Understanding strategic property investment
There is a lot of confusion between money and life. The purpose of money is to support the well being of your life. Your life is your time. How can we have both money and life? The key is to have passive income such as positive cash flow from property investment.
There are different important stages in life. During the age 25-35 years old or early stage of working life; most people are young and healthy but have limited money or savings. At this period of life, the career becomes more important. During the age 35-45 years old or early family life, most people are married and have young children. During this period of time, family becomes more important. At the age of 45 to 55 or later family life, most people have children studying in universities or graduated and getting married. During this period, the financial needs and family become more important. At the age above 55-65 years old, most people are beginning to retire or are already retired. At this period of life, health become more important (Figure 13.1)
Life is a journey, we should learn how to work through the life with a plan, that is, start investing in property when you are young. Property investment can be used to support your children’s education needs and also your retirement needs.
When a person has monthly cash flow from his property investment which is more than enough for his property maintenance and living expenses, he is not only having money but also free time. Do you want both money and life? If the answer is yes, invest in property.
To be a successful property investor, one requires a plan and it has to be a very personal plan, because every individual differs in age, financial status, family situation and future financial needs. A personal strategic property investment plan is includes taking into account the economic scenario, the property cycle, your children’s education and your retirement needs.
A property investment plan is like a vehicle to take you from where you are now, financially, to where you want to be, some time in the future. It consists of a written vision, goals and strategies. A written investment plan may be dull and boring but you will become rich automatically once the plan is in place.
A vision creates imagination and hope while goals focus and harness your energy to achieve the results you want. Finally, strategies guide you towards the right actions you need to take to achieve your goals. If you hold on your vision in your mind’s eye all the time and do something positive daily towards achieving it, you will be surprised by the results over a period of time.
A property cycle tends to repeat itself. The property boom and bust cycle is certain but the quantum and duration of the cycle changes. Historically, a complete property cycle from bust to bust or from boom to boom takes about 10 to 15 years. Property cycles differs from one country to another. In Malaysia property boom cycles appeared in 1980, 1993 and 2007 and property bust cycles in 1985,1998 and 2008.
During a property boom, development intensifies and developers expand their property activities and projects take about two to three years to complete. When the projects are completed, the developer have to sell their properties or pay their banks interests. Over-development during a boom cycle leads to oversupply during bust cycles. On the other hand, under-development during bust cycle leads to undersupply during the boom cycle.
You may develop your personal strategic property investment strategies such as selling at high price during the boom cycle and using the money to buy at a bargain price during bust cycle or/and long term holding for properties having positive cash flow and high potential capital gain.
In Malaysia, after the currency crisis in 1997, the properties market turned to winter with the falling properties price, tighter money and falling interest rate. Since 2000, the Malaysian’s properties market gradually recovered and improved with rising properties price, easier money and rising share prices. It can be considered as a property spring.
From 2004 to 2008, the Malaysia’s property market seems to appreciate rapidly with rising commodity price, rising overseas money and rising interest rates. It can be described as property spring. In 2009 to 2011, property prices in the Klang Valley and Penang appreciated between 30% to 100%. This rapid price escalation is called property summer. The concept of the four seasons in the property is to help us fine- tune our investment timing and strategies.
Property Investment Strategies
What strategies should you consider in property investment during a boom cycle? You may use “buy and hold strategy” for properties generating positive cash flow and giving high potential capital gain because every property boom cycle will be followed by another higher property boom cycle. You may sell your properties generating negative cash flow and having low potential capital gain because it is easier to sell and can sell at a better price. You may keep the cash from your sale to purchase a better property during property bust cycle. You may also use the money to reduce debt as the interest rate is expected to go up further to cool down inflation.
In life, everything happens slowly. For example, a heart attack does not happen overnight. It is because of accumulated cholesterol over a long period of time. Financial ruin also does not happen overnight. It is because of accumulated bad debt over a long period of time. All the good or bad events happening in one’s life are the result of accumulated habits and actions over the years. Wealth is also accumulated over a period of time. The sooner you realize this fact and make a decision to change the direction of your habits and actions from bad to good, your life will improve and prosper.
If a person invests without a proper plan or drifts with the crowd, his personal net worth is very likely to swing with the economic cycle, and goes up and down in tandem with the market. On the other hand, if a person has an investment plan guided by the buy low and sell high investment strategy, his net worth will increase over a period of time (Figure 13.2)
In 1998, Mr. Kee had RM200,000 worth of shares and RM300,000 worth of properties. Today, his shares have appreciated to RM500,000 and his properties to RM600,000. His net worth is $1.1 million.
If the share market were to collapse followed by an oversupply of properties, Mr Kee’s shares may be worth only RM200,000 and his properties valued at only RM450,000. His net worth may be reduced to RM650,000. In an extreme case, if he sells all his investment today, he will have cash in hand of RM1.1 million. If he sells his shares and keep his properties, he will have RM500,000 cash and RM600,000 worth of property. If he sells his property, he will have RM600,000 cash and shares.
Investment is a plan with strategies, supported by action. Applying the concepts of property cycles and investment strategies will surely increase your property wealth significantly over a period of time. If you plan and strategize your investment correctly, your net worth will increase over time. Without planning your net worth may swing with the market.
Mr. Wong’s personal property investment plan
Mr. Wong, 32 years old, is married with a two year-old son. He has been working for the past eight years, owns a car and has no significant savings. Currently he rents an apartment to house his family. He was just drifting and flowing with life without any plans. After he attended a seminar in property investment, he decided to improve and change his life through property investment. The following are his personal investment plans and strategies.
Have my own home and investment grade properties to support my children’s education and my retirement
- To save at least RM30,000 for the next three years
- To buy a landed residential property in the direction of growth, priced at least 20% below market price within the next four years
- To buy at least one ready-built positive cash flow investment grade property every two years (with adjustment according to market conditions.
Mr. Wong plans to save for the downpayment over the next three years to buy his own landed home which is in the direction of growth, near his office, and other amenities such as schools, the market and shops. He plans to delay his home purchase as property prices are expected to be on the high side for the next few years. He will buy the property when property prices drop due to higher interests rates. As such, he plans to buy his personal home.
He also plans to aggressively purchase his investment properties during crisis times. His investment focus will be undervalued positive cash flow properties with high potential capital gain in the direction of growth. The plan is to buy as many units as possible during the crisis years, when he plans to use the flipping strategy to ride the property wave. He will use the flipping strategy as he does not want to hold appreciated properties in his investment portfolio.
During the next expected property “Bull Run”, he plans to sell his highly appreciated and problem properties. The cash gain from his investment will be used for his children’s ongoing education. He plans to enjoy the fruits of his labor for a while before getting ready for the next round of investment. Should the property cycle (bull run) be repeated in 2019 and 2032, he plans to use the same investment strategies and adjust according to the changes in economic scenario and opportunities.
Your Personal Strategic Investment Plan
Fill in your vision, goals and strategies into the following planning sheet and develop your own 20-year property investment strategy. Considerations to keep in view when formulating your plan are your current financial status, future financial needs, and to review and adapt the plan to the changes in the market. After you have developed your personal strategic plan, hold on your vision in your mind all the time and do something constructive and positive towards your goals daily. The results will manifest itself over a period of time if you are disciplined and delay instant gratification. Life management involves not only managing your finances but also your health, family and the society you live in. A successful and well-balanced person should have a healthy body, be emotionally stable, mentally strong, have harmonious relationship with family members, be financially sound and contribute to society.