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Bad experience with a mortgage broker

ongkl — Tue, 16 Jun 2009 22:39:39 +0000

Last year, we came to know a mortgage broker who helps property buyers to apply for mortgage loans from several banks. We liked his service because he could get few quotations of mortgage loan from different banks for a property. With his service we were able to know which bank can offer the best package to us.

When we first met, we noticed that one of the businesses stated on his name card is “risk management”. We asked him what he does with risk management. “Oh, that’s actually about insurance,” he replied. We didn’t pay much attention at that time.

After a few months, when we wanted to sign up a mortgage loan through him for a property, things started to show that we have made a mistake by ignoring his side business in insurance.

Our mistake
The mortgage broker brought bank’s letter of offer of the mortgage loan to us in a rainy day. We didn’t read through the letter of offer in detail at that point of time and we assumed it should be quite a standard one.

After we signed the letter of offer, the broker claimed that we have to take up either a Mortgage Insurance (MI) or a Mortgage Reducing Term Assurance (MRTA) as it’s a requirement of the mortgage loan. He then showed us two packages of AIG’s MI and MRTA and explained to us the difference between them.

He highlighted that the premium of MI for our mortgage was not much different from the MRTA but they both serve the same purpose. However, we may surrender this MI in future when we sell the property and we can take back a certain percentage of the total premium invested.

It sounded very straightforward to us. We trusted him and signed up an MI with him on the spot.

It was until we talked to the banker when we sign the loan agreement for that mortgage loan, then we realised that we have made a mistake.

We asked the banker if it is the bank’s standard policy that borrower of each mortgage loan must buy an MI or MRTA. Answer from the banker surprised us – there is no such policy. If there is such a requirement it will be stated in the letter of offer.

Of course, as you can imagine, there was no such clause in our letter of offer!

We asked her to calculate the premium of bank’s MRTA for our mortgage. The result astonished us – it was almost ten times cheaper than AIG’s premium!!! We asked her why there was so much different. She replied AIG’s premium of MRTA is normally higher than banks’ and the factors used by the mortgage broker in his calculation may tend to inflate the premium of MRTA.

Why did he want to do that?

Conflict of interests
The reasons for his doing were indeed quite simple – conflict of interests. Obviously, his interest in the commissions that he could get from MI was higher than what he could get from MRTA. That’s why he inflated the premium of MRTA so that both premiums of MI and MRTA look not much different. He was showing an unfair comparison to us so that we tended to choose MI as if MI gave additional benefit for the same amount of money.

But most importantly, we could see his interest in insurance brokerage was higher than in mortgage brokerage. That explains why he dared to tell us a requirement that doesn’t not exist in our letter of offer – because he wanted us to buy mortgage insurance, most probably from him.

Lesson learnt
As discussed in our previous article “What is MRTA and do you really need it?”, you may or may not need an insurance on your mortgage. It depends on your investment strategy and plan. Our bad experience with this mortgage broker does not affect our view about the insurance itself. It taught us a lesson about working with people with different expertise and interests.

We do believe there are people who can master and do well in more than one job. But we never believe one can do well in jobs that have conflict of interests.

(If you’re not already a subscriber to REIJB.com, subscribe here to receive FREE monthly updates of auctioned property from more than 10 banks and our latest articles via email.)

We write regularly about real estate investment. Some of our featured articles include:
“How to find good real estate/property agents?”
“What must you know before buying auctioned properties?”
“Where to find cheap properties?”
“Why apartment can be the best real estate investment?”
“How important is location to an investment real estate?”

(Also, don’t forget to subscribe to our newsletter to receive a property investment evaluation tool. You can use this tool to estimate monthly cash flow, monthly installment and return on investment for your property. This tool will also show you if a property investment is worth borrowing/leveraging.)

Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

Bad experience with a mortgage broker

Why do you need to pay so much interest to bank?

ongkl — Sun, 07 Jun 2009 22:30:23 +0000

photo credit: Material Boy

Recently I received an email from a humble 22-year-old student questioning about why should we borrow and pay so much interest to bank for our real estate investment.

It is very encouraging to read his email. As a student of his age, I have to say it’s not easy for him to think so deep about issues of real estate. He has performed some in-depth observation and analysis using our property investment evaluation spreadsheet to prove his points. I still can remember 10 years ago when I was at his age – as a student also, I didn’t even bother to know what is a mortgage loan…

Here is a summary of his mail:

Hi Ongkl, in your previous article “How to finance your real estate investment for maximum return?”，you encourage us to get the longest tenure available to us when we apply for a mortgage loan.

But, isn’t it the longer the tenure the higher the total interest payment?
Also, isn’t it the more we borrow the more the interest payment?

Let’s take the default values from your property investment evaluation spreadsheet as an example. We assume that:
1. The property is not sold for the next 30 years.
2. The interest rate and maintenance cost are fixed for these 30 years.

According to the table above, the total net profit in 30 years is increasing as the % of loan is decreasing.

Then why should we still want to take the highest % of loan and the longest tenure? Let’s say we have cash on hand, shouldn’t we put as much cash as possible into the down payment? Even if we can’t make a full payment with cash, 30 to 40 thousands still can reduce the amount of interest payment substantially.

Home buyer or real estate investor
Many people do not know how to select the right approach when they first come to real estate investment. This is because we all have the same mind set as if we are buying a home. I have to admit that it took me quite a while to learn the difference between buying a home and an investment property before I acquire my very first investment property in Singapore.

As a home buyer, we don’t like to pay more interest to bank. This is understandable since buying a home can only be considered as an expense instead of an investment. Why? Very simple, because we don’t get any income from our home… So we should try to pay as little interest as possible when we buy our home. If possible, purchase it with cash.

