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In this day and age, investments have expanded on par with the advancements occurring globally. These advancements have provided new platforms for people to invest their hard-earned cash in. Examples of popular methods to invest cash in the 21st century include, but not limited to, stocks, bonds, cryptocurrencies and mutual funds.
However, regardless of the progress that globalization could offer, investing in properties have always been a cult favourite amongst fellow investors. This guide would offer an in-depth perspective on property investment and some useful tips to navigate this with ease.
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The value of properties appreciates over time. This had always been one of the major benefits of investing in properties hence, equating it to be a fruitful asset. Properties are one of the very few assets that would offer the investor returns that are higher than the inflation rate. However, this is also subject to a few important factors.
To identify these factors, careful observation of how the property market works is absolutely necessary. This would prevent investment mistakes since it’s a known fact that property investment involves a lot of money. Below are the factors for appreciation of property values:
The role in infrastructure development is essential in the value appreciation of properties. Any new addition to the neighbourhood that would add value to a prospective resident’s life would contribute to the increase in value, nevertheless.
Be it a new road connecting to the major highway, or the addition of a new KTM line just 10 minutes away from the property; these minor projects would help add value to the property as they function as a growth driver.
This is due to the potential of these additions to bring in more population to the area and consequently, higher demand for the properties in the area.
Apart from the infrastructure surrounding the neighbourhood, it should be noted that amenities within a property are equally important to increase the property’s value. These days, with a hectic life, it’s quite rare for residents of a property to leave their homes.
Their form of relaxation might be focused on spending their time at the in-property amenities such as the swimming pool or clubhouse provided. Including an additional in-house amenity, especially in metro cities, would have a high chance of having the properties’ values increase.
This applies to landed properties such as semi-detached houses too. An addition of a garage or mini terrace garden would give the owners a high chance to increase the valuation of the property.
A country’s economic state is equally important in the rise and fall of property’s prices. When the inflation rate is high, the value of money will reduce. As a result, a builder would need to spend money on input items like construction materials, labour and permits.
Despite this fact, irrespective of the growth drivers, this is not a direct factor that the property prices will rise. This would have to come hand in hand with accessibility, infrastructural development and the current availability of residential properties.
The price hike of properties would also be contributed by the GDP, supply and demand rate as well as the unemployment rate.
Policy changes, usually at the governmental level, would directly impact real estate appreciation. One major policy change would be the lending rates.
Theoretically, the cheaper costs of borrowing would bring more buyers to the market, creating more demand hence, leading to appreciation. On the contrary, reductions in stamp duty rates, income tax benefits and GST rates would also impact the demand for these properties.
Investing in properties would be a good idea for those planning to retire in the following years to come. This is mainly due to the fact that by buying a property and renting it, a steady cash flow could be seen.
The investor, upon retiring, could still have that source of money even without a job. It would also act as a secure source of income for those who’d been fired or retrenched from their jobs.
The inflation hedge stems from the positive relationship between GDP growth and the demand for real estate. When economies expand, the demand for real estate drives the rate of rents to be high.
Hence, there will be a higher capital value and properties would maintain the buying power of the capital bypassing some of the pressure caused by the inflation to tenants — leading to capital appreciation.
As a person investing in real estate for the first time, it could be tempting to follow the tide and choose a residential property as an investment. It would be a good choice, indeed. However, the best suggestion is to actually survey the different types of investments to make.
One might find the various options available appealing too. The general public would have the perception that investing in housing projects would provide a rental income hence, helping to provide a steady cash flow. However, it’s a lesser-known fact that commercial properties would actually offer a better earning potential.
This is due to the fact that the rental earnings paid by businesses would be higher over the long term. Apart from commercial properties, one could look into retail investments too as the demand is still considerably high albeit a long term investment. Therefore, it is essential to look into one’s financial and long-term goals before choosing a real estate type to invest in.
It would be a known fact that real estate requires a lot of capital. However, despite the high capital requirement, investors would always seem to flock to properties as a viable method of earning a side income.
