If you are still a newbie and you would like to get started in investing in properties in Malaysia, you are probably wondering what should be the first type of property that you should buy. You might have heard that real estate investing is one of the best places to invest your money in, but you do not really know what type of property to buy. You may not yet be well aware of the different types of properties that there is in the market and you may still be groping your way through it. And being a beginner in the field, what could be the safest type of investment that you will be able to handle well?
This is a common concern with those who want to start investing in real property and of course the answer is really simple to the question: What type of property to start with? I will say that the first type of property that you should start with is the residential income property and we are going to talk about this in detail.
Residential Income Property
So what type specifically of a residential property should you start with? Well I suggest that you start with a single-family home. You can buy an apartment, a condominium, a low cost flat, or a terrace house whether a single, double or triple story type. If you are thinking in terms of appreciation, terrace houses are the ones that appreciate in value more than the other mentioned types of residential properties. But if you were looking for a greater rental income, the best option would be a low-cost flat and also an apartment. But of course a low-cost flat is not available to everyone unless your income is really low and you can buy only one such property.
The Advantages of Investing in Single-family homes
1. Higher liquidity
So what is the advantage of investing in single-family homes? The first is that single-family homes are very easy to sell. You may wonder why it is easy to sell. Well the answer is that the demand is always there. You see, if you would like to sell it, such as when you are desperate to sell it, you can always find a buyer for it, which gives you high liquidity when taken in this sense. If you compare it with stocks and other types of paper assets, apparently properties are not as liquid. But if you compare it to other types of properties, single-family homes have a higher liquidity. They are very easy to sell.
2. Stable tenants
The second type of advantage is, when you rent out a single family home, you get stable tenants. There are two types of tenants for this type of property. The first is the responsible family type, which is comprised of a couple and their kid or two. These types of families are usually very responsible when it comes to paying their rent. The second type of tenants is the singles or students or maybe a group of them. But if you are thinking of getting a more stable income, my advice is that you take the responsible family type.
3. Easy financing
The third reason for choosing single-family homes is that they get easy financing. This is because, in Malaysia, the government encourages its citizens to have their own home and banks also easily provide loans for this type of investment. Everyone should have at least a roof over his or her heads. This is the reason why it is very easy for you to get financing. You can borrow up to 90% of the house’s value and sometimes you can even get 100%, depending on how you structure it.
4. Easy to rent out
The fourth reason is that it is very easy to rent out. Why do I say that? I say that it is easy to rent out because there is always a ready market for this type of property. We all know that everyone needs a place to stay. So I can say that this type of property will be very easy to rent out.
You can compare this situation to the relationship between a patient and a pharmaceutical industry. Let us say that the patient is suffering from diabetes or hypertension. He will need to take his medications regularly. Each day, he would need to take a pill or two depending on the severity of his illness. He needs to take it non-stop and the pharmaceutical company would definitely love this type of patient. Why? Because they would need to take the medicine on a subscription basis; they will pay regularly or monthly for their medicines. They produce a steady and increasing income for the pharmaceutical company.
This is the same situation with single-family homes. Those who could not afford to buy and own their own home will need to rent. They need to rent regularly just as much as the patient would need to buy his medication regularly – because they have to. It is a basic need and they have to find a solution to that need. Although this may not be the only reason for people to rent, as there are a lot of other reasons, this can be said to be one of the major causes for renting homes. When property prices are skyrocketing and more and more people cannot afford to buy them, they will be forced to rent. When this becomes the situation, there will be more demand for single-family homes. They will be renting at least for one or two years until they can afford to buy their own home. So this is why I say there is a constant demand for single-family homes.
5. Low down payment
The next advantage of having this type of property is that there is a very low down payment for the acquisition of this type of property. This means that you need lesser capital to get started on this type of investment, aside from the fact that you can easily get the financing for it.
6. Growing demand
Another reason for buying a single-family home is that it has a very strong demand. I would like to show you a population statistic in Malaysia from www.statistic.gov.my. The Malaysian Population Clock shows that there is currently an approximate of 29 million people living in Malaysia. This is based on the assumption that
- there is one child being born every 58 seconds;
- 1 death for every 4 minutes and 36 seconds;
- 1 gain on net migration every 5 minutes;
- and the general increase of 1 person in the population every 56 seconds.
The other statistic that I would like to show you is the rate of urbanization in Malaysia. Approximately 72% of the population in Malaysia in 2010 lived in the cities. The rate of urbanization in Malaysia, meaning the number of people from rural areas coming into the cities, is about 2.4% annually. So if you were thinking of buying a home in a growing town, definitely the demand would be there. The last advantage of buying a single-family home is, and this is really a good advantage, that it is a form of an enforced saving program.
7. Enforced Saving Program
If you buy a house and get into a mortgage plan, you are forced to pay the mortgage every single month – whether you have a tenant or not (but of course the best situation for you is to have a tenant) – which is similar to having an insurance endowment plan. Having a family home investment is effective in forcing people to save money. It is like having a child and he is, let us say about 1 year old, and you want to save a lot of money for his education in the future maybe 18 or 20 years down the road. So what most people would do is to buy an education plan for their children. So, they are forced to save money for their children. Of course if you stop along the way when you are paying for insurance, most people would lose the money. So then, they are then forced to pay for them. I would say that if you invest in this type of property, it will give you an enforced type of saving program: you will be enforced to save money in order to pay for the mortgage, which will result to having your equity growing every time which is a good thing. So these are the reasons why you should buy a single-family home as your first type of investment.