On the other hand, in real estate investment, or maybe all other kinds of investment, what we emphasise most is the maximum return – how can we get the highest return from the minimum amount of money invested?

100% cash or 90% loan
Take the case showed in the above table as a an example. Yes, if you borrow 90% to purchase the property, total net profit in 30 years is RM43,166 only, compared to RM157,680 in the same period of time if the property is purchased with 100% cash.

However, take a look at the money required by both scenarios. For 90% loan, the required capital is RM31,750, compared to RM166,750 if you purchase it with 100% cash. That is more than 5 times different!!

If you invest the RM166,750 in 5 similar properties with 90% loan, the total net profit that you can expect in 30 years is RM43,166 x 5 = RM215,830 instead of RM157,680! If you can earn another RM58,150 with the same amount of money (RM166,750), will you still use that money to buy one property only with 100% cash?

Even if you can just find 4 similar properties, the total profit in 30 years (4 x RM43,166 = RM172,664) is still higher than one 100%-cash property’s, and not forgetting, you still have RM166,750 – (4 x RM31,750) = RM39,750 cash on hand.

Moreover, with 4 or 5 properties on hand, capital gain from the appreciation of estate value is also 4-5 times.

I think this should be enough to stress my point – focus on the maximum return that you can get from real estate investment instead of the interest. Interest is only part of your costs of investment. Just take all the costs into account before you calculate your return, and then choose the right strategy to go for maximum return.

For the above example, I would definitely go for 5 properties with 90% loan, even if I can buy one with 100% cash. What about you?

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Post from: Real Estate Investment in Johor Bahru

Why do you need to pay so much interest to bank?

What risk you may face if you borrow too much and how to manage it?

ongkl — Thu, 14 May 2009 22:18:03 +0000

photo credit: Andres Rueda

“There is always a price to pay for everything”

“No risk no gain”

For a real estate investment with “infinite return” as discussed in our previous article “Is it possible to have an infinite return on investment?”, the price to pay and the risk involved sometime can be significant, although supposingly you don’t need to pay a single cent in this type of investment.

Impact of interest rate hike – another power of leverage
Let’s take the real case of tan81 in the article as an extreme example since it is 100% leveraged.

If the base lending rate (BLR) bounces back to above 6.25% and his rental income is still the same (RM1450 per month), his rental property will stop putting money into his pocket but will start drawing money out from his pocket every month.

This is because every 0.1% increment in interest rate will cause an increase of RM14 in his monthly installment. His monthly cash flow from the property is around RM100 only, while every 1% increment in interest rate requires him to pay another RM140 more every month.

Unless he is taking a fixed interest rate package, otherwise he is exposed to the risk of interest rate hike. Imagine, an increase of 1% only in interest rate will require him to increase rental income by almost 10% to break even…

This is an effect of leverage. The power of leverage can help you to magnify your return on real estate investment through financing (as demonstrated by our real case in “How to increase the return of an investment property to more than 20%?”). However, it can also magnify your repayment cost even with a slight increase in interest rate, if you borrow too much for your investment property.

Managing the risk – keep your monthly installment below 60% of rental income
As discussed in our previous article “Inflation may come back soon (or it has never left?)”, if inflation strikes, which will cause the interest rate to go up, your cash flow from rental property should increase also.

However, in order to have a “robust” cash flow from your investment regardless of economy condition, we encourage for each investment property, monthly installment should not exceed 60% of the income generated from the property.

For example, if you can collect RM1000 every month from a rental apartment, keep your monthly installment below RM600, which should be enough to service a loan amount of RM130,000 with interest rate 3.75% and tenure 30 years.

This is to provide some room to maintain a positive cash flow should your bank revises interest rate to even double of the existing rate.

If you look at our rental apartment in Tampoi discussed in “How to increase the return of an investment property to more than 20%?”, we did follow the guideline of keeping monthly installment below 60% of rental income.

However, if you look at another case study from our reader in Penang (“How to turn a property to become worth borrowing/leveraging?”), which the main objective was to turn her property to become worth borrowing, you will find that if the reader borrows 90% she will not be able keep her monthly installment below 60% of her rental income.

The main reason is rental income of the property was relatively low (RM600) in this case. Because of this we suggested the reader to borrow just RM40,000 (or 38%) in order keep her monthly installment at RM184 only while increasing the return on investment from 4.23% to 6.21%.

In real life, most of the time we just can’t have the best of both worlds unless we do things right in the first place. That’s the reason why risk management is so important to every investment.

How to make sure we do things right in the first place?

Make your assumptions boldly but verify them carefully.

photo credit: me and the sysop

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Post from: Real Estate Investment in Johor Bahru

What risk you may face if you borrow too much and how to manage it?

Is it possible to have an infinite return on investment (or free money)?

ongkl — Mon, 11 May 2009 22:41:07 +0000

photo credit: oskay

If you have read Robert Kiyosaki’s books about financial education, you must be familiar with the term “infinite return on investment” mentioned in many of his books (sometime referred to as “free money”). If you have not heard about him, an investment with “infinite return” actually means an investment that requires no money from you but you receive return in term of money from the investment.

“Is it really true in real life?” Many people may ask as it sounds too good to be true.

In this article, we will discuss a real case of such investment in real estate shared by tan81, a blogger who shares his investment experience at tan81 investment and rich secret. tan81 has shared the latest progress of the acquisition in his blog.

A real case
tan81 found a furnished rental property last month, which was valued at RM280,000 by Hong Leong bank. He managed to negotiate the purchase price to RM230,000.

The property is currently rented to a tenant for RM1450 every month. Monthly maintenance fee is RM200. Total monthly maintenance cost is around RM250 including other expenses like quit rent.

