Real estate investment Q&A #1

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.