Why apartment can be the best real estate investment?

What accounts for the primacy of apartments over other real estate investment types? In this article we will outline the four reasons why apartment properties can be the best real estate investment.

Cash flow
In our previous article How to know if a property investment is worth investing? we highlighted that a real estate investment that generates cash flow effectively put money into your pocket every month, while your equity in the real estate investment increases over time. And this is the real estate worth investing that we are talking about.

Cash flow is such a vital element of the power of real estate investments.

In commercial real estate, leases can be for many years. While the security of a long term lease is nice, it doesn’t allow you to take advantage of fluctuations in the market.

In apartment investments leases tend to last normally six to twelve months. This allows for constant adjustment of rents to maximize market value and cash flow. Additionally, apartment buildings tend to have more density than commercial buildings. That means you have a lot more individual residents on shorter term lease.

Demand
People always need a place to live. Shelter is one of the basic requirements of existence. That alone gives apartment an advantage over other types of real estate investments. You can rest assured knowing that there will always be a demand for residential housing whether the market is going up or down.

Apartments have become the housing answer to the retired age citizens. These people are frequently referred to as “empty nester” because heir “nest” is now empty. Their children are all grown and gone. Suddenly, they find themselves living in a large, virtually empty home, requiring a lot of upkeep.

Staying in apartment, they are free to come and go as they please. If they want to go traveling, all they have to do is lock their doors and leave. There is another, possibly unexpected benefit. They have undoubtedly moved into a building with other owners who are in the same boat they are, retired, no children around, leisure time, etc. New friendships are readily found and they may feel less alone and more secured then they did in their homes.

On the other hand, young working class in cities also find apartment to be an ideal temporary home which is easy to maintain. Their only maintenance requirements are within the four walls of their apartment. All major exterior maintenance is paid for out of the monthly maintenance fee paid by each apartment owner.

They also find themselves living in a secured environment with 24-hour security system, which is one of the most crucial criteria to live in a not-so-safe city like Johor Bahru. Amenities such as swimming pool, tennis courts and recreation buildings provide them a convenient yet affordable quality life style.

All of this brings us to one conclusion. Apartments have become a much needed form of housing.

Affordability
Rental housing is cheap – cheap to rent and cheap to buy. We have discussed the primacy of leverage when it comes to real estate investments in our previous article Why you want to take up a loan for your real estate investment? The good news is leverage makes investing in real estate, especially apartment, extremely affordable.

In any given purchase you only have to come up with 10 to 20 percent of the total asset value in order to experience the benefits of an apartment investment. Take our recent acquisition in Permas Jaya for example. That was a RM125,000 apartment. We only had to invest a bit over RM16,000 to secure it.

Real estate is one of the only investments you can buy that is often immediately worth many times more than what you have invested. If we had invested our RM16,000 into a mutual fund ot a stock we would have had… RM16,000 worth of stock. By placing our money in an apartment investment we immediately had an investment worth RM125,000 – 85 percent more than our initial investment.

The appreciation we receive from our RM125,000 investment is not based on our actual cash, or our RM16,000 investment, but on the value of the total asset. At the appreciation rate of, say, 6 percent, that means the total appreciation for just one year on our total asset value of RM125,000 works out to be RM7,500 versus the same total appreciation on our down payment of RM16,000, which is RM960. That’s a difference of RM6,540.

The bank doesn’t get a cent of that. We are effectively using bank’s money to compound our returns almost eight times over our actual investment. We can’t think of cheaper money than that, can you?

Business cycles
Apartment investments are one of the only sector of real estate investment that aren’t affected by business cycles traditionally viewed as negative like rising interest rates and recession.
As interest rates rise, homes become less affordable. What does that do? It makes demand for rental housing even higher because it becomes the affordable option. The same thing happens when there is an economy downturn or recession. When people are holding back their expenses, especially the largest purchase in their life – buying a house, renting a house becomes an affordable option.

As demand increases, occupancy and rents increase. We have seen the occupancy rate of certain apartments and condominiums in Johor Bahru increased since December 2008, such as Larkin Utama and Wadihana. You can imagine what will happen next to the rent.

This is not the case for landed housing and commercial real estate. For commercial real estate investors, when housing becomes more expensive, market conditions become more strained. This is because given the choice between allocating income to housing – a basic human need – and an office, a potential resident will chose housing. They might even set up a home office. And when market turns gloomy, more and more commercial landlords’ tenants simply won’t be able to pay up. (Read our previous article Why you should stay away from commercial properties now?)