In one of his articles, he estimated the transfer fee for a property worth RM260,000 should be around RM7470, which includes:

Stamp Duty 1st RM100，000 X 1% = RM 1，000
RM160,000 X 2% = RM 3, 200

Legal Fees 1st RM 150,000 X 1% = RM 1,500
RM 110,000 X 0.7% = RM 770

Other costs = RM1，000
Total = RM7470

Here we assume RM7500 is required for the transfer of the property.

Housing loan package offered by Hong Leong bank to him is Mortgage Plus with floating interest rate BLR-2.2% (up-to-date BLR is 5.55%), tenure 30 years, zero entry cost and 5 years lock-in period.

If he loan 90% of the purchase price, the projected cash flow and return are shown in the following table.

From the above table, we can see tan81 has found a property worth borrowing with monthly cash flow of RM287.72 and a cash-on cash return (cashflow yield) 11.32% if he loans 90% of the purchase price. An upfront cash of RM30,500 is required in this case.

However, as mentioned in his blog, tan81 decided to borrow RM250,000 from bank, which is about 89% of the bank’s valuation (RM280,000). With the approval of this loan amount, which is enough to cover all expenses, he effectively doesn’t need to fork out any money for this acquisition!

Look at what happens to the projection of cash flow and return now.

From the above table, tan81 will still get a cash flow of nearly RM100 every month even though he doesn’t need to pay anything to buy this rental property. This is a typical example of “infinite return on investment”!

How can it be true?
Though this is a real example of “infinite return on investment”, it is a bit different from those cases described by Robert Kiyosaki. In most of his cases, Robert would still need to pay a certain amount of down payment in cash.

The only thing that made Robert’s cases “infinite return” was that he borrowed this cash from somewhere else. For example, friends, overdraft (OD) or term loans with – most of the time – much higher interest rates.

In the case of tan81, which solely depends on a housing loan to cover all expenses of an acquisition, is something that can be happened quite uniquely in Malaysia. We normally call it 100% (sometime can be more than 100%) loan or sometime “loan with mark-up”.

In Malaysia, banks will normally offer a mortgage loan amount based on the purchase price stated in sell and purchase agreement (SPA). For example, up to maximum 95% of the purchase price is quite common for new development projects.

So how can a borrower borrows up to or more than 100% of the purchase price?

As far as we know, the trick is in the purchase price stated in SPA.

For example, in tan81’s case, since bank’s valuation of the property is RM280,000, that means bank is willing to lend up to 90% of this valuation amount (RM252,000), provided financial strength and credit record of the borrower meet the requirements of bank.

Once you know the bank is willing to lend up to RM252,000 for the property you want to buy, all you need to do is to use the valuation amount (RM280,000) as your purchase price in your SPA and submit this SPA for loan application. If your financial strength is strong enough and your credit record is clean, you might just be offered with the maximum loan amount of RM252,000.

Simple right? But wait… is there any risk?

In our next article, we will discuss the risk that you may face and how you can manage it.

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Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

Is it possible to have an infinite return on investment (or free money)?

How to turn a property to become worth borrowing/leveraging?

ongkl — Sun, 03 May 2009 22:46:59 +0000

In our previous article “How to increase the return of an investment property to more than 20%?” we have shown you how we increase the return of an apartment to more than 20% from a bad starting point. Most investors have such experience where they found their investments were not as good as they expected in the beginning.

However, the most important thing for a successful investor is that he/she will never stop looking for ways to improve his/her investments. In this article we will use a real case to discuss how an investor can improve the return on his/her property from one of the investment tools exclusively given to real estate investment – refinancing. (You can read “Why you want to take up a loan for your real estate investment?” to understand how a property worth borrowing/leveraging can have higher return on investment.)

A real case
There was a reader of reijb.com asking for our advice on how to turn one of her rental apartments in Penang, which was supposed to be a not-worth-borrowing property, to become a worth-borrowing one, in order to optimise the power of leverage on the investment.

With our property investment evaluation spreadsheet (which you can download it free by subscribing to our newsletter), she found her property in a bad situation if she loaned 90% (see table below summarised by the reader).

We assumed the reader has invested RM69,415.56 (down payment) in the property and her existing loan amount was RM40,000. Her existing return (cash-on-cash yield) is 4.23%.

The cash-on-cash yield becomes negative if she loans 90% of the property purchase price (RM104,400) with an interest rate of 4.6% and tenure of 25 years. This means that it will be a negative cash flow of RM 22.61 every month with the loan.

Even if we re-evaluated with an interest rate of 3.75% (which is offered by most banks now), though the cash flow becomes positive (RM21.92/month), the property is still not worth borrowing. From the chart below, we can see the return decreases when the loan amount increases showing a typical not-worth-borrowing model.

Suggestions to improve investment return
To turn her property into a property that worth borrowing, we have two suggestions for her:

1. First she needs to refinance the property in order to get a lower interest rate for her outstanding loan, say 3.75%, compared to her current outstanding loan at 6.1%

2. Second thing is to increase the rent to at least RM660.

Table below shows the improved cash flow projection for the property with these two suggestions.

With the two measures, though the monthly cash flow will reduce to RM81.92 if she loans 90% of RM104,400, her return will increase to 6.36% because she can take back RM53,960 from the loan (RM93,960 less RM40,000 outstanding loan).

In other words, after taking back RM53,960, she effectively had just invested RM15,451 in this property. She can use the RM53,960 to invest in new properties or other places.

However, we suggested her to refinance just enough to repay the outstanding loan RM40,000. As we can see from the second column in the above table, she will still get an increased return of 6.21% with an increased monthly cash flow of RM359.37 if she refinance RM40,000 only.