There are 2 methods to achieve the goal of earning money from investing in properties. The first one is to buy the property at a low price and sell it at a higher price. This would be done via value appreciation and a thorough understanding of the real estate market is necessary to proceed with this method.
The second method is to collect rent from tenants. This is a popular option for those who might want to keep the property for the usage of family members. Renting off the property would be a good way to allow an asset to pay for itself. In this case, it would apply to the utilities and loan repayment. Again, the methods chosen should reflect the long term goal of not only the individual but the entire family too!
The choice between leasehold and freehold properties has always been a prominent debate between property buyers. However, in the context of investors, the best choice is definitely the freehold property. Now, to explain the differences.
Freehold land is basically land that has been dispensed to an owner for indefinite tenure. Hence, there would be no renewal needed or any expiration year to keep track of. Meanwhile, leasehold land would come with a limited tenure and oftentimes, it would be at a tenure of 99 years.
Renewal is possible after the expiration of the lease but it would be expensive. The transfer of ownership would also be lengthy. Knowing the cons outweigh the pros when it comes to leasehold properties, why would someone still want to invest in one?
Well, the answer is quite simple. It’s reliant on the cost of leasehold properties which are cheaper to acquire in comparison to freehold properties. In reality, freehold lands are expensive and limited in availability.
Taking into account the rising prices of properties, it is important that an investor identify the potential locations and survey them before making decisions. This is probably one of the main reasons why the capital of the country, Kuala Lumpur, seems like a safe bet for property investors.
The rapid development of each crook of the city seems to appeal to investors more. Despite that, many investors have miscellaneous concerns such as the crime rates and the distance to basic amenities such as grocery stores, schools and hospitals. Therefore, a general survey of the take-up rate of the nearby properties would be helpful to analyse the prospects of the property being a successful investment.
Apart from the type of properties and the prospects of the property being a successful investment, the costs should definitely be taken into count. Most times, a bank loan is necessary to make a purchase. In Malaysia, the banks will fund at a 90% rate for the first 2 properties and only 70% for properties thereafter.
As an investor, one should set aside a budget for the down payment, legal fees and other administrative charges. But it does not end there! If the property is not new, it would be best to set aside money for any form of renovation.
A popular question being asked by investors is the prospects of one asset being a better investment than the other. The same goes for the never-ending comparison between stocks and properties. Both of these assets have their own pros and cons.
At the end of this comparison, one should only determine the best asset to invest, based on the long term goals set. Here’s a comparison table to help gain an insight into the pros and cons between both stocks and properties.
To see the returns from one’s investment, one has to also spend the appropriate amount to reap the benefits. From the very beginning, the investor would have to spend money for the downpayment and the closing costs. Not only that, if the property comes in less than a desirable condition to live in, a renovation would be necessary too. This would also come in handy to maximise the rental income. Upon owning the property, there would still be miscellaneous expenses, such as property taxes, insurance, mortgage payments, and property maintenance.
Apart from the usual errands that an investor would have to do such as finding prospective tenants or buyers and maintaining the property, learning about the ropes of real estate would also be time-consuming. An investor should only make significant decisions in his investment when he’s absolutely sure of it. One way to make sure that the investor is going down the right path is by educating and surveying the real estate scene in Malaysia. This, on top of making sure the property is in top shape, would definitely be time-consuming and might take a toll on the investor’s daily routine.
When investing in a property, one should always remember that it would be a long term commitment. Regardless, if it were to be rented out or to be sold when the land value appreciates, it is still a lengthy commitment. A handy tip for prospective investors is to have a set timeline of retirement, and familial commitments such as funds for the children’s education and medical insurance, before stepping into the realm of real estate investment.
Each type of property investment is subject to its own sort of risks. These risks would definitely impact the investor to a great extent. Some of these include but are not limited to, buying the property at the wrong timing, increased liability for the accidents happening in the property, and a tough tenant to deal with. These risks definitely occur out of the investor’s expectations. However, the investor must be prepared for it.
