How to know if a real estate investment is worth investing?

Kicking off the evaluation process is the toughest for us. Question after question kept popping up

• “Is the property market low enough?”,
• “Is this property worth considering?”,
• “Are the numbers the only criteria for investment?”

What are we really looking for in real estate investing?? Quick bucks $$ or Regular income….

Bottom-line = Money!!!

Property Agents have tons of recommendations for YOU! How will you know whether they are good investment for you?

There are many factors that need to be considered in evaluating a real estate investment. For example, location, environment/neighborhood, facilities, financing options, rental income, etc. If all above works, it is time calling your agents and set up appointments. Happy Viewings!!!!

Actually it is not difficult and it does not need much of your time to know if a real estate investment is worth investing in the first place. All you need is crunching some numbers with your calculator, and Bingo! You can decide whether the property is worth investing.

Later in this article, we will show you how these numbers work in your prospective real estate investment by two real life cases in Johor Bahru.

Numbering GAME
Numbers, numbers and numbers.. How do you get them?

You may try calling a few property agents, check with banks on properties valuations and of course there is plenty of information on the Internet. Once you have these numbers you can determine if a real estate investment is worth spending your time for a viewing. “Seeing is Believing.” Check out the property to see the actual condition and the environment, whether it is to your liking once you get your numbers RIGHT! Once you get your numbers, you will see:

Incomes
One-time income – selling price
Regular income – rental price

Costs
One-time expenses (startup costs) – down payment, agent’s brokerage, legal fees, stamp duty, furnishing cost, etc.
Regular expenses (monthly costs) – monthly loan repayment, monthly maintenance fee, quit rent, property tax, etc.

See how they (Numbers) work..
The basic requirement for a good real estate investment is that the income it generates must be more than its costs.

If the selling price of a real estate investment is more than its purchase price and startup costs, this investment generates capital gain.

If the rental income of a real estate investment is more than its monthly expenses, this investment generates cash flow. To find out more about the importance of cash flow and how it will lead your way to the road to riches you can visit KCLau’s Money Tips or read KCLau’s new book Top Money Tips for Malaysian.

If you are looking for capital gain, the gain or loss depends very much on the real estate market. Hoping to make money from capital gain on real estate is like buying a product and hoping the value of the product will go up with time. On a long term basis, real estate will be appreciating in value because of inflation, but the gain is not guaranteed.

On the other hand, a real estate investment that generates cash flow effectively put money into your pocket every month, while your equity in the real estate investment increases over time. This is the real estate investment that we are looking for – an investment worth investing.

Too good to be true?
With this economic crisis, you will ask yourself, “Is it the RIGHT time for me to start investing in real estate? Everything is so uncertain NOW.”

In Johor Bahru, you can find plenty of real estate investments worth investing at this juncture. We discovered most of these investments that generate substantial cash flow are mainly apartments or condominiums. You can read from our upcoming article to know why apartments or condominiums are better real estate investments in Johor Bahru. Here are two recent real life cases of real estate investments worth investing in Johor Bahru.

Case 1: We found a condominium in Larkin area of Johor Bahru in Octorber 2008 selling at RM160,000 with existing tenant. Monthly rental income is RM1400 while monthly maintenance cost is around RM300 (maintenance fee plus sinking fund plus quit rent).
If we finance 90% of the purchase price to buy this condominium with interest rate 4.85% with a tenure of 30 years, monthly loan repayment is estimated to be RM760. Thus, this condominium is generating a net cash flow of RM340 every month, RM4080 every year.
Total capital outlay for this investment is RM24,000 for down payment including other startup costs like legal fee and brokerage. Effectively this investment gives us a yearly cash-on-cash return of 18.5%. In other words, within 6 years we would be able to take back our capital RM24,000! The best thing is we still own the condominium. It will keep putting money into our pocket every month. We also have the option to sell it away when the market is good.

Case 2: There is a 3-rooms apartment in Tampoi sold at RM125,000 in October 2008. Monthly maintenance cost is about RM150. If we finance 90% of the purchase price with interest rate 4.85% with a tenure of 30 years, monthly loan repayment is estimated to be RM600. Expected rental income for a fully furnished apartment in the area is about RM1200. With furnishing cost of RM10,000, total capital required for this investment is around RM27,000, while total monthly cost is RM750. The apartment is expected to generate a net cash flow of RM450 every month, RM5400 every year.
Cash-on-cash return on this investment is 20% which we can expect to take back all the capital within 5 years.

Sound interesting right?
Of course, so far we are only talking about numbers. A good real estate investment does not rely on purely numbers. You still have to go and have a look at the building structures, study the location and neighborhood, and perform other checks before you make your decision. What we have discussed, however, can save you time and give you more ideas on the potential returns of a real estate investment before you tell your agent which real estate you want to view in the coming weekend.

You may notice that in the real cases that we mentioned above, when come to financing we chose the loan amount of 90% on the purchase prices, interest rate at 4.85% and a tenure 30 years. You may wonder on what basis we use these numbers to get the monthly loan repayment for a real estate investment. Monthly loan repayment is the major cost of your real estate investment and investing in real estate is all about financing.

In our upcoming article “How to finance your real estate investment for maximum return?” we will discuss about how to finance your real estate investment in order to get the maximum return. SO STAY TUNED! (If you’re not already a subscriber to Real Estate Investment in Johor Bahru, enter your email address in the box beside this article and subscribe to receive our FREE latest update via email.)