A real problem
After hearing our suggestions, the reader fed back a real problem to us – she has been trying to increase the rental to as low as RM 30 per month but each time she plans to do that, she was advised against doing that because the reason was that she might just loose her current tenant who pays the rental promptly.

The tenant has requested her to install iron grille on the windows but she refused his request. Moreover, the reader believes RM 600 is the highest rental in that apartment building. Other apartment units are renting out at RM 450 to RM 550.

More suggestions
With her feed back, we suggested more to her, but basically is to “communicate” well with either the tenant or her banker.

• For tenant, we suggested her to install the grille so that the tenant will find it more reasonable to accept an increase in rent. Maybe she can add more “gifts” to this rental increase like giving the tenant a DVD player or rice cooker which won’t cost much. The most important thing is to communicate with her tenant with confident and the tenant may find her having all the reasons for the increase.

• If increasing the rent is really impossible, there is another solution but it may be a bit troublesome. She has to communicate and negotiate with bank to refinance for an interest rate 3.7% or below with 30 years tenure (see below table for the improved return without the increase of rent).

However, if her age doesn’t allow her to apply for loan tenure of 30 years, then she may have to consider a “third party loan”, which uses a joint borrower from her close relative whose age is eligible for 30 years tenure. Though not every bank will do “third party loan”, as far as we know, Standard Chartered and CIMB banks do provide this kind of loan.

As we can see from this case, improving the return of an investment real estate sometime may not be easy and straightforward. But the fact is real estate investment does provide ways to control and improve your return on investment. Sometime the result of improvement may not be a big amount in money. What we appreciate most is the chance for us to explore and learn more to enhance our investment skill.

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Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

How to turn a property to become worth borrowing/leveraging?

How to increase the return of an investment property to more than 20%?

ongkl — Wed, 22 Apr 2009 22:30:37 +0000

We have acquired a rental apartment at the price of RM125,000 in end of last year 2008. The apartment was rented out in March 2009 before the completion of its furnishing work. Its monthly rent is RM1300. Initial annual return of this property was 8.54%. Later in this article we will show you how we increase its return to more than 20%.

A bad start
This is a 3-bedroom apartment located in Tampoi with amenities like swimming pool, gym, 24-hour security, badminton, basketball and tennis courts. The apartment’s name is Sri Wangi and the unit that we acquired is on the 4th floor.

We signed a sale and purchase agreement (SPA) with the vendor of this property in November 2008. However, due to the delay in loan application during the holiday season of December 2008, we decided to pay cash to buy this property. We managed to get the keys of the property in end of February 2009.

It was a bad start to us because we planned to finance this purchase. Using cash to buy a property is never our first choice because all properties that we acquired are properties that worth borrowing based on our analysis. (Read “Why you want to take up a loan for your real estate investment?” to find out what is a property that worth borrowing and how such property can give you the maximum return.)

We expected to rent the apartment for a monthly rent of RM1200 with fully furnished condition. We allocated RM15,000 for the furnishing cost. Estimated legal and brokerage fees were about RM7600. Management fee of the apartment with quit rent and assessment was around RM150 every month.

From the analysis using our property evaluation spreadsheet (which you can download it free by subscribing to our newsletter) as shown in the following table, the property would bring us monthly cash flow of RM1050 if we successfully rented it out for RM1200. We expected the annual return (cashflow yield) to be 8.54% if we used cash to acquire it.

RM1050 is quite a good cash flow but when we compare it with the total cash capital that we were required to put in (RM147,500), 8.54% is really not an attractive figure. We need at least 11.7 years to take back all the cash capital.

Take a look at the spreadsheet if we financed this acquisition. We could expect a return of 18.14% if we managed to borrow 90% of the purchase price from bank for a tenure of 30 years with interest rate 3.75% (see table below). This mean we would be able to take back our cash capital, which would be RM35,000 only in this case, within 6 years!

Turning bad luck into good luck
Although the expected return dropped significantly compared to the case if we financed the purchase, we decided to carry on with our plan to increase the value of this property – to furnish the apartment with the allocated budget.

During the week when furnishing work was undergoing in March, several prospective tenants were brought by our property agent to view the apartment. Two of them liked the apartment very much. One offered RM1200 while the other offered RM1300. We chose the latter.

The main reason why our apartment could be easily rented out even before we finished the furnishing work was that we had a reasonable budget for quality furnishing work. With that budget, we were able to use quality paint and purchase new lightings, furniture, electrical appliances and air-conditioner for the apartment.

Though simple designed and configured (see figure below), tenants like our way of preparing the best for whoever is going to stay in the apartment.

We were not happy, yet, with the RM100 more–than-expected rent. We negotiated and asked for discounts from lawyer, agents and contractors. We managed to reduce the furnishing cost, legal and brokerage fees to RM14,000 and RM5700 respectively.

Not only that, we are now going to finance this apartment. The tenancy agreement signed in the middle of March 2009 now becomes a very strong supporting document to prove its increased value to the banks since the apartment is generating income by itself.

Marching toward more than 20% annual return
Look at our spreadsheet right now (see table below), if bank loans us 90% of the purchase price, with the saving in furnishing cost and fees, the return of this apartment now jumps to 23.5%!

This is not the end yet. We decided to ask banks to perform new valuation on the apartment instead of using its purchase price in order to maximise the loan amount. Several banks like Standard Chartered and CIMB banks came back to us and told us that, the value of this property is now between RM135,000 to RM150,000.

Based on banks’ valuations, we are able to loan at least RM120,000 from them. In return, we will be able to increase the return of this property to 29% since the loan amount is effectively 96% of the purchase price now (see table below)!!!

