The colour of a cat is not important, as long as the cat knows how to catch a rat. Similarly, the colour of our skin is not important as long as we know how to make money and survive in this world. What kind of animal characteristic resemble you? If your characteristic resembles a wild animal, then you are better equipped to be a business owner and investor. If your animal characteristic resembles a domesticated animal, that means that you are tame and destined to be an employee. It is hard to tame a wild animal and it is even harder to untamed a domesticated animal.
There are four ways of making money in life. Two of the ways are (1) to exchange time for money in life, which is being an employee or (2) being self-employed. The other two ways are (1) being a business owner using a business system for making money and (2) being an investor using money to generate more wealth. Property entrepreneurs have a property business system and leverage using other people’s money to invest in property to make more money. Entrepreneurship needs lots of ideas., courage and energy. Property entrepreneurs require imagination and the ability to make decisions in order to creating new wealth.
Investment in income property has better much chances of success compared with normal business. Property investment does not need much of your own resources such as capital and business space. You can leverage on bank loans and operate from your own home. For example, if you borrow RM95,000 to purchase RM100,000 properties, you are taking only 5% of the risk and the bank is sharing 95% of the risk. It is very different from starting a new business using bank loans because banks would be reluctant to lend money to new businesses.
Why not start a property rental business using bank loans and get your tenant to help you pay the monthly instalments? You can begin operations from your home without additional operational expenses. Eventually after the loans are fully paid by your tenants, not only the property belongs to you but also perpetual rental income and capital gains thereafter. Property entrepreneurship is a relatively lower risk and higher returns venture. How do you get started to become a property entrepreneur?
If you want to become a property entrepreneur, first, you have to decide to become one. Secondly, you must equip yourself with the property’ investment skills and know-how by reading the right property investment books and attending the right property seminars or workshops. Form your own property mastermind group to encourage and support each other so that you may all invest intelligently. To be successful in property investment, you not only need to invest and master the property investment know-how, you also need the basic business skills.
After you have mastered the property entrepreneurial skills, you need to find your property investment niche. Your niche such as your investment territory, type of property within certain price range and type of tenant. Your investment area should preferably be within an hour of travelling time from your home or office because property business involves tenant management and property maintenance such as renovation and repair.
The type of property may be residential or commercial property or both. There are many young enthusiastic property investors who like to invest in apartments and condominiums with no money down. I know a few of such investors who have more than 50 units of such property acquired over a period of between 5 to 10 years.
Some property entrepreneurs focus on students, some focus on workers and expatriates as their tenants. The target tenant among property entrepreneurs differ such as student, workers, business owners and a mixture of all the above. The target tenant selection is based on various factors such as availability of the investment opportunity and also personal financial situation and preference.
The sources of investment property are usually the primary market, that is, direct from developers, and the secondary or sub-sale market, and auctions. The choice of the investment properties depends on the property entrepreneur’s preference and also his knowledge and skills. The three major determinants of the value of a property are location of the property, type of property and timing of purchase and selling.
Different types of properties at the same location give different rental yields, and potential capital gains. Generally, landed properties give us lower rental yield compared to high-rise property. An exception would be a high-end condominium priced above RM1 million. This type of condominiums gives us a higher potential capital gain.
The timing of purchase may affect the potential capital gain or capital loss. If you purchase a property during property bust or crisis, your entry price will be lower and the chance of capital gain would be higher is compared with when you buy a property during boom time. You may consider buying from a primary market property as it will take 2-3 years to complete construction, by then, the property may have appreciated along with the improvement in the market.
Property leverage means using other people’s money (OPM) and other people’s time (OPT). Property investment is the business leverage of other savers money with an interest rate of about 3% for more than 20% profits. For residential properties you may borrow up to 100% of the purchase price. For commercial properties it would be about 80% of the purchase price.
Property investment is also business leverage on other people’s time (OPT). To achieve significant success in any project, you need a supportive team. A successful property investment team comprises of a property mastermind group, property agents, insurance agents, bankers, lawyers, property manager, property valuer, property maintenance team, accountant and tax consultant.