Finance would indefinitely be a large majority’s subject of concern when it comes to investing in properties. With the rising living costs, it is near to impossible to set aside some money to invest in properties.
The easy way out would be bank loans but with a low credit score, it would be a hassle to get a loan from the bank. However, there are quite a few ways to invest in properties without any cash and without involving the banks.
Don’t get confused between private lenders and loan sharks! Private and hard money lenders are licensed people that can provide one with a loan given against a set of criteria for the repayment process. This could be an option sans the bank loan hassle. These types of loans would generally have higher fees and interest rates, however.
Delving deeper into the context of both options, private money lenders would mostly include friends, co-workers or family members who have the money, are interested in investing in real estate but do not want to do the searching or house hunting. As an investor, strike a deal with them. The best is a legal agreement and the parameters of each party and at the end of the day, it would still be a win-win situation for both parties.
Hard money lenders would offer financing without a down payment. These lenders are not bound to the strict repayment schedules of a regular bank. However, it is important to do some research before receiving money from these lenders. Do a background check to ensure the lenders aren’t part of any loan sharks that might land one in trouble.
This is very similar to private money lending. Partnerships provide the option that allows an investor to have access to real estate deals that are unknown to the person. These partnerships consist of both individual partnerships or commercial ones.
However, an agreement is best to be made to prevent any further complications. This is a mutually beneficial method as one of the partners might have the cash while the other might have the connections. It’s a concept of bringing your abilities to the table during the agreement. Just ensure that the investor’s goals are in line with that of the other partners.
In short, wholesaling is the process of finding a property seller whose property has yet to be listed on the market, getting it under contract and then finding a buyer to purchase at a set amount of profit.
One of the greatest perks would be the fact that the investor would get a share of the selling price prior to it hitting the market. However, keep in mind that one should only get involved in this with a decent knowledge of the local real estate market scene. One should also have a huge network of potential buyers to pitch to.
If a prospective investor were to only have a small amount of cash, investing in property would be a slightly easier task as there are readily available funds that could be used. The other portion could be found via other means such as loans, instead.
This would only happen if the seller is motivated enough to give the investor a loan to enable the investor to buy the property. There would be terms, however, that should be adhered to. This may include higher monthly payments instead of a down payment. The best way to go about this is to make decisions after obtaining legal advice from a lawyer.
A plus point for this scheme would definitely be the elimination of the need to pay a hefty down payment. This works by signing a lease agreement that allows the investor to end in a sale. It should be noted that each RTO scheme is different and would take various lengths of time that the buyer should lease the property for. This could be any duration between 5 to even 20 years.
The buyer would only need a total of 3 months worth of rent to be eligible for this scheme. The best part would be the fact that regardless of the economic situation, the buyer would purchase the property based on the valuation at the beginning of the lease.
When it comes to real estate investing, a one size fits all concept is definitely unavailable. Different types of investors have various ways of investing in properties to obtain profit. There are various factors determining the methods of investing — budget, risk appetite and investment goals.
However, there’s a singular clear distinction to differentiate these investors from one another. This would be the duration of investing, namely, being a short term investor or a long term investor.
Investors who are short-termed would only focus on a singular thing — making quick cash within a short period of time. These investors would mostly choose property types that are in high demand with an aim of selling them as soon as a price increase is seen. Flipping properties would be another method that these property investors would use. For this, the investors would purchase an old or abandoned property and renovate it. After that, the property would be sold as soon as possible.
These types of investors would focus on the steady increase in the property’s value over time with 2 methods being in great use — capital return and rental return.
For capital return, the investors would sell the properties as soon as the sale price has increased to a certain percentage above the original purchase price. As for the rental returns, the investor would then rent out the entire property to others. This would be done in an attempt to obtain a steady stream of passive income throughout the tenure of the ownership.
These types of properties consist, but are not limited to terrace houses, apartments and condominiums. Basically, any property that comes with residential land titles would be entitled to be labelled as a residential property. However, an exception would be any commercial land-titled properties, protected under the Housing Development Act (HDA). A popular type of property would be that of SoHo units.
