Why invest in Real Estate?
Real estate investments are one of the most secure types of investing nowadays. We all know that stocks and bonds can be badly affected by recessions, as we had experienced during 2008. Real estate on the other hand, has the capacity to increase in value as time passes even as an effect of economic fluctuation. If you are thinking of the costs of investing in real estate, you should not worry as we will show you how to make that purchase without taking too much from your own money savings.
Real Estate Never Depreciate in the Long Term
Real estate never depreciates in value. Of course this may sound unbelievable because several years after the sub-prime crisis, the property prices in USA had gone down up 30-50% at some places. But in the long term of 10-20 years, properties only appreciate.
This is one of the most important characteristics, which are the main reason why you should opt for this type of investment. Since no new land is created on earth every single year either through the creation of man or by nature, the demand for this limited supply of this property increases as the population of the earth also increases. The higher the demand, the higher will be its resulting market value.
You can earn profit in real estate in either of three methods: acquiring, selling, and renting it out.
There are some tips and several different methods through which you can earn a profit or income from real estate. First is by giving you better leverage hence making it desirable collateral for loans. The earning capacity for these types of properties makes it an attractive mortgage subject for banks and other financial institutions.
Secondly, this type of investment appreciates over time or increases its net worth through the years.
Thirdly, it has the ability to generate cash flow which is mainly that part of the income profit which you can spend after you have paid for your loans and other expenses necessary for the maintaining of the property.
And lastly, it is a type of investment where you can have a “say” on what happens to it. You can decide what to do with the investment and not just let others do the thinking for you as what happens with investments on stocks where a board of directors generally does the overall decisions for your investments.
Real Estate is not “mobile”, so its location matters.
With regards to “where” your properties should be located, there are some factors to consider. Both the short and longer distances from where you reside have their own pros and cons and it is up to you to decide which to choose. Basically what you have to consider about it would be the type of property that you have, its size and how much you manage the property.
If you have a property which is nearer to you, you may have your tenants at your house almost all of the time. They will be there to field their corresponding interests and problems that they may be experiencing at your property. This can be quite bothersome as you really do not want to hear every trivial thing that may be happening in the place but has no significant relation with you as the owner.
Ideally, smaller properties should be located close to home as it only requires lesser management and hence can be constantly checked for any problem that it may be having such as minor repairs and vacancies. These can all be managed single-handedly by the owner himself and does not require the help of professionals. Also, if a prospective tenant would come by, he will be able to show him or her the property without taking much of the time in travelling. Such a small property should not take hours to reach.
In direct contrast, larger properties can be had even if it is located outside one’s own country. They will require the handling of experienced professionals which shall be composed of the management. With the property in their hands, the owner can take as much time off without the property in sight and still be assured that it is being run by capable men. This is why such properties can be located at farther places.
What Type of Properties to Invest in?
So what type of property should you put your investment on? Commercial leasing spaces such as office and warehouse units, or should you choose to buy an apartment? As far as cash flow is concerned the best property to buy would be apartment buildings. There are several factors which makes it the best property to acquire and not something else.
First, apartments can be bought cheaper than other types of real estate such as houses. They have a lower premium compared with other real estate investments.
Secondly, apartment rental incomes are not affected by business cycles that can be in season or out of season. Having a shelter above your head is one of the most basic needs of human beings hence the demands for it will never go out. You may lose a tenant today, but tomorrow there will be another looking for it. Thirdly, an apartment will provide you with a regular source of income, which you can increase depending on the prevailing market price.
Since apartments are rented out for shorter durations such as 6-12 months at a time, the owner will be able to change the rental fee if there is any fluctuation in the market. Apartment complexes also have an edge over other types of real estate in that they provide additional facilities to tenants such as recreational facilities that make them more attractive for potential occupants.
How to Evaluate and Estimate a Property Value
The first thing that you would need to know when choosing a property to buy is its value. So how do you determine a property’s value?
First, you need to know that a property’s value largely depends on how much income it is able to generate for the whole year which is called its annual rental income. There is a formula which is used in order to determine the value of a property which is:
Property Value = Annual Rental Income/ Capital Rate
A property’s capital rate will depend on its location and also in its type. To get the current rate, you should know the prevailing market rental income for the type of property that you have and also the selling rate of the property. Through this method, you will be able to know if the property is just the right amount or is overpriced.