Single-family Home Specifications
Let us talk a bit about the specifications. My advice is that you don’t buy houses that are too big; don’t buy a bungalow. Larger types of houses are not very practical when you are just starting on real estate investing. Just buy a house with two to four bedrooms. Two-bedroom types of property are suitable for one to three persons only. This would fit with newly wedded couples or those with only one child or a baby; a couple or two adult friends with each one using one room. I would say however, that this would have a lesser demand than when you have three to four bedrooms.
With the slightly bigger type of property you will be able to accommodate four persons or more and is ideal for smaller sized families. In Malaysia, the number of children born in a single family is about two to three so most of the demand would be for houses with three to four bedrooms. This is considered as medium-sized families, which is more common in Malaysia. This type of house is also good for a group of friends, colleagues or schoolmates. The house should also have at least two or more bathrooms. The more, the better and of course you can also command a higher price with the additions.
The ideal size of floor space is about 1,000 to 1,800 square feet. If you are planning to buy a property in a somewhat crowded area, you may not be able to afford this size. So, you can opt for a 600 to 800 square feet property but these are only for those who are in a really, really crowded city areas.
Since the public transport systems in Malaysia are not really well planned, a lot of people have their own cars. This requires you have more car park lots in your property. You should have at least an area enough for two cars and the more space that you have the better. This will appeal to potential tenants as they provide something that they are really in need of. The more that you are able to cater to what people need, the more would be your chances of getting a lot of tenants for your property. Aside from that, they will be willing to pay for a higher rent seeing that your property provides them a lot of favorable benefits.
Risks of investing in Properties
1. Interest rates hike
Of course all types of investments involve a lot of risks. So what are the risks of investing in a single-family home? The first one is the hike of interest rates. It has happened these past few years and has caused a rise in the amounts of installments to be paid. It is necessary therefore that you should have other resources that can cushion this effect. Have an external or another source buffer funds where you can get the finances to augment for your payments.
2. Vacant for a long time
The next risk is if your property goes without tenants for long periods of time. You will then have trouble paying for the mortgage. In order to minimize this risk, you should prepare yourself for the worst. You should have a ready payment for the mortgage, which can cover at least one or two years, preferably at somewhere liquid such your savings at the bank. This will help you pay for the mortgage if you get in the worst-case scenario. If you cannot find a tenant for your property, you can use that money to pay for the mortgage.
The other solution is for you to rent the property out at a much lower price than the current market rate. You may not be able to get some profit at this type of setting but at least you will have something with which to pay for the mortgage. This is not recommended for most of the time and the best solution is not to get in this type of situation.
3. Bad Tenants
The third risk that is involved in investing with family homes is when you get a bad type of tenant. They may destroy your property; they may break some parts or amenities of the house or may even cause some trouble in the neighborhood. Having tenants who have a bad reputation can also drive other potential tenants away from your property. Seeing that there are possible threats or bad influence in their immediate surrounding can definitely turn off some well-meaning people, the best advice for this would be to be very careful in selecting your tenants. Interview them! Select tenants who have a more responsible character. You will be able to know that when you conduct the interview. If you feel good about them, then rent the property to them.
4. Management hassles
When you invest in property, you also need to have some management skills. You may encounter some hassles with this aspect. If you were managing your own property at first, your tenants would be calling you if they have problems with the property. Situations such as this one can really be a hassle for the owner especially if you have other matters to attend to. You can get interrupted while you are in the middle of something important or even in the middle of the night. Having to think about all of your tenant’s complaints can be really troublesome.
5. Stagnant price
Another problem that you may have with this type of investment is when you get a stagnant price for it for some time. This can be caused at times by an oversupply of properties for rent and this has happened and will happen again. When there is an oversupply, the tendency of the price is either to get lower or to remain at a particular level. And since you are dealing with real estate properties, this can continue for an extended period of time. The rental price may not be able to increase within a few months or so and this can be quite a problem for a first-time owner.
You may have to put up with the situation or find some alternative ways with which you can increase the price of your rent. So these are some of the risks that you may face if you invest in single-family homes. But I would say that if ever the price gets stagnant for this type of property, it would not really give you a lot of headache. When you get the factors of your investments right such as the cash flow, this would be the safest road that you can take. You only need to study the market and the situation really carefully in order for you to get the best possible profit from your investment. Some mistakes can be avoided by planning well and by knowing how to cope with the risks that are involved.
Profits from Investing in Residential Income Properties
So what about the profit? I would say that it would give you at least three types of profits. When you rent out the property, the rental income would generate cash flow. When the property appreciates, you get a capital gain. When you have finished paying for your mortgage, you will also be able to build up your own equity. As you can see, there is more than one way by which you can earn profit with this type of investment that you would not be able to find in other types of investment. While you are gaining your equity, you can also enjoy cash flow through your rental income. You can never enjoy the same situation in gold and precious metal investments. Family home properties will allow you to gain more profit without having to wait for a long time or to sell ownership of the property.
Profit at the time of buying!
One more thing that you need to learn about investing in this type of property is that you gain your profit at the time of buying not at the time of selling. I think that when you invest in something, this is the most important characteristic that it should be able to provide you. A lot of people will tell you that you can only get your profit from an investment if you buy it low and then sell it at a higher price. But this should not be the case at all.
When you do this, you are having a mindset that the investment will gain a higher and higher price. If you concentrate more on the concept that an investment should give you a profit at the time of buying, then you will be in another league of investment. If you buy the property at a price below the market value: that means you buy at a low price and then if you decide to sell it the next month, you are gaining a profit at the time that you buy. The best investment you can make is to always realize the profit at the time of buying and not at the time of selling. If you buy for cash flow, it should also provide you a profit at the time when you buy. There are properties that can provide you with this setting. You should concentrate on these types of investment. I know that it is hard to find. My final advice is – “If you can’t find this type of property that can ensure profit at the time of buying, you are not looking hard enough.”