Characteristics Of Investment Grade Property

Investment-grade property not only gives us rental income but also gives us high potential for capital gains. Investment- grade property is a property that has these characteristics:

1. Ready-built

Ready-built property is a completed property from the secondary or sub-sale market. Buying ready-built properties can reduce unnecessary developer-related risks such as abandoned projects. You can inspect the physical condition and estimate the repair cost of a ready-built property. You also know the nature of business of your neighbour shops. If it is selling say for example, coffins, run! Avoid also the car or motorbike repair shops which produce a lot of noise and pollution. Preferable neighbour’s business would be supermarkets, franchise retail outlets and restaurants. There are no holding costs and interest cost for a ready-built property which you can use or rent out right away

2. Ready tenants

Buy properties with ready tenants as they come with a rental income. Tenants help you to pay your monthly installments. For an investor, a tenant is similar to a customer. Without tenants, you cannot have a property rental business. Take good care of your tenants and you wall have perpetual rental income.

3. Location with high occupancy rate

Buy properties located in an area with more than 90% occupancy. Chances are such properties can be rented out easily. During bad times, you can still rent out property in a location with high occupancy rates by adjusting the rental to be slightly lower than the neighbour’s rental. This is to ensure regular and sustainable rental income in good and bad times.

4. Below market price

The market price is the average price of at least three of the latest known property transacted prices for a similar type of property in the same area. An offer price is an asking price by the seller and is normally higher than the market price. A transacted price is the price that has been mutually agreed upon by the buyer and seller, and is recorded in the sales and purchase agreement. Unlike the stock market, property price information is not as efficient. Property prices of the same type of property in the same location can be very different depending on each owner’s expectation. If the owner is desperate to sell the price would be lower. For the purpose of investment, always buy properties below market price. There are many properties in the market, be patient and negotiate for the right price before buying.

5. Maximum borrowing with longest repayment period

Investment is a business using the leverage of other people’s money (OPM). Use as little of your own money as possible. Borrow to the maximum allowed and spread the repayment period as long as possible. The longer the repayment period, the lower is the monthly instrumental and the cash flow will be higher. The younger you are, the longer you can stretch your loan repayment duration. You may also want to consider taking a loan with a fixed interest rate for predictable repayments and easier financial planning. You can do this especially during times of low interest rates with the expectation of interest increase due to inflation.

6. Positive cash flow

Positive cash flow properties should be ready-built, have tenants with rental income; and with minimum monthly instalment payments and maintenance. A positive cash flow property is one with surplus income after deducting all the related expenses. For example, a double-storey shop office’s rental income is RM3,000 per month, instalment payments to bank is RM2,300 per month and other maintenance cost such as quit rent and assessment fees is RM200 per month. Your cash flow per month would be RM3,000 – RM2,300 – RM200 = RM500.

7. High return on investment

The return on investment for our own money should be at least twice of the prevailing cost of borrowing. For example, if the cost of borrowing currently is 6%, the return on investment should be at least 12%. For example, a three-storey shop office’s purchase price is RM900,000. YOU borrow RM700,000 from a bank for the purchase. Cash down payment for the purchase is RM200,000. The positive cash flow is RM2,000 per month. ROI (return of investment) = (RM2,000 x 12) / RM200,000 x 100% = 12%.

8. High potential capital gains

Properties near to a town or in the direction of growth has higher potential capital gains. Landed properties such as terrace houses, semi-detached bungalows and shop offices appreciate faster than high-rise properties such as apartments and condominiums. High-rise properties command higher rental income than landed property.

9. Increasing a property’s value with minor repairs

Buy the worst properties in the best neighbourhood. Then carry out minor repairs to increase its value. For example, landscaping, painting and repairs costing RM5,000 may increase the value of a property by more than RM50,000.

10. Good neighborhood

Buy properties in the best neighborhood. The land in a location with good neighborhood appreciates faster. Good neighborhood has characteristic such as clean, peaceful, safe and secure environment. Good environment include places with lots of greenery and water features and also may also possess good views such as city view or hilltop or mountain view.

11. Located in the direction of growth

The key to capital gains is in the location of the land. Properties in the direction of growth of a town or city appreciate faster. Direction of growth also means locations with many new infrastructure under construction such as highways, shop offices, factories and hypermarkets.

12. Good feng shui

The good feng shui environment for residential property usually means that the back of the property is against a hill or mountain, with the front entrance facing a water feature such as a lake or a pond. Good feng shui environment for commercial property usually means it is surrounded by water features or moving vehicles. The good feng shui property is preferably located inside the concave side of a river or road.

13. Can be sold easily

The purpose of investing in properties is for profit. Buy properties which can be sold easily to generate profit from capital gain. Properties that can be sold easily means that there is sustainable demand for them. This includes properties with proper legal documents, whereby legal ownership can be transferred easily, located in an areas which are not black-listed by banks (for example, land-slide-prone areas), having good rental income and high potential for capital gains.

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