How To Identify The Right Investment-grade Property
Property have a unique characteristic when compared to other types of assets. Property is an immovable asset, unlike a car that can be moved or removed easily. In comparison, the price for the same type of car anywhere in the country is almost the same. The price for the same type of land or land with property can vary in different areas depending on location and many other factors. Normally, the land near towns and cities is much more expensive than land in rural areas. That is why the same type of property sitting on a land in different location can have very different prices. All this is due to the acquisition price of the land.
Like people, each and every property is unique even though they may be of the same type or design and in the same location. There is no such thing as a perfect property but it is about the combination of a set of characteristics. The characteristics are the location, type of property, seller, price, condition of the property, neighborhood, feng shui, legal status, and eligibility for financing.
Location of a property is the main determining factor of price and potential capital gain. Buying properties in an urban area is very expensive, whereas buying properties in a rural area is much cheaper. The rate of capital appreciation of a property depends on its location from the direction of growth from a town. A growing city or town moves outwards in its direction of growth at the rate of about one mile a year. For example a piece of land located in the direction of growth about one mile from town today worth RM50/sf. One year later, it becomes part of town worth RM100/sf. Almost all communities expand horizontally. A growing population demands more space. The price of a property increases proportionately to the demands for more land by a growing population.
The value of a property is derived from its usage by people. For example, the land located in an area occupied by two million people has an average price of about RM100 psf today. Twenty years from now, when the population doubles to four million, the average price of the land may also double to RM200 psf.
In property investment, we can predict the price of the land a few years from now by following the direction of growth of the land. The direction of growth of a town can be predicted by marking the location of new productive activities such as shopping centers, industrial plants, airports, seaports, universities, stadiums, hospitals and areas supported by housing development. For example, the average price of the land in the direction of growth where its infrastructure and buildings is still under construction is RM50 psf today. Ten years later, its average price may appreciate to RM150 sf.
Properties should also be linked to the town via highways and roads. Accessibility to a property is also important in determining its value. If a piece of property is located near to a town but does not have proper access, its price may remain stagnated until the accessibility has been created or improved.
Direction of growth of a town
The direction of growth of a town as shown in Figure 7.1 is towards the east of town A. The land on the eastern region may possess a higher potential capital gain and growth in price.
Buy properties in the direction of growth of a town because the price has not appreciated much yet. The capital gain potential is higher compared to other locations. In Kuala Lumpur, the visible centre of growth is from the Kuala Lumpur City Centre twin towers and the direction of growth can be measured from there. For residential properties, search for high capital growth locations such as those with river front/water front, hilltop with city view or mountain view, and near to forest reserves. The back of the property facing mountains and the front with water features such as river/pond/sea is preferred for better feng shui; thus the rate of capital appreciation would be faster for such properties.
For example, a bungalow sitting on a hill facing the City and with its back towards the hill/mountain is worth RM1.5 million today. Ten years later, its price may double to RM3 million. Compared to similar bungalows worth RM1.5 million without the mountain and water features, after ten years, its price may appreciate only to about RM2 million. In other words, the rate of capital appreciation for residential properties near hills or mountains and water features would be faster. Residential properties such as bungalows or semi-detached houses located in an area which can be converted to commercial use also has higher potential for capital gains.
Type of property
Generally, the relationship between rental income and potential capital gains for different types of properties can be represented in the Figure 7.2.
High-rise residential properties (apartments/condominiums) yield relatively higher rental income but give us lower capital gains. Landed residential properties (terrace/link houses, semi-detached houses and bungalows) yield relatively lower rental income but give average potential capital gains. High-rise commercial properties (retail space and office lots) yield average rental income and give average potential capital gains. Landed commercial properties (shop office and factories) yield relatively higher rental income and also give us potentially higher capital gains. On the other hand, land has relatively higher potential capital gain but yields little or no rental income.
When buying your own home, I suggest you consider landed residential properties such as a terrace house/ semi-detached house/bungalow and avoid high-rise properties such as apartment/condominium because the former has higher potential capital gain. Home buyers should also consider proximity to the workplace, schools, market, shops and transportation hubs.
When you are going for investment, I suggest you consider landed commercial properties such as shop offices and factories if you have the budget. Landed commercial properties not only gives you relatively higher rental income but also potentially higher capital gains. You may also consider a combination of landed commercial properties and high-rise residential properties for both rental income and capital gain.
Again, from my experience, it is better to invest in your own target market, not too far from your home or office. The reason is that you have better local knowledge of the properties, so the chances of making mistakes are minimized. For example, in your property investment target territory, the average price of a double-storey link/ terrace is RM300,000. Whenever there is an offer to sell at less than RM250,000 you should consider buying, of course, after due inspection of the subject property.
As a property owner, it is easier to manage tenants and maintain the properties located nearer to your home or office.
Investors should focus on landed commercial properties (such as shop office and industrial properties) as these properties not only give you a higher rental return and potential capital gain, but they are also easier manage when it comes to handling tenants and carrying out maintenance works on them. For commercial property, maintenance is the responsibility of the tenant. If you own a business, by all means buy your own shop or office to house your business to prevent a “rude awakening” from your landlord.
Investors who have the holding power should consider investing in land. The capital gain is substantial and there are no problems with tenants and maintenance. From my observation, most of my rich investors have increased their wealth by investing in land.
For those who enjoy managing tenants and maintaining properties, it is recommended to buy landed residential properties such as link/terrace houses and selected condominiums. Landed properties give us higher rates of capital appreciation but lower rental income. Properties such as condominiums yield a relatively higher rental income but give us lower capital appreciation. If you buy both, then your property investment portfolio would give you both capital gains and good rental income.
Search for motivated and flexible sellers who have to sell their properties fast. The reasons could be due to retirement, transfer to another state/country, or a need for fast cash. Only buy properties from a motivated seller who will not pass along his personal problems to the property, such as owing other people money. These people may frequent the property to enquire about their loans. If the property price is way below market price, make an appointment with seller to inspect the property, At the same time, always ask the seller why he wants to sell his property. If the property is in good physical and legal condition but the owner needs cash quickly and is motivated, you may consider buying.
For example, a motivated seller wants fast cash to fulfill his business commitments. He is willing to lower the selling price of his property from RM300,000 to RM200,000 provided you pay him 20% of the purchase price upon signing the Sale and Purchase Agreement.
There numerous properties out there. The common question is how to find the right one. In the stock market, there are also hundreds of listed companies; you don’t have to know all the companies, what you need to know is about 5 to 10 stocks very well such as its fundamentals, management and historical price movement. Similarly, for property investment, focus on your target territory, preferably near to your home or office because it involves property maintenance and tenant management. For example, if your home is in Bandar Utama, the target are for your property investment should preferably be within an hour’s drive from Bandar Utama.
Property maintenance includes things like repair of piping and drainage, electrical wiring and lighting and painting. Tenant management involves showing tenants your property, signing the tenancy agreement and rental collection.
Familiarize yourself with the target area by driving around during week-days, week-ends, day time and night time. Observe the flow of crowds and the estimated the occupancy rate. Inspect the physical conditions of the property and estimate the costs of repair. Then fine- tune on things such as feng shui factors. However, do not make major feng shui renovations to your property as some tenants or buyers may not like them.
The sure way of making money from properties is to strengthen your internal value, match what you want with what is available in market place, and transfer your wealth from cash to properties and vice-versa in an alternating manner.
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