Once we get the RM120,000 from bank, our cash capital will be reduced to RM24,625, and we still have a monthly cash flow of RM590. In other words, we will be collecting RM7080 from this property every year and within 3.5 years we should be able to take back all our cash capital RM24,625.

Of course, the above estimation is based on the assumption that the apartment will be continuously rented out. Also, tax on the rental income is not considered.

So, what do all these mean to you?
From this real life case, we demonstrated the three advantages of real estate investment to you as discussed in “Why real estate is a good investment?”:

1. Cash flow – we collect cash every month as a rental income from our rental property. In this case, we collect RM590 every month for a cash investment of RM24,625.
2. Leverage – we reduce our total cash capital by financing/refinancing our property and in return leverage the return. In this case, we improve the return on investment (ROI) from 8.5% to 29%.
3. Control – we actively control to increase the value and then the return of our investment property. In this case, we furnished the apartment so that it can be easily rented out for a higher rent and valued for a higher valuation.

(If you’re not already a subscriber to Real Estate Investment in Johor Bahru, subscribe here to receive our FREE latest update and articles via email.)

We write regularly about real estate investment. Some of our featured articles include:
“How to know if a property investment is worth investing?”
“How to estimate the value of a property?”
“How to find good real estate/property agents?”
“What must you know before buying auctioned properties?”
“Why apartment can be the best real estate investment?”

Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

How to increase the return of an investment property to more than 20%?

Real estate investment Q&A #3

ongkl — Sun, 12 Apr 2009 22:52:55 +0000

Question #15 – How to find auctioned properties?
How can i know about properties that under bank auctions? I think there is an auction house doing it in City Plaza, are they appointed by the banks or…?

How many are there (places i can know abt auction houses) and usually how fast do they update their list. Also for good bargain do they “keep” the info to regular gangs of property agents instead of releasing it out to the public?

Answer #15:
You can contact auctioneers to get a latest auctioned properties list from them. Their contacts are available at auction advertisements on papers, notice board at the ground floor of JB High Court and Internet.

Besides City Plaza, some LACA auctions are held by auctioneers in their auction houses in TJB tower.

Most auctioneers are appointed by banks. Banks also appoint certain property agencies to find bidders for their auction properties. These agents collaborate with auctioneers to provide services in facilitating their clients to successfully bid the property they wanted in auction.

We have discussed some of our experience and details in acquiring auctioned properties in “What must you know before buying an auctioned property?” with recommended links and agents.

Question #16 – Inspection of auctioned properties
I admit that I never really consider to buy an auctioned property just because of the tedious due diligence works.

One particular thing is that the potential bidder can’t inspect the property. How do you go around this?

Answer #16:
It is necessary to conduct on site inspection of an auctioned property and its surrounding neighborhood to ascertain the physical conditions of the property. You may not be able to inspect the interior condition of a house. But you can ask around the neighborhood who may have visited the house. From the exterior condition also you can have a rough idea how much cost is needed to refurbish the house.

The stage of maintenance has a significant effect on property’s value. Don’t go for the deal unless you are confident that you understand the value of the property and the possible costs required.

Question #17 – Property agent’s conflict of interest
How would u know if the agent you’re hiring won’t be trying to sell for his clients? Wouldn’t there still be conflict of interest as agents would likely already have a pool of clients they’re already serving and earning commission from?

Answer #17
In today’s market where sellers are more than buyers, agents start to know they have to serve buyers better in order to close any deal. However, we always encourage home buyers and investors to do their ground work like learning how to estimate the property value, how to identify a property worth investing and borrowing before negotiating any price with the seller through agent. (You can learn these from our previous articles “How to estimate the value of a property?”, “How to know if a property investment is worth investing?“, “Why you want to take up a loan for your real estate investment?“)

No doubt most of the agents today still tend to sell for their clients and the conflict of interest is there. It’s our own responsibility to protect our own interest. And the best way to do so is to equip ourselves with the right investing and market knowledge.

Question #18 – Questions for prospective property agent
Maybe you can come out with a set of questions we should ask our prospective real estate agents, before engaging any.
In Penang, I’ve met many agents who don’t really know about the market. Only a handful of them are professional and knowledgeable.

Answer #18:
Some questions that we normally ask our real estate agents:

How old is the property? Fully-furnished or unfurnished? Lease hold or free hold? How big is the built-up area? How much is the monthly maintenance cost, if any?

Any other expenses for the property? Has the individual title issued? Why does the owner want to sell?

What is the lowest offering price? Is the price reasonable in the market? Any room for negotiation?

How much is the highest and lowest rent I can get from the property? How long will you need to find a tenant for the property?

Once you have asked the same questions to several agents, you will be able to identify who can serve you better.

Question #19 – Commission rate of property agent
May I know what’s the standard fee like for hiring/paying an agent in KL or PJ area? Is it 1% of the property purchase price like in JB?

Answer #19:
Yes, you are right. But for certain higher value transactions you may negotiate with the agent to have some discount on the commission. For example, for a transaction above RM250k we normally expect to get 20%-30% discount from property agent, i.e. 0.7%-0.8% of the purchase price instead of 1% for agent’s commission.

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Real estate investment Q&A #3

Real estate investment Q&A #2

ongkl — Sun, 05 Apr 2009 22:31:30 +0000

Question #10 – Life insurance as a source of start-up capital
In “Where to find sources of start-up capital?” … your insurance policies that have a cash value are an excellent source of capital. Once you have determined how much cash or loan value you have in these policies, find out how much interest you will have to pay to borrow that money. You can check with your insurance agency or ask expert to find out more about this option.

Answer #10 (contributed by KCLau):
If it is an investment-linked policy, you can redeem the unit (just like unit trust). Of course there are terms and regulations that require minimum unit left in the policy in order to keep it in force.