Property Mastermind Group
A property mastermind group is a group of property investors that meet regularly to brainstorm, exchange information and ideas on how to make more money from property investment. The function of this group is to search and identify the right property to invest. This informal group also mutually supports each other emotionally as investment involves risk and fear.
You can form your own informal property mastermind group by gathering a few of your friends who are interested in property investment. The function of this group is to search for the best bargain property from newspapers, magazines and the Internet. After short-listing a few bargain properties, this group will go out to inspect the property and make an offer to the seller.
Property agents can help you to search and locate the right property. They also help in getting information on the value of comparable properties and can even assist in getting a loan for potential buyers. Their main role is to facilitate negotiations to buy and sell properties. There are good and bad property agents. The good property agents are not only hardworking but also have local knowledge of the property. They are usually patient and skilful in negotiations.
An insurance agent helps you to protect your property. An experienced insurance agent can help you to choose the right type of insurance policy and the amount needed to protect your investment. If you purchase properties by cash; you need to buy at least a fire insurance. If your property is financed by the bank, they will buy the fire insurance on your behalf. Land does not need insurance because fire cannot damage a piece of land. Only the property on the land needs insurance.
Property investment is a business using the leverage of other people’s money (OPM). Always build good rapport with your bank manager. This can help to ensure that your loan processing proceeds smoothly.
Lawyers are one of the most important professionals dealing with your property transaction. A lawyer helps you in preparing the sale and purchase agreement and completing the transaction of the property. Choose a lawyer that you can have direct access to, is efficient in his/her work and preferably specializes in property.
Once you put a down payment for a piece of property, the lawyer is will help you complete your transaction successfully and in the shortest possible time. This will save you from paying unnecessary penalty charges for late payment. The sales and purchase agreement (which must be signed within 14 days after paying the down payment, unless otherwise allowed by the seller) usually stipulates that the buyer has three months (plus one month grace period) to fully pay up the property purchase price. Upon signing the S & P, a payment of 10% would have been made. (If you have paid a 2% down payment or earnest deposit as it is sometimes called, the balance of 8% would be paid upon signing the S & P.) Any delay after the three-month period is usually liable to a late-payment charge of 8% per annum. If the delay exceeds four months, the seller may even have the option to pull out of the deal.
(Note: The calculation of the three-month plus one-month period only starts upon obtaining the relevant consent from the land authorities, usually for leasehold properties. This consent alone may take anywhere from three to six months. It is not surprising that a property transaction takes up to nine months or even longer to complete, although in some cases, especially for freehold properties bought on cash, it takes less than three months. The time frame to obtain such consent may differ from state to state. For example, consent is usually easier to obtain in Wilayah Persekutuan compared to Selangor state. Of course, it also depends on how efficient your lawyer is.)
In order to work efficiently with your lawyer, you should also be well-versed with every step of the transaction along the way. You may get this advice from seasoned investors or from your lawyer himself. A good lawyer is one who is always on top of things. The moment you call up to enquire the status of your property transaction, they should be able to tell you whether your file is with the bank, the land office, the bank’s lawyers, or the seller’s lawyers, etc.
Lawyers usually expedite your transaction for you via phone calls and writing in the relevant party. A good lawyer will immediately alert you if the file has been stuck in one place (the bank’s lawyers, for example). He will then request you to personally call or visit the irritating party to resolve matters, otherwise undue delay may be caused and you would be the one paying for it.
The process also works in reverse, that is, if you are the seller instead. In this case, the faster the transaction is completed, the faster you can get your money to invest in other properties.
A property manager manages the administration details of your properties, from rental collection to tenant management, property maintenance and preparing financial reports. If you have more than twenty residential properties, you may need a property manager to assist you in rental collection, property repair and maintenance, solving tenant’s problems and preparing the accounts.
