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How to sell your property?

ongkl — Wed, 05 Aug 2009 22:35:04 +0000

Once the determination has been made to sell your property the next consideration is how to go about it. Remember when you purchase the property? You were convinced that the seller was trying to make a killing and had the property priced well above its fair market value.

Well, now the shoe is on the other foot. Now you are the seller and any potential buyer will feel that you are the one trying to make a killing. He can, as you did, find out exactly how much you paid for the property by performing land search at the land office.

How much should you sell
Perhaps I should clarify something at this point. It was suggested that you check the records at the land office and find out how much the present owner paid for a property. You discovered Mr. Seller would make a $70,000 profit at his price. Likewise, the potential buyer you have can find out that you expect to make a $40,000 profit in just five years.

The point is, do not judge a property’s value by how much profit you are willing to allow a seller to make. Remember, the value of an investment property is in direct proportion to the income it is producing (read “How to estimate the value of a property?”). I might add, that is the income it is producing today, not what it is capable of producing a year after you buy it provided you can increase the rent.

Knowing how much the present owner paid for the property may be some help in your negotiation, but has little or no value in determining what the property is worth today.

How to find a buyer for your property
You can try advertising your property yourself, but you may consider listing it exclusively with a knowledgeable investment property agent in order to obtain best results. He has the leads and contacts that you may never be able to locate on your own.

Why “exclusive”? It seems to be common practice in most areas for sellers to give only an “open” listing when he the seller is still free to offer it to other agents or sell it himself without paying a real estate professional fee (commission). Most investment property agents will shy away from this type of listing, or at least give it a very little attention.

Why? Because they have virtually no protection. They may locate a buyer and show him the property, complete with all the detailed information on the investment, which they have spent considerable time preparing. The next thing the agent knows is that the buyer has contacted the seller directly and made a private deal, cutting the agent out altogether.

If you decide to employ a property agent, be honest with him. A good one is well worth the fee he is paid. I apologise for a “plug” for the investment property agent, but you would be surprised at the number of beginning investors who make costly mistake due to lack of knowledge of investment real estate. But still, you can learn to “do it yourself”.

Selling it yourself: tips on preparing advertisement for your property
You will no doubt receive many calls on your “For Sale By Owner” ad. Chances are 90 percent of them will be from real estate agents looking for a listing. If you decide to cooperate with an agent on an “open listing” basis, do not spread your property all over among several agents.

Pick one or two that are qualified to represent you in a professional and ethical manner. Do not be attracted by the usual come-on, “I have a buyer for your property.” We all have “buyers” for well-priced investment real estate. You do not want a lot of brokers running around your property, so any broker cooperation should be on a confidential basis.

Several things you need to know about the ad that you run on your property:

1. Never put the property address in your ad. You will have a parade of cars past your building and may never hear from one prospect. Once he knows the proce and location, he can make a judgment as to the property’s value without your help. In most cases, his judgment will tell him that the property is overpriced. You also want to keep your offering reasonably confidential from your tenants as well.

2. Do put the price in your ad. This will eliminate calls from unqualified buyers.

3. You can advertise “low down payment”. “low interest mortgage”, “excellent terms available”, etc., as long as the price is the only number that appears in the ad.

4. Make sure your headline attracts the readers and compels them to read the remainder of the ad. If they skip the headline, they’ll never call you. The mere heading, “For Sale By Owner” always attracts attention. The average buyers automatically figure they can buy at a bargain price because there is no real estate fee (commission) involved.

5. Do not try to save a couple of dollars by cutting an ad short. Paint a mental picture that will attract an interested investor.

Which of the following two typical ads for an apartment would prompt your response?

For Sale By Owner
Apartment – Good Area
Priced at $230,000
CALL: 1234 5678

_________________________________________

OWNER MUST SELL!
High Income Producing Apartment
Bldg in Prime Rental Area
Beautifully Landscaped
Close to Shopping yet in a Quiet Neighborhood
Priced at ONLY $230,000
CALL Owner at: 1234 5678

Both ads are short, but the second should have more emotional appeal, and hopefully, attract some serious callers. No doubt the first question you will be asked is “Why must you sell?” you can honestly tell the caller that you are purchasing a larger property.

Try several different types of ads until you find one that attracts callers.

(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:
“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

How to sell your property?

How to negotiate the purchase?

ongkl — Thu, 23 Jul 2009 22:39:05 +0000

photo credit: moron noodle

Purchasing real estate is an unique experience. Even the most experienced investors like to “haggle” or negotiate the price. Before entering into a formal offer to purchase the property you have selected, you need to understand what will probably happen when you start to negotiate and what you need to prepare in order to get what you want.

Prepare yourself
Now, you are ready to buy the property that fits your needs. Where do you go from here?
Assuming this is your first investment purchase, consider using a knowledgeable investment Realtor to assist you. Purchase contracts can be tricky.

It is interesting to note how some investors feel it is wise to negotiate the purchase of investment real estate without professional help, even though they are probably about to spend the largest sum of money in their entire life. And yet, they will call a mechanic friend to look at a used car before they buy it to certain it’s a good deal for the price they are paying.