 

50 Comments

  • KCLau

    Reply Reply February 25, 2009

    The only disadvantage I can think of about investing in apartments is the low appreciation in long term.

    Furthermore, there will be more apartment built down the road when lands are scarce. The previous apartment we bought might not be favourable when new project with better facilities is launched.

    Anyway, this is just my opinion. I do agree with all the advantages you share, which makes apartment the best real estate investment we should be looking for at this moment.

    • ongkl

      Reply Reply February 27, 2009

      KC, the main reason why apartments in Malaysia have averagely low appreciation is because of the problem of poor management in most apartments.

      In fact, only sound management can actively increase the value of an apartment in long term, which makes apartment building becomes one of real estate investments that allows investors to have more control over the property value.

      Cheers

  • JB

    Reply Reply February 25, 2009

    Hi, interesting review website you have here, please keep it up.

    What is your take on Permas Jaya area? It’s not mentioned much in your reviews, but I think that Permas Jaya is quietly very strategic place for staying and investment (if the right price) due to its convenient location. Due to the bridge, it’s only 4-7km from Taman Pelangi/Sentosa in JB and other city spots like Melodies garden, Kebun Teh, etc. By the way, Tmn Pelangi/Sentosa to me is the central commercial hotspot for JB City (not Danga Bay or Wong Ah fook walk etc). Also, Permas is very central when referencing to other hotspots like Pasir Gudang industrial area (jobs), Tampoi industrial area (jobs), other popular residential/commercial areas like Johor Jaya, Tmn Molek, Desa Tebrau etc (leisure).

    The possibility of expanding and extending the current bridge is always in the horizon. And possible also for the bridge to connect directly to Singapore (“3rd” Causeway? or 2nd Crooked Bridge?). In that case, that is additional potential in terms of investment.

    I’ve stayed in Permas for more than 10 years now and I find it very convenient, which also explains my biased opinions. There are a number of apartment/condos here like Fair View, Permas Ville and Pan Vista, with our own Jusco mall.

    On the other hand, I find Nusajaya extremely far and seems like middle of nowhere, when already there is so much land supply in more convenient areas of JB. What do you think?

    • ongkl

      Reply Reply February 27, 2009

      Hi JB,

      The location of Permas Jaya is considered good and central to most local residents. However, if the authorities can upgrade further the existing traffic and public transport systems there, it will definitely become an ideal residential area of JB.

      Location of Nusajaya may seem far at this moment. With more quality developments undergoing in its surrounding like Bukit Indah and Nusa Bestari, soon it may become one of the modern residential area of JB as we know people always like to buy new house for home.

      Cheers

  • syed muhammad

    Reply Reply April 3, 2009

    Hi Ong,

    I would like to know if indera putera court at jalan inderaputera J B is a good condo for investmenat. I sawa unit there which is going for RM 200k.Is that a fai price for a 1800sq ft unit.it is run down though and the maintenace is RM300/mth.Can u comment and keep me posted.
    Regards

    • ongkl

      Reply Reply April 8, 2009

      Hi Syed Muhammad,

      If you can get a unit there at RM200k, we believe it can be considered a good buy. For a furnished 1800 sqf unit there, on average you should be able to rent it out for RM1500-RM1800. Using our propery evaluation spreadsheet (which you can download it free by subscribing to our newsletter), our analysis showed that this is a property that can generate a positive cashflow. If you are young enough and can loan up to 30 years, this is a property worth borrowing and investing which can give you cash-on-cash return of more than 10%. Our analysis included RM20k as your furnishing cost.

      Cheers

  • khalid

    Reply Reply April 20, 2009

    Hi Ong,
    Your article on Why apartment can be the best real estate investment is certainly a good read. I am convinced that in the context of JB investing in apartments will be worthwhile.
    I have been looking at a couple of apartments and was recently at MAPEX. The developer of KSL city is guaranteeing an 8% rental return pa for 3 years and is allowing this to be offset against the purchase price. A studio apt of 306k (freehold) can fetch approx 73k rental returns.
    Firstly, is this too good to be true or is there a catch somewhere? Second question is 8% the benchmark for rental returns for similar apt in JB?

    • ongkl

      Reply Reply April 25, 2009

      Hi Khalid,

      This is not good at all. The “guaranteed rental return” is indeed included in the pruchase price already. In other words, they are pricing the property at least 24% higher than their actually selling price.