If it is a traditional policy, the cash value is available for loan. Currently the loan interest is 7% (not low actually).

Question #11– Is now a good time for rental properties?
“Credit is tight, Approval of loan are low, …”
Persons who wish to own a house are forced to rent one. Thus, there is a need in rental market during this recession. But, properties have no market, value is going down, this affects rental.
Good timing for income producing properties?

Answer #11:
We found out that although the property values have been going down after Sep 2008, rental market is not much affected, yet. We believe the rent will not drop as fast as the property value, and thus give us more and more opportunities to find properties with high rental yield.

In other words, the gap between the selling price and the expected rental income of a property is becoming smaller now. But here we are only talking about residential properties because people still need a place to stay in hard time.

Question #12 – Lido Boulevard
I was told Lido Boulevard is a good investment. Can i have any feedback on this project?

Answer #12:
In Jan 2008, the developer, Central Malaysian Properties Sdn Bhd (CMP) said the project “is set to commence in March 2008“.
In June 2008, again, the developer said it “will start work in September 2008“.
So sorry that most of the time we just have no faith in most new development projects in Malaysia, especially those who claimed to be “one of the biggest private finance initiatives” in this uncertain period of time.

Question #13 – Tebrau City Residences, Desa Tebrau
How do you think about Tebrau City Residences, Desa Tebrau? Shopping malls around there create much value. Developer is http://www.plenitude.com.my .

I’m looking to buy a unit @ Tebrau City Residences…

Do you have any views on that? I happen to think that the rental yield will be good as it is situated in the IDR and also has 3 huge hypermarts surrounding it….

The developers are also hinting of a 5* hotel being built behind it.

Any ideas or hints??

Answer #13:
Though we don’t know much about this project and its developer, the location is definitely premium. We also learn that the price of most properties such as the apartments under this project is considered affordable for the quality they deliver.

As we are expecting manufacturing, retail and service industries to be hard-hit by recession in the coming quarters or years, we are reserved about the short-term yield that the area may deliver. However, there is one thing for sure: when the economy starts to recover, which it will eventually, the properties in such premium location will be the first to enjoy the fruits.

Question #14 – Lagenda Tasek
What do you guys think of Lagenda Tasek by IJM?

Answer #14:
IJM is quite a prominent developer in Malaysia. However, with the economy situation right now, the risk of buying property from new project has increased due to the potential financing problem with both developers and buyers.

We find the location of Lagenda Tasek a bit inconvenient though it is located beside Jalan Skudai and adjoining to Larkin. Unless there will be some improvement of the traffic system there, otherwise future residents of the estate may find it a hassle to get in and out from there.

Other than that, we also find Lagenda Tasek a bit ambitious with the number of units just like IJM’s Suria Mas apartment in Larkin. Maybe that’s the reason why they can be priced as the “affordable” apartments in the area.

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Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

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Real estate investment Q&A #2

Real estate investment Q&A #1

ongkl — Mon, 30 Mar 2009 03:20:22 +0000

photo credit: Moe_

reijb.com is going to enter into her 5th month. Thank you for all your support.

We have received many feedbacks and comments from readers which help us to improve the contents of this blog and make reijb.com a place of discussion about real estate investment.

We hereby summarised some of the questions and answers which you may have missed but yet interested:

Question #1 – Fixed and floating rate mortgage, which one is better?
Last time, there are fixed interest rate home loan package available. But nowadays, this kind of offer is getting less.
Some investors pointed out that it is safer to use a fixed rate mortgage because we don’t have to worry about interest rate hike in the future, which might affect the monthly installment amount. What do you think about this?

Answer #1:
Yes, there is virtually no more fixed interest rate mortgage in the market now. But no worry, it can be a good thing for real estate investors and home buyers to choose floating interest rate in this period of time of economy crisis.
Please read “Why floating rate mortgage can be a better choice now?” for detailed discussion.

Question #2 – Is now a good time to buy house?
Is now a good timing for buying a house in JB since BLR dropped? We are looking for a house near Tampoi area. Please advise.

Answer #2:
Generally speaking, compared to months or years ago, yes, we would say now we can find more good bargains in JB. From what we have seen in the past few months since Aug 2008, the attitude of most sellers (home owners/developers/agents) have changed to become “softened”. And we discovered that more developers are throwing in those units they previously held (to jack up selling price) into the market.

Also, now we can get better offers from banks in terms of interest rate and other terms. For example, Maybank now offers shorter lock-in period (3 years) for non-zero entry cost mortgage. But according to bankers, however, loan approving rate has dropped nearly 50% since Sep 2008 due to more stringent policy adopted by banks. They are trying to secure more ‘quality’ borrowers by promoting more attractive packages.

Specifically for housing estates near Tampoi, we have yet to look into this market. However, the area is classified as one of the prime suburban areas by JB town councils. Most of the residential lands for apartments/condominiums there are lease hold mainly because of its location as the nearest industrial area to town and better traffic system. The other area that deserves such status is Larkin, but you may find less choice of houses there.

Question #3– Is there really a high-return property?
There is one big problem with the 1st scenario in “How to know if a property investment is worth investing?“. How many people have actually bought a condo for RM168,000, or even RM200,000 and manage to rent it out for RM1,400 within even the 1st 6 months? Agent fee alone is 1 month.

AFAIK a condo that is worth RM168,000 in JB or KL can only be rented for around RM1,000.

I would stand corrected if someone is able to have proven to own a property worth RM168,000 that fetches RM1,400 monthly rental. This does not include a property bought several years ago for RM168,000 but renting at RM1,400 now (in which case in the first few years there would probably be negative cash flow).

Answer #3:
Yes, not many people are able to spot such good deal from the market.
If we spend some time searching for wholesale bargains like fire sales by developers, desperate owners or bank auctions, we will be surprised by their offering prices and quality of properties.