In order to know if it is worth your money to invest on, you should also compute if it will be able to provide you with a fair amount of income that will give you extra cash after you have deducted mortgage payments and also other expenses for the property’s operations.
Finding good real estate agents
One of the best ways to find a property that will be worth buying would be by hiring the services of a real estate agent. Real estate agents know the ins and outs of buying real estate and they may know a property or two that they know would be a good buy. They know the current trends in the market regarding real estate prices and also they will know how to go through the whole process of buying the property that they can get you the best price that you can pay for such a property. They can also help speed up the negotiation process by knowing how to ask for the right deductions on what things. They also know better about government taxation regarding such acquisitions, the amount of rent that you can expect from such a property, the type of financing that it would require and how to manage the property too.
When choosing a proper real estate agent for you, you should ask him certain things and see if he will be able to answer them correctly and promptly for you. Things such as the amount of income from the property, what age it is, and how much the maintenance costs would be if you buy that property.
He should be able to know what these things are if he is a good real estate agent. Also, he must be able to answer your inquiries promptly to see that he is very much interested in working for your interests. He may even offer some of his services for free if he is really one of those fine agents that seek their employer’s good and not make profit out of them by conniving with the agent of the seller of the property. He should be able to get in touch with at regular intervals in order to update you with how the negotiations with the seller are going and if there are any new developments with the sale.
Real estate agents are usually hired only by sellers and not by potential buyers but if you really want to get the best deal out of the property, having your own real estate agent to assess the property value would be a good step.
Finding Cheaper Properties
If you wish to buy a property but do not have that much budget to do that, then you should turn your sight on buying cheaper properties. These properties may mean poorer conditions but with the proper management, you will be able to turn it into a high-income generating property. There are various reasons why properties go out for a lower price than that of the market and these should make you wary about the chances of buying one.
First there is the problem with finances which is one of the major reasons why an owner will agree to settle for a lower rate. If he cannot keep up with the maintenance costs and other operational expenses, he will be forced to sell the property.
Second is the death of the previous owner and the court is settling his properties. The need to speedily dispense of his properties makes it one of the reasons why it will be put up for sale at a cheaper price.
Third is the dissolution of partnerships due to irreconcilable differences between the owners.
Another reason also is the poor condition of the property which has been mentioned earlier due to perhaps the increase in vacancies in the property and the poor type of management that it is under. If the owner or manager has been secretly taking funds from maintenance costs then the property will definitely be neglected.
There is also the issue with foreclosed properties, which are auctioned at lower prices and also the length of ownership that may be taking quite a toll on the owner. He may find it better to sell the property and may be thinking of retiring.
Financing: Loans vs. Cash
So how do you finance your acquisition? Should you buy the property completely out of your own money or will i t be a better option to put up a loan from the bank?
Experts in the field of real estate investment advice that you should make the acquisition with as much as 90% of the money from bank loan. It is not considered to be a wise move to buy the property with all of your savings especially if you are thinking of renting the property out for tenancy. You only need to think about how much you will need to borrow from the bank, what would be the ideal time-frame for the loan and at what rate should you make the loan.
Experienced real estate investors know that there will be greater returns and advantage if you borrow your capital from the bank. It may not seem so to you at first glance but if you think about it carefully you will be able to realize how much better it is to do so.
But a note of caution here: you should not loan money from a bank if the amount of net income which you can get from the property does not exceed the amount of payment that you have for the bank loan. The loan should at least be 60% lower than the amount of rent income that you can get from the property.
How much loans should you take up when financing a property purchase?
Taking up loans from the bank may not seem to be a wise idea at all but investors advise that you should even make 90% of your investment capital come from a bank loan! Why should this be so? Isn’t it suicide to do that?
No, actually it can generate you with additional funds and lesser interest rates to pay hence making it the best move that you can make for a real estate investment. Loans are like one of those questions from the Sphinx which some do not comprehend at all but with the correct knowledge, you will be able to navigate through the maze easily and acquire benefits for yourself along the way.
First, you should understand the different factors that come into play when you make a loan
- the principal, or the amount of money that you are going to borrow;
- the length of time where you will be obliged to pay for the loan; and
- the interest rate which the bank will charge upon the loan in order for them to generate income.