      For example, if you deduct this 24% from their list price, is the price still look attractive? Not at all for KSL City – a studio unit after less 24% is still RM230k! We can use the same amount of money to buy 2 studio units in Prima Regency which can fetch about 8% rental return for vacant units…

      The RM73k “rental return” is in fact an upfront cash to the developer, borrowed by you from bank, and they return it to you slowly without any interest while you have to bear all the interest charged by bank. And they still own the property to do whatever they want to do for the whole 3 years!!! Either they use it to generate more money for their pocket or just leave it vacant, they have nothing to loss because they have already got all the money from your bank loan…

      The most scary thing is that the “expected rent” and their list price just don’t reflect the true market situation. Do you believe a studio apartment can be rented out for more than RM2000 after three years, when you may have to serve a monthly installment of at least RM1300 for the loan? Think twice and calculate thrice…

      Cheers

  • Lee

    Reply Reply June 29, 2009

    Lately thinking to invest in a studio apartment near the tebrau city area. I am just wonder what kind of tenant would like to rent the studio apartment as the place is so small yet, the rental fee is comparable to other bigger property. May I know the market of studio is really good?

    • ongkl

      Reply Reply June 30, 2009

      Hi Lee,

      Nowadays more and more young working couples are looking for studio apartment for its convenience. A biger house doesn’t mean a better house. Bigger house requires more effort to maintain. We have seen the demand on studio apartment increases in every city around the world.

      Cheers

  • Khairul

    Reply Reply July 10, 2009

    Hi ongkl. Yes there is a trend nowadays that people especially expats are looking for serviced apartments for rent. In one of the books that I read previously, the author stated that to avoid serviced condos or apartments merely because the maintenance cost is quite high compared to the normal apartments and condos. I’m not really convince by what the author wrote because more developers are building serviced apartments or condos and there are demands on this kind or property. What do you think of the serviced apartments and condos in terms of investment?

    • ongkl

      Reply Reply July 14, 2009

      Hi Khairul,

      Damand on serviced apartments and condos are similar to normal rental apartments as they share the same group of tenants and buyers.

      Cheers

  • Ben

    Reply Reply September 7, 2009

    hi Ong,

    Can I check with you if the Prima Regency apt is a good investment ? Is this considered as a serviced apartment or just another condo ? Do you know where I can the factsheet for this development such as age, number of units facilities etc ?
    For a studio apartment there, what kind of price can be considered reasonable ?
    Can a foreigner purchase a studio unit which is below the RM$250,000 threshold ?
    Lastly, how you you compare Aster Court (DP Plaza) against Prima Regency ? Or do you have any reocmmendations for a better investment in JB ?

    Thank you very much in advance !!

    rgds
    Ben

    • ongkl

      Reply Reply September 7, 2009

      Hi Ben,

      Prima Regency is considered as one of the good investment properties in JB. It’s more like a condo than serviced apartment.
      You can check at the management/sales office there to find out more details about the development.

      Furnished studio apartment there ranges between RM110k-RM130k.

      A foreigner can only purchase a property priced above RM250k in Malaysia.

      Although the location of Aster Court is better than Prima Regency, the facilities, environment and management of Prima Regency are much more better. Rental demand on Prima Regency is thus higher than Aster Court.

      Cheers

      • Rachel Tan

        Reply Reply March 17, 2010

        Need to correct this info “A foreigner can only purchase a property priced above RM250k in Malaysia”.
        Sould be Above RM500k not RM250K year 2009

  • Ben

    Reply Reply September 7, 2009

    hi Ong

    Thank you very much for the prompt response.

    Thou it is located quite far from the JB Town….so why is rental demand higher over there ?

    Actually, I am not very familiar with vicinity of Prima Regency. You mentioned that the environment there is better. How is it better ? Does it have all the convenience of facilities and shops as JB town ? I may also take a look at the surrounding the next time I visit JB.

    Thanks !

    rgds
    Ben

  • Mick

    Reply Reply October 8, 2009

    I read with interest your comments on Prima regency. I am thinking of buying a studio unit for RM108k (unit includes a covered car park). Is it a fair price?

    • ongkl

      Reply Reply October 17, 2009

      Hi Mick,

      RM108k is considered a good price. Good luck.

      Cheers

    • wstay

      Reply Reply October 18, 2009

      Hi Mick,
      I think if the unit is 10 above floor, then it is a fair price .

