By Hanniz Lam
Real estate investing can really be quite simple once you understand the basic factors of the investment, economics, and risk. You buy properties, avoid going bankrupt, and earn money through rent, so that you can buy even more properties.
Keep in mind that “simple” doesn’t mean “easy.” If you make a mistake, the consequences can range from minor inconveniences to major disasters.
Should You Buy Property in 2022?
According to Property Guru, All indicators point to an ideal time for buyers to get into the market. It is an opportune moment to take advantage of low prices while they are on an upward trend, and benefit from prevailing low interest rates while they last.
However, an important factor to consider before committing is the stability of personal finances and job security in the current climate, which is still coping with uncertainties.
WHAT YOU NEED TO KNOW BEFORE YOU BUY INVESTMENT PROPERTY
You must have an eight-month personal emergency fund plus a one-year fund to cover carrying costs on your rental property.
You must have a separate fund that can cover up to one year’s worth of mortgage, tax, insurance, and maintenance costs for your property.
Many new property investors make the mistake of assuming that they will always be able to rent out the property, that rental rates will always rise, and that their tenants will treat the property with great care.
My own father-in-law learnt a big lesson when he rented his house to a “Datuk”. Assuming that titled people are more responsible, he was devastated when the tenant skipped rent for six months (each time the Datuk would promise that he would pay up by xx date and missing deadlines) .
The tenant also left him with unpaid water and electricity bills when legal action was taken. The legal fees alone cost almost RM10,000.
You must have an ample investment property emergency fund to fall back on.
Real estate must be part of a diversified investment portfolio
Too many lost everything in real estate when the bubble burst. Most investors claim that they were well diversified because they owned several properties in different neighbourhoods.
That isn’t what diversification means.
Owning several properties means owning a lot of the same type of asset.
If you are not contributing to retirement funds, you have no business in investing real estate. Even if you own investment property, you should not slow down your retirement savings.
Understand that you will pay more for financing
If you are taking out a mortgage to invest in real estate, be prepared for a different set of lending rules compared to buying a home to stay in.
Lenders will often insist that your downpayment for a real estate income property be at least 30% of the purchase price, and the mortgage price will also be higher than the rates charged for a home you live in.
There’s little help if you fall in financial trouble
Most financial aid programmes are to help for mortgages used for primary residence. Investment properties are not eligible for any assistance.
This makes sense as financial aid should be to help families stay in their homes, not to be used to rescue investors and speculators.
Here are a few quick tips for planning a property investment in Malaysia:
- Research on investment strategies that you can adopt. There are two commonly used strategies in Malaysia: buy and flip, and buy and sell.
- Creating a list of investment property criteria. For example, knowing what facilities you want a property to possess.
- If you’re interested in a certain property, compare it against similar ones in the area to get a gauge of whether the price is reasonable
- Find out if property prices in the vicinity have appreciated or depreciated in the past 10 years.
- Factor in all kinds of costs that you’ll have to bear, such as legal fees, taxes, maintenance fees and more.
- Know who the potential property you’re investing in would attract. For example, are they families or young couples? Different types of property appeal to different groups of people.
- Find out if there are any new or future developments/infrastructure in the area.
WHAT TO DO IF YOUR REAL ESTATE INVESTMENT IS UNDERWATER
If you are 10% to 20% underwater and can afford your mortgage, stay put or agree to cover the entire mortgage if you want to sell.
If you want to sell, understand that you should pay the difference between the mortgage cost and your sale price.
If you are 40%-50% underwater, walking away may be the best move but understand the liabilities if you go this route. Speak to your financial advisor on the next steps to take.