Some apartments/condominiums in Larkin area worth RM160,000-RM190,000 now are rented for around RM1200-RM1500 (fully furnished). The unit in the 1st case was found in the same area with existing tenant from a local company. 2 weeks after we found the unit, our agent was able to rent another unit out in the same building (2 floors higher) for RM1500 within a week!

However, we cannot deny that there are many units of these apartments/condominiums currently rented below market price (RM800-RM900). They may be rented to owner’s friends or relatives or rented out several years ago.

“Seeing is believing” – that’s what we always say in the market….

Question #4 – Are rental markets of JB, KL & Penang the same?
I think your explanation about the rental market in “Will property price and rental fall further?” (that rental rate are expected to increase as more people will prefer to rent instead of buying house in this uncertain period) applies to the market in KL and Penang too. Isnt’ it?

Answer #4:
Theoretically, yes, rental markets in KL and Penang are expected to see the same things happen.

But there is one factor in JB rental market that KL and Penang markets do not have – Singapore. Within the next 6 months, Malaysian workers retrenched by Singapore firms will flow back to rent houses in JB while they look for new jobs. This may temporary create another influx of tenants to JB. The strong Singapore currency will also attract more people from the north to come and find job here in long term, just like what has happened in the last 1997 Asian currency crisis.

p/s: we further discussed our recent observation about the increased occupancy rate of certain rental apartments and condominiums in Johor Bahru in “Why apartment can be the best real estate investment?”.

Question #5 – Is inflation your friend or enemy?
I don’t really “catch” the meaning of “inflation is an enemy to all home buyers because they don’t earn income from their houses…” (in “Inflation may come back soon”)
Would you explain more details about it?

Answer #5:
Home buyers buy houses for their own stay. Whenever inflation strikes, cost of living becomes higher and higher, including the price of a new house, monthly installment of new housing loan, maintenance of house, utilities and other household expenses.

Unlike property investors who benefit from higher rental income and property prices due to inflation, home buyers have to rely on their existing sources of income to cover the increased home-related expenses.

Question #6 – Does Iskandar Malaysia project benefit property investors?
How do you think about Iskandar Malaysia project? Does it really benefit the property investor?

Answer #6:
In his latest comment on remarks made by Singapore PM Lee Hsien Leong that the republic was not competing with Johor especially with Iskandar Malaysia, Johor Mentri Besar Abdul Ghani claimed that the special economic corridor had attracted RM40bil in investments since its launch in November 2006.

If everything portrayed by the government about Iskandar Malaysia is true, it definitely benefits almost everyone in JB including property investors there. However, in the market we found more speculations rather than concrete confidence from investors. For example, price of land plots along the second link has increased tremendeously (>80%) as a result of speculators’ operation. This has also invited criticism from former Malaysia PM Maharthir because without the support from true economic activities, everything looking good now will not sustain, and eventually someone will have to pay the bill – most likely the locals will lose their ownerships of agricultural land and tax payers will have to repay additional natioanal debts incurred by unnecessary infrastructure projects.

Investors are realistic players while speculators are gamblers.

Question #7 – Why prices of some properties never go down?
I see that supply > demand in JB property market due to many housing development projects, but price of properties never go down.

What is the reason behind this?

Answer #7:
Property price of new developments may not easily go down as developers have to meet their break even points. Unless they are really in deep trouble. So we see a lag effect compared to resale/sub-sale market.

Certain resale properties in JB like high-end semi-D, condominium, bungalow and land are mostly bought by cash-rich buyers such as wealthy Malaysians and foreigners (Indonesians and Singaporeans). They have the holding power and normally do not like to let people take advantage from their properties when the market is bad. Sometime we can even face difficulty to find such properties in bad time.

Properties that reflect instantly the effect of supply and demand are those bought by middle and low classes in the resale market.

Question #8 – Why strata title is not issued yet for a completed project?
Regarding Wadihana, I was told that though it was completed more than 15 years ago, strata title for individual unit has yet to be issued and that the owners are now in dispute with the developer over it for the developer is dragging its feet. Is this true?

Answer #8 (contributed by goBetong):
If strata title is still outstanding after 15 years, the property is not worth any consideration. Either (i) the developer is intentionally irresponsible and to his advantage, keeps dragging the title application it to enable them to control/manage/continue to make monies from the properties or (ii) that the developer is still owing $ to the bank and is unable yet to redeem the master title or (iii) the property is not constructed to specification, CF is temporary. Whatever the scenarios, it stinks to seven heaven. Why anyone of sound mind would want to invest in a property w/o title and which, is not outrightly his is beyond my comprehension.

Question #9 – Does a property with average rental yield or capital rate guarantee a cashflow investment?
For example, i buy an apartment at $200k with 10% down-payment of $20k, 90% with mortgage loan (interest rate 6.5%) of $180k with $1100 monthly installment.

if my capital rate is 6%, i manage to get monthly rental income $1000.
in fact, i invest $20k then getting -$100 cash flow.
please advice.

Answer #9:
Yes, you get a preliminary monthly cash flow of -$100 before other expenses like tax, repair, insurance, etc. (with 30 years of tenure for your loan)

Here we can see how high interest rate (6.5%) can turn a so-called high rental yield (6%) investment into a negative-cashflow deal.

In fact, even though now we can get lower interest rate at around 4%, which reduces the monthly installment to $860, a $200k apartment rented at $1000 is still not considered as a positive-cashflow deal if its monthly maintenance fee is above $140.

(If you’re not already a subscriber to Real Estate Investment in Johor Bahru, subscribe here to receive our FREE latest update and articles via email.)