So here is how you do it:
– go for the largest amount of money that you can borrow,
– the longest period of time for you to pay for it,
which will result into lower amounts of interest on your loan making it easier for you to repay them back.
You may think that it is a crazy idea as you may get worried about how you are going to pay for it back. What you need to know is that at this setting, the amount of payments that you need to make each month or year gradually lessens as the interests lessen and the period lengthens. This makes it all easier for you to pay them contrary to what you may be thinking as an additional problem to your property business. It is exactly the opposite.
With the income from the rental of the property being able to cover for the expenses in the property and with the small amount of payment that you need to give to the bank, you will surely have an extra profit wherewith you can gain additional funding if you know where to put that money.
You can either put it in a savings account where it can earn interest, invest it in another real estate property, which can both provide additional income for you. Or, if you wish to cut down your loan, you can use them to pay for it which will lessen your outstanding principal which in turn will lessen the amount that you would need to pay to the bank. If you do this, you may have to give an additional fee for the early payment that you make but it is not that much though.
One of the ways, which can also help augment your financial situation and pay for the investment loan, is by getting a mortgage refinance, on your existing properties. This method allows you to increase the value of your property and also to provide you with additional funds to help pay for the loan.
Since property appreciates in value or increases its market price as time goes by, you can apply for mortgage refinancing say perhaps after four or five years. This will not hurt as the additional money that you can get will help pay for your past loan and also give you an extra allowance which you can use for another real estate property also. Through that property, you can get additional income which will help pay for the other property.
You should not worry about banks interests on your loans. They do not act as a liability if you are investing that money on a money-making property such as properties for rent which includes apartments and condominium units. The income which these properties generate will cover more than the payments that you would need to do and also the maintenance and operational costs.
Do not think of making investment loans as you would with house loans. Houses do not generate income and so the least amount of interest should be taken into consideration when planning to acquire a home. But if you are investing on a real estate property which is able provide you with cash flow, what you would need to consider would be the amount of return on investment that you can get from it and how fast you will be able to get back your capital. You will be able to get maximum returns only if you put less money from your own savings and larger amounts from a loan.
Acquisition of Properties Through Auctions
There are several things that one has to know and think carefully over before buying properties that are auctioned in the market. Firstly, you should know that there are two different types of property auctions: those done by banks and those that are done by the courts. Mostly, properties are auctioned to the public due to being foreclosed either by the bank or by the court.
These two also have distinguishing characteristics between them that you should know in order to be able to go through the process more carefully. Those done by banks are called Loan Agreements cum Assignment or LACA; these types usually go on auction without the necessary titles hence you should be ready to have some budget for the processing of the title.
Those coming from the courts are called non-Loan Agreements cum Assignment or non-LACA and properties auctioned do have titles to them. LACA requires lesser amounts of deposits than those of the non-LACA. And aside from that, auctions of the court come less frequently as properties still have to go through a long process in order to be legally available for auction.
After winning an auction for a particular property, you should check the conditions of the property and see whoever the owner might be. You can do these by going to the appropriate government agency which deals with real estate ownerships. See if the property needs a lot or minimal amount of repairing to be done so you can make some arrangements if that can be deducted from what you have to pay.
The property should also not contain any stray occupants or any occupants at all. It will be your property now and you will have the legal right to eject anyone who is occupying your property illegally. You may need to consult with your lawyer regarding this procedure but the sooner that you can get them out, the better will it be for you. You will also need to be ready to settle any payments or fees that may still need to be paid such as assessment fees, unpaid utility bills and quit rent.
You can get some help about acquiring real estate properties by contacting the Malaysia National House Buyer’s Association. They will be able to provide you with necessary details that you need to know about buying properties especially if you are a first-time buyer. But in the meantime, you can get help from different agents, real estate help centers and government agencies which deal with buying real estate.
Study also the various difficulties or problems which you may encounter on the process of buying real estate such as missing titles, poor conditions of the property and the awarding of ownership to winning bidders. Being in the know before these things happen to you will greatly help you to find a solution for them in case they come your way.
Property Holding Company Vs. Individual Investor
You can also choose to invest in real estate through a company, which deals with buying, and selling real estates. This is a good option too since the government allows deductions on company taxes, payrolls for employees, operating and management expenses and also on the depreciation of machineries. This can serve as a plus for your investment since it cuts out a lot from your income tax which cannot be said to be the same if you are working as an individual real estate investor.
