience a price rise in tandem with the costlier property that you couldn’t afford years earlier.

This way, you have locked-in the price differences of that dream property. And once you have saved up the difference, you can always sell the current property and upgrade to your dream home!

Thursday, 3 July 2014

Property Investment Vehicles

Using an investment vehicle for your property venture is a topic that I wished I knew earlier. So far, none of the properties that I have purchased utilizes an investment vehicle. Now knowing some benefits of this method, I may consider this in my next purchase.

I discovered this tip from my property agent (who was just as clueless as myself!) who casually ask me the question, “I have been servicing a loyal client over many years, every time he makes a property purchase he would form a company and buy in the company name. Do you know why?”.

I set out to research this topic and to my surprise, I discovered a wealth of advantages in doing so! Here are some value information that I discovered.

Overcome Local Property Ownership Laws

An experienced property investor friend of my mine shared with me once that in the Iskandar Region in southern Malaysia, foreign property owners must resell their properties to a local below RM1mil. Some savvy investors therefore incorporated a local company to purchase the property and later sold the company (with the property as an asset) to other investors! While I can’t verify the story, this might be an interesting point to research when investing in foreign properties.

Tax Exemptions

To encourage small businesses, countries in South East Asia have special tax laws where new companies enjoy tax exemptions for the initial years of incorporation. The income generated from the property would therefore be tax-free for the first few years!

Tax Reductions

In most countries, companies enjoy a much wider variety of tax breaks or deductions. As a property investment company, many of the expenses incurred can be expensed in the company books. Examples of expenses just to name a few are, utilities, repairs, agent fees, maintenance fees, property taxes, furnishings and renovations.

Property Sharing Agreement

Direct property investments require high upfront capital. Therefore a group of investors may pool resources together to share in a property purchase and profit together. By incorporating a company as an intermediary, the shareholders can easily draft terms and agreements into the company’s shareholder’s agreement. The share of the property can also be easily apportioned by using company shares. In the unlikely event of death, bankruptcy or major illness of one shareholder, the interest of the remaining shareholders is still protected using company law.

Larger Pool for Investment

By incorporating a company to pool resources together, a group of investors could potentially negotiate for better prices with developers by making bulk purchases. Perhaps with a larger pool, the group of investors may even acquire costlier properties with higher yields such as shop houses or even buildings!

Enjoy Company Specific Benefits

Many governments support small and medium businesses by providing assistance to support their businesses. This may take the form of tax rebates, innovation credits or xyz. A good example is Singapore where the government has encouraged local businesses to improve productivity through the PIC scheme. The scheme provides up to 60% grants to businesses that invest in innovative ways to enhance their business productivity.

Perhaps one day, I could manage my own mini REIT through this method! I hope the day will come when I can blog about this! 

Tuesday, 1 July 2014

Complexities in Foreign Property Investment

Just last year with the help of my dad, I chanced upon a small 850sqft apartment in Klang Valley (Malaysia). The property was much older and certainly not as swanky as the premium condominiums nearby.

At an asking price of RM280k and an estimated rental of RM1100 per month, the property yield was approximately 4.71%. Higher than the condos around it which ware yielding at less than 4%. The yield was also higher than the bank’s 4.5% interest. Additionally, it had a superb location right next to an upcoming MRT station under construction.

There where however a few hurdles which needed to be crossed, the unit was a bumi-lot. In Malaysia, properties are categorized into lots meant only for only bumiputra owners and non-bumiputra owners. A bumiputra (literally prince of the earth) in Malaysia refer to natives of the land, generally covering the ethnic Malay, Iban, Kaddazan and other races.

To make matters worse, the property has already changed hands twice and the strata title for the unit have not even been issued to the very first owner yet!

Using good advice from local lawyers, we drafted an agreement where we would lock-in the price of the apartment by paying a 10% deposit. The deposit would be kept in escrow and would not be released to the seller until the strata-title is transferred to my name.

Additionally, the deal is time-bounded to 1 calendar year ensuring that if the transaction failed to complete, the lawyer would release the deposit in the escrow account back to me in full. Meanwhile, the local lawyers would apply for a conversion of the status of the unit from a bumi to non-bumi. They will also follow up with the land office to process and release the strata title.

This experience highlights the importance of understanding local laws when making your property investment. Ensure that you have got good property agents, lawyers and bankers who can advice you on the local market conditions, areas, laws and peculiarities of the region. Finally, always spend your own time and effort to research the area that you plan to invest in.

Did I make a good decision or did I take unnecessary risk? Do share your views.