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.

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