Checklist before taking up a Property
Before buying a property, you should also do some checking about certain things about it. Here is a checklist of what you would need to assess in a property before choosing to buy it.
• What is the physical condition of the property? Is it in a good, habitable condition or is it nearly falling apart? Would you consider buying it at this state even though you can get deductions due to the damages or repairs that need to be done on the property?
• What type of setting does it have surrounding the property? Is the area where it is located a place which has shown much improvement over the years or is it in a place that is gradually being abandoned due to the worsening conditions surrounding the area? If so, you need to know beforehand that it may not appeal to prospective occupants and you may experience losses from it.
• What type of additional facilities does it have? Do they have amenities which will serve to attract good tenants such as enough recreational facilities like a basketball court and a swimming pool, sufficient security measures and sufficient parking areas for the occupants? These are all factors which can make or break your real estate rental business.
• Is the property partially or fully furnished or does it not contain any furnishings at all? Furnishings help increase the rental income that you can get from the property hence seeing if it has or has not any of them will also determine your future income from the property.
• How old is the property? Has it been built recently or has it been in existence for quite a long time already? You need to know that the older a facility gets, the more repairs would be needed to help refurbish it. Minor repairs such as repainting and fixing of broken water and electrical systems can be quite costly so you should be taking age as a consideration.
• Has the property been able to attract a lot of occupants for the past few years? Does it have a lot of occupants at the moment? To be able to know about these, you should do your own ocular inspection but not flagrantly. You can simply pass by at the property when the occupants would be more likely to be at home and you will be able to know that and also the type of occupants that it possesses.
The location of the property can also be a major concern for the buyer but what you should always think about is if the property would be able to command a good return on investment. A property can be in a high, inaccessible place but if there are people, who would be willing to pay highly just to have it, why not buy it? Your property can be in a highly-accessible area but if no one is willing to put up occupancy there due to other competition and bad conditions, then it is just as bad as having a rental property up in the mountains.
You should also drop by the city planning agency in order to see if there are any planned changes in the area such as the building of roads to see if the place would be viable for future rental business.
So as you can see, sometimes location is not a major factor at all when trying to decide whether to buy or not a property. If after you have answered these questions and has seen that the property will be a good investment, then there is no reason why you should not buy it.
What to do with your property: Sell and Rent out?
For you to decide on whether you should let your property be rented or sold out in the market, you should carefully think over some factors which can directly affect on how your property will perform in the market in the near future. You should also think about the monetary considerations regarding the expenses that you would have to make such as maintenance and operational costs that will form part of the money that you would have to do away with on that property.
First, you should consider if the property will be able to cover for the expenses of long-term ownership which is required for leasing out rental properties such as maintenance of the building, the fixing of any damaged or worn out facilities such as rotting ceilings and woodworks which may be attacked by termites which will cause tenants to move out if left untreated.
Aside from that, you will also have to pay for the initial payment for the acquisition of the property that will also include the fees for your agent, legal fees and other documentary stamps that will be needed for the transfer of ownership. Know beforehand what would be the income capacity of the property once you are done with the repairs and furnishings that you will do on it. Will it be able to cover the costs of maintenance and other expenses such as payroll for employees that you may have just in case?
If you are thinking of making profits by selling, you should think about making more than what your purchase price has been. Is the market selling properties of the same type at a higher price than what you have originally paid for it? Or will the difference be only a small margin? Do not be hasty in making decisions over selling a property. Make sure that you will not be making any profits from it through rental if the current selling price does not give you that much profit from it. The fluctuations in the market price will vary almost daily so you should be careful with the timing of the sale.
If you choose to rent the property out, think of the monthly cash flow and the monthly payments that you would need to do for the investment loan that you have made. If there is also only a small amount of margin between the extra profit that you can get out of these deductions then you should think twice about renting the property out. Selling it might be a better option.
Think also in terms of the equity that you will get out of such rental income. Will you have an increasing owner’s equity as time passes by or will you be losing out a lot more?
Also try to think about the future of the area where it is located. Will it be a good commercial area or residential area? Will it attract future tenants to the place or would it be better off as a private property? These are things that you would have to consider before choosing to rent or sell your property out.