A property valuer helps in preparing a property valuation report based on similar properties and the latest transaction prices. The bank will request a copy of the valuation report in order to evaluate and approve the loan. The maximum loan amount is normally set below the forced selling price of the property as suggested in the valuation report. After you have paid the 10% deposit and signed the sale and purchase agreement (S&P) to purchase a freehold property, you have three months time to get the loan and settle the balance without paying interest, thereafter interest would be charged as mutually agreed and as stated in the S&P. This would usually be not more than another two months. In approving your loan, the bank will appoint a qualified property valuer and take pictures of your property and also to draw a plan of your property.
Your property maintenance contractors include the electrician, plumber, painter, landscaper, repair and renewal contractors and cleaners. Their function not only consists of repairing and maintaining the property but also in helping the investor to estimate the cost of repairs for the properties you intend to purchase.
If you are a new property investor and you have less than five residential properties, you may need to engage and outsource a property maintenance team to manage your properties in a most cost-effective way.
An accountant prepares the accounts and advises on issues related to income and expenses. Professionals can provide us with very good advice. However, in the end, we have to make our own investment decision and be responsible for it.
A tax consultant can help structure the best deal to minimize property portfolio taxes legally. Always consult your tax consultant as it may save you thousands of Ringgit. Professional advice is always better than free advice.
Property investment structure
A property entrepreneur needs to structure his properties which are sustainable, with its cash flow income and growth via continuous capital gains. A balanced property portfolio is one that has sufficient positive cash flow properties compared to negative cash flow ones, with those negative cash flow ones having high potential for capital gains. Your property portfolio would be best if you have positive cash flow property with good potential capital gains at the same time. The example below is based on interest rates of 4.5% and 20 years term loan. (Figure 4.1).
In the figure above, high-rise properties such as condominiums, fetch relatively higher rental income but command lower potential capital gains. An average high-end condominium’s rental income is RM4,000 per month. After five years, the condominium would have appreciated from RM500,000 to RM550,000. The Semi-D house would have appreciated from RM700,000 to RM8oo,ooo. Land commands a relatively higher potential capital gain but usually yields no rental income. After five years, the land would have appreciated from RM300,000 to RM500,000. Land is usually bought with cash because it does not yield rental income.
From the example above, after five years, your overall net worth would have increased from RM500,000 toRM950,000. The monthly cash flow has increased from minus RM326 to RM1674. This is an example of how you can structure your properties with high potential capital gain while keeping the monthly cash flow positive. You make money from capital gain while the positive cash flow helps you to sustain in the property business. The above is an example to illustrate how to structure your properties portfolio for maximum profitability. The example above did not factor in the timing of purchases, the loan duration, the expenses such as quit rent, assessment fees and tenant management.
You may also buy your properties using private limited companies. There are a few advantages of using a company, especially for tax purposes. You may use property holding companies to hold your family’s property and appoint your spouse and yourself as the directors. The other purpose of private limited companies is for financing purpose. For example, you may have found a property which yields more than 10% pa in good location, with very good potential capital gain selling at say, RM3,000,000. When the property is out of your affordability and borrowing capacity, you may invite your rich friends or uncles to jointly purchase the property using a private limited company.
You may also use private limited companies to purchase leasehold property. You may sell the property by transferring the shares of the company to the purchaser (buyer) without going through the process of obtaining consent from the land office, which can be quite a hassle at times, as mentioned earlier.
Property Business Structure
Property investment is a business. A business is composed of a product and/or service, operations and marketing for a profit. A property business comprises a portfolio of properties, rental collection and monthly profit and loss account, repair and maintenance, payment for quit rent and assessment fees and tenant management. The marketing aspect of property business is advertisement for sourcing and selling the property. (Figure 4.2)
The final result of the property business is either profit or loss. The quality of property selection, the property maintenance and tenant management and selling of the property at the right price will determine the profitability of your property business.
Conventional business needs a lot of time and attention to look after its daily operations and to be sensitive to the changes in the economy and business environment. Also, the value of a conventional business does not increase so much as compared to properties. For a property business, you do not need to look after the daily operations as rental collection will be banked into your account faithfully on the first week of the month by your carefully-selected tenants. Repair and maintenance only occurs every now and then. The major difference between a property business and conventional business is that the net worth of the property business with a well-selected portfolio of properties is almost certain to double every 10 years or so.
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