  • Ray

    Reply Reply October 22, 2009

    Hi Mr Ong,

    Bukit Indah is launching the serviced apartment soon, do you think is a good investment? What kind of price is considered worth buying?

    Cheers

    • ongkl

      Reply Reply October 25, 2009

      Hi Ray,

      Sorry that I am not aware of this new development. However, Bukit Indah is one of my favourite new towns in JB.

      Cheers

  • Jim

    Reply Reply November 8, 2009

    Hi Ong,
    I went to the property fair last weekend.
    I’m looking at Tebrau City around Jln Harmonium?
    how’s the pricing over that area?

    THks

  • Jagdev

    Reply Reply November 25, 2009

    Hi ong,

    Im am looking at buying a 3+1 condo (Straits View) in Permas Jaya asking for around RM $460k. Built up area is 1650sq.ft. Rental/mth is around RM 3,500. Could you please advice me on whether is this a good investment deal?

    • ongkl

      Reply Reply December 5, 2009

      Hi Jagdev,

      If the unit is well renovated and at high floor (above level 10), RM460k is a fair price.

      Cheers

  • Lisa

    Reply Reply December 17, 2009

    Hi Ongkl,

    Kindly advise the Bayu Puteri Marine Service Resident which in between Taman sentosa, before Johor Jaya and some where behide of ICQ with the golf & river view.

    DO you think is worth to invest on a full furnished studio unit (609sf) + a carpark @ Rm$280K ~$300K from 12~ 17floor, With 3 % (Abt Rm$1700 per mth) of 5 years guarenteed rental return + 5 years not guarenteed rental.

    Thanks & Best Regards,
    Lisa

  • matthew

    Reply Reply December 30, 2009

    hi Ong,

    I have about 150k cash, is there any good property around taman university in skudai cos my family members mainly live there, shall i get a loan or pay cash. My purpose is purely for investment cos i am single.tq. Also people said that the safety in jb is a big problem, which area close to taman university is good investment and safer :). Thank you for your help.

    Matt

  • Astro

    Reply Reply March 5, 2010

    Hi Ong,

    Need your advice as I’m not sure if this workable or if this a wise plan. I was thinking of forking out 180K to buy a unit at Prima Regency and then rent it out. I’ll then buy another link house at Nusa Duta by paying 10% downpayment and use the rental from Prima Regency to service the monthly instalment of Nusa Duta. Pls share your view! Thanks!

    Best Regards
    Astro

  • Astro

    Reply Reply March 5, 2010

    Hi Ong,

    Need your advice as I’m not sure if this is a wise plan.

    I was thinking of forking out 180K to buy an unit at Prima Regency & rent it out. I’ll use the monthly rental to service the housing loan of another link house at Nusa Duta which I’m going to pay only 10% downpayment. The loan period would be 30 years.

    Pls share your view.

    Thanks & Best Regards
    astro

    • Shawn Ng

      Reply Reply April 9, 2010

      Hi Ong, how is the property at Nusa Duta cause I am searching for a new house now?

      • Ken

        Reply Reply April 29, 2010

        Hi Shawn & Astro,

        Have you guys bought the houses at Nusa Duta yet? What type of house are you looking for?

  • Sumit Mehta

    Reply Reply March 9, 2010

    Interesting website- thanks for your good work. You have some useful tips there.

    However I’m really concerned about your praise of leverage without highlighting the risks of it, and your seeming naivete on the matter.

    You wrote:
    “Real estate is one of the only investments you can buy that is often immediately worth many times more than what you have invested. If we had invested our RM16,000 into a mutual fund ot a stock we would have had… RM16,000 worth of stock. By placing our money in an apartment investment we immediately had an investment worth RM125,000 – 85 percent more than our initial investment.

    The appreciation we receive from our RM125,000 investment is not based on our actual cash, or our RM16,000 investment, but on the value of the total asset. At the appreciation rate of, say, 6 percent, that means the total appreciation for just one year on our total asset value of RM125,000 works out to be RM7,500 versus the same total appreciation on our down payment of RM16,000, which is RM960. That’s a difference of RM6,540.

    The bank doesn’t get a cent of that. We are effectively using bank’s money to compound our returns almost eight times over our actual investment. We can’t think of cheaper money than that, can you?”