Beware of the Signs that you should sell your properties
There are certain signs that will tell you if you already need to sell your property in the market. You should be wary of them in order to avoid overburdening yourself with things to think about when you have really no other choice but to let the property go from your hands.
First, there is the gradual lessening of the amount of equity that you are getting from the property. Is there a lot more repairs that you spend on which takes up much of the income that you are getting even getting to the point where your capital is being used for the maintenance costs? If so, then you probably should be thinking about selling the property.
Second, are there problems that your property might be facing and you can’t find any other solution? Such problems might be disagreements between the owners, the increasing deterioration of the property and the increasing competitions from other rental properties? Are you experiencing a lot of losses due to these factors? Then you should put up your property for sale.
Third, are you thinking of taking another direction in your life in which the ownership of the property would not be quite in line with what you have in mind such as retirement? Old age and a change of residence or occupation can all lead to a different path.
And last, but the most important of all, is if your property can now command a good price compared to your original purchase? If the property is at a good selling position then you should think about selling it out since buyers may get harder to find as competition increases. These are all signs that your property can now be put up on sale.
How to sell a property?
If you finally decide that your property is at the right moment to be sold in the market, you should do some things that may be necessary for you as the seller.
First and foremost, you should think about the person to whom you will hand the ownership of your property to: what type of owner should possess your property? Should he deserve to own the property so much so that he should possess the right skills for management and should have enough wisdom with handling rental property estates? In order to have a buyer, you should post an advertisement for your property or you can get them through a reliable agent who will find the right buyer for you – one who has the finances and will agree at a price that you will most likely settle for.
In your advertisement, it is not necessary to include the address or location of your property. Doing so may harm your bargaining interests as the buyer may set up his own price which may be a lower than what you have in mind or what your agent has found your property to be worth. Also, you should not place the final value of your property on the advertisement. This can turn off some potential buyers who may later agree with you at the price set once they see the property for themselves.
The advertisement should contain an appealing and attractive description of what the property is and its advantages. A simple and bland style of advertising will definitely not do your selling strategies any good if you fail to catch the attention of prospective buyers. List down the various advantages that one can get by buying the property such as low mortgage payments and low interests but do not include the amount of the actual payment itself.
You can choose to sell directly to the buyer and not through agents. This will help attract them as they know that the price would not be padded with additional fees for the real estate agent. Who would like to pay for a higher price if he can also acquire the property at a lesser rate if they buy through the seller himself?
Lastly, do not let your occupants get a hint that you are selling out the property. It may alarm them and send them packing which may not be good for the next owner of the property.
When a property is rented out, it generates income for you and you should really treat this as a business.
First, you should know what type of tenants you would like to have. Do you want students, families or bachelors? Do you want a people with stable jobs or are you fine with those who do not have one as long as they can pay the rent on time? Think also about the type of unit that you will be renting out. Will it be for commercial purposes such as offices spaces and warehouse units or would you like to rent it out as an apartment?
Advertise your property in order to attract potential tenants. You can also do this by word of mouth through your friends or relatives.
You should also ask for a deposit of two-month rental and an advance payment for one month. This is in order to secure your finances if ever the worst comes and they fail to pay you for other expenses. Also, you should ask for some legal advice as to what your rights are as an owner which you can impose upon occupants and also their rights too. This will help you avoid any unnecessary problems that you may have concerning legal issues.
You should also know that you can take advantage of the government’s tax deductions for owners of rental properties. Such things will ease you some of the financial burdens of having a property and give you additional money to invest in other ventures.
All of the options that you have for real estate buying or acquiring, selling or renting it out for occupancy will provide you with sufficient profits that make it one of the best investments to buy. You don’t want to lose and gamble your finances into an unsure future. So place some of your money in a real estate property. It is a better investment compared to many other kinds of investments that are out there.
Real estate presents you with an opportunity to have a secure investment portfolio. It is a type of investment that is not affected negatively by fluctuations in the market and appreciates over the longer term. Properties allow you with a lot of ways with which to earn profits and they are seldom out of demand. With these characteristics, it is definitely one of the most important assets that you can have in your portfolio.
If you are interested to get educated on how to make consistent passive income from real estate investment, head over to our first ever online course designed for Malaysian real estate investor: www.PropertyMethod.com