Property details to check before you buy an investment property

photo credit: lemonjenny

You have located the investment property that you feel has what you want. Before you get involved with the detailed analysis of income, expenses and financing as discussed in our previous articles “How to know if a property investment is worth investing?” and “Why you want to take up a loan for your real estate investment?“, you need to find out more about it. Although our property investment evaluation tool (which you can download it free when you subscribe to our newsletter) contains most of the items that are of interest to you, let’s discuss some that are not on the analysis, and see why they are important.

Age of the property
When the property is older, repairs or appliance replacement expenses may be expected in the near future. This should be taken into consideration in the price you are willing to pay for the property. Do not pass up an older building just because some repairs or replacement are needed. Those expenses can be written off through tax deduction. Assuming you are in a 28 percent tax bracket, for example, you are only spending 72 cents for repairs – Malaysia government is contributing the other 28 cents. This makes the cost of repairs quite inexpensive.

For example, say your taxable rental income of a new investment property is RM1000. You are supposed to pay a tax of RM280. But you spent RM100 for repairs when you first bought the property. Now your taxable rental income become RM900 and the tax you need to pay is RM252. The RM28 saving in your tax is exactly a 28% discount on your repair cost!

Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

Rental history
Look at a property that is a few years old. Has it enjoyed a high occupancy level over the past few years? What happened to its occupancy or rent level during the period of economic slowdown?

There are three easy and inconspicuous ways of finding out whether or not the building is fully leased. We stress inconspicuous because you do not want to alert the tenants that something is going on (we discussed this in “Don’t do this if you want to find investment property on your own”),

1. The least accurate check is to look at the mailboxes. Blank slots may indicate vacant apartments.
2. A more accurate check is to look in the meter room where each apartment is individually metered for electric. See how many meters have been turned off by TNB, indicating those apartments are unoccupied.
3. The final check is designed for the night owl. Drive by the building at three or four o’clock in the morning and see if the parking spaces are filled. This test won’t work during the day because most of the tenants are usually gone. You can also observe how many units are lit on after eight o’clock at night if you don’t like to be a night owl.

This inspection also gives you an idea of the quality of tenants in the building. When the parking lots are filled with motorcycles, for instance, don’t expect the building to be occupied by wealthy, retired people.

Neighborhood
What kind of properties surround the property you are considering acquiring? Is yours the only well-kept building on the street? You may have trouble keeping it that way. Deteriorating areas are usually followed by difficulty in renting apartments and, therefore, vacancies climb.

Building condition
What is the physical condition of the building? Your sell and purchase agreement (SPA) may give you, at your expense, the option of having at least a termite inspection made by a licensed inspector. Are the apartments well maintained? This will not only tell you what repairs you may be facing, but will also give you an indication of the type of tenants that are renting the apartments.

Amenities
Amenities such as clubhouse, swimming pool, tennis courts, and laundries affect how you’re your property can compete with other rentals in the area. Major amenities, such as tennis courts and swimming pools, however, may not be justified on smaller complexes because in return the management cost and sinking fund required may be relatively higher.

Parking
In today’s society, parking has become a serious problem. Almost every family in Malaysia has at least one car. Unless the building you are considering has at least one parking space for each apartment, plus a proportionate number of “visitor” parking spaces, you’d better think twice. Two parking spaces per unit are desirable, but not necessary.

If the complex is situated on a mojor street, do all or part of the parking spaces front on the street? If they do, what happens to your parking if the street is widened?

Furnished or unfurnished
There is something to be said both for and against furnished apartments. First, the good news. Furnished apartments usually demand a higher rent.

For the bad news, furnished apartments deteriorate more quickly. The furniture will not last too many years and tenants will not be as careful with your furniture as they are their own. Tenants in furnished apartments tend to be less stable. It’s easy for them to pack up and move, so they do. A tenant who has to hire a moving company will probably think twice, unless circumstances other than finding a better place for less money are his motivating factors.

These basic details concerning the property you want to purchase will add to your evaluation of the investment. You are now ready to gather the income, expense and financing information from the seller and make your own analysis of the property to determine how much you can afford to pay for the investment property that you wanted.

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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?”

(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.

Related posts:

1. Why apartment can be the best real estate investment?
2. How to increase the return of an investment property to more than 20%?
3. How far away should your investment property be?