    Firstly your first sentence is quite incorrect. What you call as a cheap way to increase asset side is called leverage the world over, and its the reason why we are in the crisis we find ourselves in. Its factually incorrect that real estate is the only market you can use leverage in, you can use it in stocks bonds or commodities, using derivatives.

    Secondly, it would be prudent to be aware of the danger that leverage can cause. In your example where you showed the +ve effect of an appreciation in your asset, you conveniently forget to mention that had the house gone down in value, you would have made the same amount of loss on your investment. The mutual fund that you disparage, wouldnt have given you the same amount of return in case prices went down, but at the same time, you cannot lose more than investment in a mutual fund, whereas in this case, if your house price falls by 13% or so, your investment of 16,000 would be totally wiped out. As we have learnt time and again, house prices dont necessarily always go up.

    Please be aware of & make your readers aware of the risks of the investments you make- such naivete will only reward you until the time when things suddenly go bad and you are wiped out.

  • niz

    Reply Reply March 27, 2010

    Tebrau city is the developed township I supposed with the coming up of Ikea and Tesco + other amenities nearby. was looking at austin perdana apartment which non of the member here mentioned. all i saw was high end condo above 200k mentioned. what about this fairly new apartment?

  • Michelle CMK

    Reply Reply April 5, 2010

    Dear Ong,

    Currently, near to Taman Kebun teh under Maha… Developer is building a residential apartment start from RM175k+++ is this worth to invest?

    My intention is more for investment.

  • Joy

    Reply Reply June 4, 2010

    Dear Ong,

    Prima Regency Savoy court level 9, selling for RM175K, is it worth buying? Thanks a lot.

    Best Regerds,

    Joy

  • Kelvin

    Reply Reply June 26, 2010

    Dear Ong,

    Tebrau Residence RM 182,000, 1050 sf ft, 3 room +2 bathroom + balcony 2011 June completed. Just In front Jusco Tebrau City+ Near Tesco + Proposed Ikea just besides the apartment

    The bad point was RM 0.14 maintenance fees only for 1 car park and access card for car park entrance + lift entrance

    Facilities such as swimming pool + gym need to pay for membership only can enjoy for the facilitity as clubhouse only completed at June 2011.

    Need to seek for your professional opinion will people rent such place at RM 1,100? Will it difficult to rent out?

    & what do you think after 5 years market value for this property?

    • Ben

      Reply Reply June 29, 2010

      hi,
      I was looking at this devt sometime ago too. SO this has been launched already ? How is the take up rate so far ? That time I remembered the est price was > $200,000….or I remembered wrongly. 1 thing i Like was the proximity to the shopping facilities and proposed IKEA. Didnt know that the gym and swimming pool have to pay separately ? how much would it cost ? To pay close to $150 per month for 1 carpark lot and lift access is too expensive.

  • Kelly

    Reply Reply June 30, 2010

    Hi Ong,
    Can you tell me whether service apartment @ Seri Molek Perdana is a worth property to invest? The surrounding area is still under developing.

    Rdgs

  • Eric

    Reply Reply December 17, 2010

    Aster Court (DNP Plaza) management is getting better and improved. Rental is getting higher as well property value

  • Chong

    Reply Reply September 23, 2011

    Hi, will level of purchase for serviced apartment affect the rental? If I purchased a unit at Level 5 compared to Level 10+ for Greenfield Regency, what would the yield differences between the two?

  • John Wong

    Reply Reply June 13, 2012

    Hi,

    I just bought a apartment at d’ambience Permas Jaya. 2 bedroom with 830sqf for 347K. Is it a good investment?

  • yeo teck hao

    Reply Reply August 28, 2012

    hi,is austin suites serviced residence a good property to invest?a studio 254k,guarentee rental 7% for 2years..after 5 years(2018),how much is the rentel per month?thks..

  • Bruce

    Reply Reply September 10, 2012

    Hi Ong,

    I am interested to invest in Danga View Apartment? The price is around 400k. There are quite a number of development going on in the surrounding areas. I wonder this will bring the price of the apartment higher in the future? Is it a good investment?

    Bruce

  • michael

    Reply Reply November 26, 2012

    any idea on impian emas properties ?

  • Soo Chen Hui

    Reply Reply December 18, 2014

    My study on apartment property and landed property is, apartment property feed higher rental if compare with landed. Is it true??

    Besides, I just bought an apartment at Bandar Seri Alam which is few KMs away from permas, initially now is ownstay and would like to rent out on mid of next year. Will it a good location for invest?

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