For residential properties, there’s a downside to it. The owners would have to pay all the bills for the properties, including maintenance fees, sinking fees, sewerage fees and assessment fees, making it a high maintenance property.
This might not be a problem for many investors, but if the rental collected is below the instalment and maintenance amount, the investors might be financially burdened with it. This could be solved if the property chosen is located in a strategic area with a high development rate.
Properties in the category of commercial investments would include office buildings, small office versatile offices (SOVO), small office flexible office (SOFO), small office lease office (SOLO) and small office smart office (SOSO).
One major benefit of investing in commercial investments would be the involvement of multi-year leasing which would lead to a more stable cash flow although the market rental rate declines.
Besides that, costs such as utilities and management fees would be borne by the tenant. The tenant would also have the responsibility to upkeep the property and fix it in case of any damage. However, the downside would be the higher upfront capital outlays.
Commercial property investments are very similar to retail property investments however, the major difference would be the fact that retail investments would have different mechanics and prime locations. Retail properties would be located in malls and storefronts. Sometimes, the landlord would receive a percentage of profits from the tenant in addition to the base rent.
These types of real estate investments would include industrial warehouses, firms and storage units. Industrial investments would often include a significant fee and service revenue streams to increase the return on investment for the owner. However, the downside to industrial investments is that it would be considered riskier, as a successful investment in it would require specialised professionals to maintain and manage it. A bigger upfront capital investment would be required for this investment too.
This type of investment is completely new in the real estate investment scene. The perks would definitely be the affordability and ease of entry. This means that an investor would be buying shares of a corporation that owns real estate properties that would distribute its income as dividends.
The industry to invest in would be up to the investor, for instance, the hotel industry or the airline industry. However, the investor would not actually own the property and would have little to no decision making power in how the entire property is to be managed.
It should be noted that there are some closing costs or in simpler terms, additional costs when it comes to buying a property to invest in. These include the legal fees, stamp duty, Real Property Gains Tax (RPGT) and Property Valuation Costs.
In short, legal fees is an attorney fee that is paid by the buyer of a property for the preparation and recording of official documents. Below is the legal fee rate in Malaysia:
|wdt_ID||Legal Fees||Amount Taxed|
|1||First RM500,000||1% (subject to a minimum fee of RM500)|
|2||RM501,000 – RM1,000,000||0.8%|
|3||RM1,000,001 – RM3,000,000||0.7%|
|4||RM3,000,001 – RM5,000,000||0.6%|
|5||RM5,000,001 – RM7,500,000||0.5%|
|6||>RM7,500,0001||Negotiable and subjected to a ceiling price of no more than 0.5%|
Stamp duty is a tax charged on various written instruments specified in the First Schedule of Stamp Duty Act 1949 — imposed to legal, commercial and financial instruments.
|wdt_ID||Purchase Price||Stamp Duty|
|2||RM 101,000 – RM500,000||2.00%|
|3||RM 501,000 – RM1000,000||3.00%|
Real Property Gains Tax (RPGT) is a form of Capital Gains Tax that homeowners and businesses have to pay when disposing of, their properties. As announced during Budget 2019, those who sell off their property in the sixth (and subsequent) years of ownership will now have to pay 5% for the RPGT. More information on the RPGT can be found here.
Below are the RPGT rates:
|wdt_ID||RPGT Rates||Individuals (Citizens and Permanent Residents)||Individuals (Non-Citizens and Foreigners)||Companies|
|1||Disposal in 1st Year||30%||30%||30%|
|2||Disposal in 2nd Year||30%||30%||30%|
|3||Disposal in 3rd Year||30%||30%||30%|
|4||Disposal in 4th Year||20%||30%||20%|
|5||Disposal in 5th Year||15%||30%||15%|
|6||Disposal in 6th Year||5%||10%||10%|
The valuation fee is calculated as the percentage of the purchase price.
For the first RM 100,000 = 0.25%
Next residue up to RM 2 million = 0.2%
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