The first step in negotiating a purchase is to determine exactly how much you are willing to pay for the property and under what terms you want to pay. We have discussed some basic techniques that help you to prepare yourself in our previous posts (“How to find good real estate/property agents?”, “How to estimate the value of a property?”). However, there are always outside factors that enter into a possible modification of your purchase criteria.

Know the market
First of all, you must get a “feel” for the market. What are comparable properties in the area selling for. When you are in a seller’s market, where prime investments are difficult to find and buyers, your competitors, are plentiful, you may have to revise your minimum standards for purchasing.

Remember, while you are deciding what is best for you as a purchaser, the seller is deciding what is best for him/her as a seller.

Generally speaking, you hope to meet somewhere in the middle. You may go into a property negotiation hoping for a 10% cash return. The seller may has a price on the property that will only give you a 5% return on your investment.

You then try to reach a happy medium with him/her, one that you both find acceptable and you both can live with. Neither you nor the seller can expect to get everything you both want. This is the reason for determining your maximum acceptable price and minimum acceptable terms before you meet the seller face-to-face.

If he/she doesn’t get within reasonable range of these terms, don’t give in and buy anyway. You may be sorry later. Again, I must emphasise that you must be realistic in your request. You may end up with a little less than you hoped for, but do not lose sight of two facts:

- Fact #1: you have chosen this as your first priority investment. it was better than any other you have been able to find.
- Fact #2: even at a higher price or terms somewhat less than you hoped for, how will it stack up compared with your present investments?

How much should you offer?
It is customary to assume that any seller has “padded” his asking price to allow for negotiating with a prospective buyer. It is also customary for a buyer to make an offer below the price he expects, and is willing to pay. With this in basic unwritten law in mind, you need to determine how much you should offer.

Never offer full price, unless the property is such a “good deal” that it is well worth what the seller is asking and you have been told by him/her that he will not negotiate on the price.

Conversely, a “low ball” offer, one way less than the listed price, may not be taken seriously by the seller. Unless he/she is highly motivated to sell, he/she will probably be insulted by an obvious attempt to “steal” his/her property and you may not get a counter offer at all.

When this happens, the buyer will have a difficult time getting the seller to consider another, more reasonable, offer. He/she might as well start looking for another property.

So, what should you offer? Assuming the property s priced fairly close to fair market value, try 5 to 10 percent less than the listed price. Your offer should be such that the final price you will accept is halfway between the listed price and your offer.

For example, assume you are willing to pay RM240,000 for a condominium, which are being offered for RM250,000. Your offer will be RM230,000 or about 8% below the listed price.

Keep in mind that this is a rough rule of thumb. Circumstances may dictate an even lower offer. These could include:

- A highly motivated seller – he/she must sell;
- Distressed or problem properties; or
- An offering price far above current, comparable prices in the area.

In any event, make an offer and be prepared to negotiate with the seller. That’s half the fun of buying investment real estate. You may even end up paying less than you expected, but you won’t know unless you try.

(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.)

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 negotiate the purchase?

When you should sell your property?

ongkl — Thu, 16 Jul 2009 22:34:44 +0000

photo credit: samismail

How do you decide when it’s time to sell your property?

The average individual has an annual physical examination to check up on his physical condition. Your investment, like you, needs an annual check-up to ensure it is still functioning well and is healthy.

There are four possible motivating factors, any of which will tell you it’s time to get out of you present real estate investment and into another.

Incurable problems
If you are experiencing problem that you cannot cure, it is probably the time to sell. Hopefully, this will not happen because your chance for realising appreciation on the sale will also be affected by the problems your property is experiencing.

These problems include such things as a deteriorating neighborhood, major expenditures needed to upgrade the property, or continual vacancies due to an abundance of more desirable rentals in your area. Each of these problems could have been avoided by carefully locating an investment.

Changes in goals or situation
Investors may decide it is time to sell because their investment criteria have changed. They may be ready to retire and take life easy. They may want to make one last change in properties and structure it to give a lifetime steady income. Equity buildup may no longer important to them. Their heirs will have the concern.

Perhaps something has happen in their lives that has made a change in their investment goals and the present property does not fit their long-range investment program. They may be tired of rental apartments and want to try a small office building or shopping center. Perhaps they have suddenly changed jobs.

Whatever the reason, investors from time to time have logical reasons for an investment change, and I stress logical.

Profit
Assuming you have been giving your investment and annual check-up, you have probably noticed that your property is worth considerably more than you paid for it. This fact really hits you when the property next to yours sells for almost twice what you paid for and you “know” that yours is a better property.

At this point of time, you may want to rush out and sell it, since there is no capital gain tax in Malaysia on your big profit. However, if you still want to own the property, you may consider refinancing it and taking some profit out of it.

Increased equity but decreased return
The remaining reason for selling your property is the result of a large increase in equity brought by a combination of appreciation and mortgage principal reduction. This is where many investors make a drastic error in analysing their present position in their property.