We write regularly about real estate investment. Some of our featured articles include:
“How to find good real estate/property agents?”
“What must you know before buying auctioned properties?”
“Where to find cheap properties?”
“Should you invest in real estate through a company?”
“How important is location to an investment real estate?”

Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

Real estate investment Q&A #1

Why real estate is a good investment?

ongkl — Wed, 11 Mar 2009 22:26:10 +0000

photo credit: C.P.Storm

Of all possible investments that are within the reach of the average investor, none ofter the combination of outstanding benefits that are available to real estate investors. And, do you want to know something, banks and life insurance companies recognise this fact!

So they invest your money in real estate. While they pay you 1 to 3 percent for the use of your money, they are making 10 to 20 percent on it.

Why is real estate such a good investment? It offers the investor at least five different returns or ways of making money, on his investment.

Gross spendable income – cash flow
Investors also refer to this as “cash flow” or how much money that you can spend at the end of the month or year after all the operating expenses and mortgage payments have been made. We also call this as “gross” spendable because we have not taken income tax consequences into consideration at this point.

We always purchase properties that cash-flow. It takes time to find them, but it is well worth the effort. The simplest definition of positive cash flow is that you collect more revenue, usually in the form of rent, than it takes to pay for and operate the property.

A big advantage of real estate over other investments is that it can produce cash flow on a monthly basis. The cash generated by a real estate investment will always be a much larger percentage cash-on-cash return than any other investment.

The beauty of a cash-flowing real estate property is that it can help you become financially free. We discussed two real life examples of such real estate property in How to know if a property investment is worth investing?

photo credit: Tracy O

Equity income
This is also referred to as equity buildup or principal reduction. Anyone who has had a mortgage on a home or car recognises that each time a payment is made, a certain portion of that payment is for the interest charged by the lender and the balance goes toward reducing the balance on the loan.

In a real estate investment, this equity income can be a sizeable amount. Although you cannot spend it each month, when the time comes to sell your property, you owe less on the mortgage, so you will receive more money at closing. It’s like putting money in the bank each month.

Making inflation work for you instead of against you – appreciation
Like inflation, you do not see it but it’s there. Only now, it’s working for you instead of against you. How does it work? Each year, because of inflation, your real estate is appreciating in value. Those of you who own a home, for example, would you sell it today at the same price you paid for it five or ten years ago?

We keep on having babies but God quit making land a long time ago. The supply is limited.

What does this mean in terms of existing land values? It means that existing land is becoming more and more valuable each year. It explains why investment real estate, whether in single family homes, apartment buildings, office buildings, shopping centres, ware houses and even vacant land, has become the most secure and profitable way to beat inflation. Existing land in most parts of the country, is appreciating at a rate greater than that of inflation.

How real estate stacks up against other investments – leverage
Leverage is an interesting thing about investing in real estate. It’s more than likely you have heard the term Other People’s Money, or OPM. The concept is simple and powerful.

The OPM concept is using money generated from someone or something other you in order to start a business or acquire an asset. While it is true that you can do this to an extent with stocks through buying on margin, the fact is that there is no investment where the application of this tool is more powerful than in real estate.

In real estate the leverage is based on the asset itself and you can get a bank to loan you the money up to 90 percent, and sometimes even 95 to 100 percent, of the total asset value. Why do banks do this?

Because they can repossess the physical asset itself should you default. Buying stocks on margin, however, allows you to borrow no more than 50 percent of the stock portfolio value. Just try to get bank to loan you the money for buying stocks – let alone your margin! Instead, you have to buy through a brokerage – at a high interest rate. In other words, when you buy stocks on margin, you are taking the risk. But when you take out a loan to buy real estate, the bank is assuming the risk. – Ken McElroy in “The Advance Guide to Real Estate Investing”

You can see the power of leveraging demonstrated by real life cases in our previous article Why you want to take up a loan for your real estate investment? No other form of investing allows an investor the opportunity to control so much with a small amount of his own cash.

We further discussed in How to finance your real estate investment for maximum return? the ways to structure a mortgage loan in order to get the maximum return from your cash investment in real estate.

photo credit: lumaxart

An investment that allows you to control
A unique advantage to real estate is that you can control it. In other types of investments, you give your money to a financial advisor and they place it for you in a company’s stock, a bond, or a mutual fund. What happens after that is completely out of your control. You have no ability to make operating decision for the company you have invested in; you are at the mercy of its managers.

Similarly, you have no control over financial markets when you purchase bonds or futures. You make a calculated guess, and then you sit back and watch. With these types of investments, the only control you have is choosing whether to buy or to sell.

Real estate is different. You purchase a tangible asset and you manage it. While there are still external market conditions that affect your investment, the difference is that you have the ability to manipulate the operations of your investment to respond to those conditions. Instead of being reactive (buying or selling), you are being proactive.

For example, if you are a landlord, you have the ability to manipulate rents based on changing market conditions in order to maximise income. This doesn’t always mean raising rents. The goal is to maximise income. Since it is a dynamic process, that might mean lowering rent or offering an incentive. A property’s occupancy comes into place here.

If you have the highest rents in a market, chances are potential tenants will rent from a direct competitor. Then all your high rents become lost potential income. The dynamic of real estate require you to keep occupancy, as well as rents, high.

You have the power in real estate to control the operational performance of your asset more than any other investment.

(If you’re not already a subscriber to Real Estate Investment in Johor Bahru, subscribe here to receive our FREE latest update and articles via email.)

We write regularly about real estate investment. Some of our featured articles include:
“How to estimate the value of a property?”
“How to find good real estate/property agents?”
“What must you know before buying auctioned properties?”
“Why apartment can be the best real estate investment?”

Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

Why real estate is a good investment?