Once you include your equity buildup and mortgage reduction into the calculation of your return on investment after the first year, if your total return continue to diminish each year, this will be an excellent indication that it’s time to sell. We will further discuss this analysis with example in another post.

In short, you should consider selling or exchanging your property when any of the four reasons are affecting the return you are making on your invested capital.

(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?”

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

When you should sell your property?

Top six tax deductions for landlords

ongkl — Wed, 27 May 2009 22:34:02 +0000

photo credit: amishsteve

No landlord would like to pay more than necessary for utilities or other operating expenses for a rental property. But, every year, millions of landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available for owners of rental property.

Rental real estate provides more tax benefits than almost any other investment. Often, these benefits make the difference between losing money and earning a profit on a rental property. But tax deductions are worthless if you don’t take advantage of them. Here are the top six tax deductions for owners of rental property.

1. Interest. Interest is often a landlord’s single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property. In Malaysia, from 2009 to 2011, this tax benefit has been extended to the mortgage interest of your first home. However, interest payment on mortgage refinance loan is not deductible for both rental property and home.

2. Repairs. The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

3. Insurance. You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers’ compensation insurance.

4. Legal and Professional Services. You can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

5. Employees and Independent Contractors. Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

6. Casualty and Theft Losses. Finally, if your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called “casualty” losses. You usually won’t be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

(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.)

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

Top six tax deductions for landlords

Auctioned Property List Monthly Update

ongkl — Tue, 19 May 2009 22:39:18 +0000

photo credit: Robert S. Donovan

Do you know that REIJB.com now updates all subscribers every month with the latest auctioned property listings from more than 10 banks?

We have sent the first update with more than 80 auctioned properties in Johor to subscribers in mid of May. We then followed up with a recommendation of auction unit at Sri Wangi apartment. Do you still remember this apartment in our case study that we shared previously, on how we manage to increase the return of a property investment to more than 20%? Read “How to increase the return of an investment property to more than 20%?” if you had missed it.

June’s update has been distributed in the last week of May. We continued to recommend good auctioned properties to subscribers when we have encountered any. (If you’re not already a subscriber to REIJB.com, subscribe here now to receive FREE auctioned property updates and our latest articles via email.)

If you are new to property auction, you can find out more from “What must you know before buying an auctioned property?”.

Thanks to our appointed real estated agents who provide these updates and service to our subscribers FREE. They are agents with years of experience in property auction. Currently they are appointed by more than 10 banks as their agents of auctioned properties in Johor Bahru.

What can you do when you found something from our lists?
You can contact the appointed real estate agent stated in every update when you found any interested property from our listings. They will assist you through out the whole process of auction. You can even authorise them to bid for you if you are not free to attend the auction. Simply give the reference number of the property to them to find out more details about the property and the upcoming auction.

All these services are FREE to you as these appointed agents receive commissions from banks ONLY should their clients successfully bid a property. No charges and fees are required from you!!!

For property which its auction date is already due, you may check with the agents if there was any successful bidder in the previous auction. If the property is still available, find out the next auction date from them because the new reserved price will be 10% lower than the last reserved price!

We will soon expand this service to auctioned properties in Klang Valley and Penang.

Happy investing!

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

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

Auctioned Property List Monthly Update

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

(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.)

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

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.

(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.)

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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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%?

Free eMoney Tips ebook (April 2009 Edition)

ongkl — Thu, 16 Apr 2009 22:20:46 +0000

We proudly recommend the FREE first edition of eMoney Tips ebook to you. This is the baby of the first group writing project in Malaysia contributed by personal finance bloggers, practitioners, and even some readers of blogs. It shares the ideas and tips of personal finance such as wealth creation, insurance and investment.

We feel honoured to have a chance to publish one of our articles in this ebook.

Thanks to all the contributors especially KCLau (Founder and Organizer), Ken Neoh (Cover Designer) and Yow Chuan (Editor), who have made the project a success. Click here to download the ebook for FREE.

These are the contents of the ebook:

Creatively Invest Your Money by Amey

Investment diversification is a genuine financial “free lunch.” by Larry

8 Great Tips to Make Your First Million by Jacquelyn

Renting a Property by Mohd Fauzi Puniran

10 tips to stay poor (or things to avoid) by Bob

Turbo Charging your Financial Transformation by Father Sez

10 Ways How to Make the Recession Works for You by Yow Chuan

How To Survive in a Bear Market by Tushar Mathur

How to Find a Good Financial Advisor by The Financial Blogger

Gold Investment In Malaysia by Carson Ding

How to know if a real estate is worth investing? by OngKL

Is It Alright that We Buy Insurance Only After We Get Married? By Loke Cheng Leong

Accounting Loss vs. Real Loss By Jadelynn

Budget by saltlamp2u

Why do Rich People commit suicide during recession? By MTSen

All Money Made is Equal by KCLau

Read comments about each article here.
If you want to participate in this project or find out how you can benefit from it, read more about the project here.

(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.)

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

Free eMoney Tips ebook (April 2009 Edition)