Is this a good time to invest in real estate? 

Or, should I wait for the economy to recover first before getting into it? 

Well, as an investor, the idea is to find good assets that generate income and to buy them at discounted prices. Typically speaking, bad economic conditions like what we are experiencing today offer investors great opportunities to invest for good assets like income-producing properties are marketed at prices which are below their market valuation. 

Here, I’ll share 5 quick steps that are useful to buy your next property at a price below its market value today. 


Step 1: Secondary or Auction Market 

For a start, there are three main property markets namely, the primary market, the secondary market, and the auction market. 

The primary market refers to properties that are either yet to be constructed or being under-construction. They are marketed by developers where their selling prices have been predetermined. So, is this the market to hunt for discounts for a piece of property? For me, not really. Why? This is because the properties are often sold at premium prices as compared to the other completed properties in the same vicinity despite them being sold with generous rebates and discounts. 

As such, let’s look at the other two property markets. 

The secondary market refers to completed properties that are being transacted (buy and sell) between their existing owners and new owners. The prices of the properties are negotiable between buyers and sellers and thus, are not fixed. In today’s economic condition, it is normal to have properties in this market being offered at prices below 10-20% from their market valuation and thus, offering a lot of opportunities for genuine investors to hunt for real bargains. 

The auction market refers to completed properties which are being marketed in the auction market by licensed auctioneers. The properties are typically offered at reserve prices that are below their market valuation. The reserve prices shall be revised downwards by 10% for every round of auction if there are no buyers for these properties. Hence, it is possible for buyers to buy a property at a huge 20-40% discount from their market valuation. 

But, with that being said, buying properties from the auction market does carry larger risks as compared to properties in the secondary market. Thus, if you ask me, I prefer the secondary market as my hunting ground to invest in real estate at discounted prices. 


Step 2: The Price Point

It is meaningless to search for a property priced below its valuation if you could not afford it today. Thus, I’ll list down two ways to calculate the maximum price of a property that you can afford based on your current financial position. 


1. The 25% Rule 

The 25% rule is a ballpark figure of the amount of initial capital outlay you need to pay to buy a piece of property and make it lettable to your potential tenants. This includes your 10% down payment, transaction costs, renovation costs, and a 12-month buffer to service your mortgage installments. 

So, how to use the 25% rule? 

Simple. If let’s say, you’d set aside RM 100,000 to buy a property. Then, you just take RM 100,000, divide it with 25%, and you shall find that the maximum price of a property that you can afford is RM 400,000. 


Maximum Price of a Property 

= Cash Set Aside for a Property / 25% 

= RM 100,000 / 25%

= RM 400,000


2. Debt Service Ratio (DSR) and the Rule of 200

DSR measures the level of your monthly debt installments against your monthly income. They include mortgage, car loan, credit card debt, PTPTN, and personal loan. It is ideal to keep your DSR below 40% of your monthly income. 

The Rule of 200 is a formula to calculate your loan eligibility for a mortgage. For instance, a mortgage amounting to RM 200,000 is to be repaid with RM 1,000 a month in installments, especially if you are below 35 years old and its mortgage rate is around 4% per annum. 

So, how do we use both the DSR and the Rule of 200? 

Well, you may start by listing out all of your current debt installments. Let’s say, you pay RM 1,200 in car loan installments and RM 300 in PTPTN a month. Thus, your monthly debt installments is RM 1,500. 

Then, you can calculate your current DSR by comparing the RM 1,500 with your monthly income. Let’s say, your monthly income is RM 7,500, then, your DSR is 20%. 


Current DSR

= (Existing Monthly Debt Instalment / Monthly Income) x 100%

= (RM 1,500 / RM 7,500) x 100% 

= 20% 


As such, if you like to keep your DSR at a maximum level of 40%, the amount of mortgage that you can be eligible for is as follows: 


Maximum Loan Eligibility for a Property 

= (Maximum DSR – Current DSR) x Monthly Income x the Rule of 200

= (40% – 20%) x RM 7,500 x 200

= 20% x RM 7,500 x 200 

= RM 300,000


If you are buying a residential property for the first time in Malaysia, you would be eligible to obtain a 90% loan-to-value (LTV) mortgage. Hence, the maximum price of the property that you can purchase is RM 333,333. 


Maximum Property Price 

= Maximum Loan Eligibility for a Property / 90% 

= RM 300,000 / 90% 

= RM 333,333


Now, we have two figures.

The first from the 25% Rule is RM 400,000. 

The second from the DSR and The Rule of 200 is RM 333,333. 

Which of the two should you choose? Well, if you wish to be extra conservative about it, you may choose the lower of the two price points. Or, you may choose to be less rigid and go with properties which are priced between RM 300,000 – RM 400,000. 


Step 3: Familiarity 

The best places to start finding your next property is to look at areas which you are most familiar with. They would either be your current residence (where you are living at the moment) and your current place of work. For a start, you could find properties where their price range is RM 300,000 – RM 400,000 situated at locations within 15-20 minutes drive away from where you live and where you work. 

For instance, if you live in Subang Jaya, perhaps, you should find properties that are within the vicinity such as Subang Jaya, Kelana Jaya and Shah Alam. It is not a brilliant idea to find properties in Ampang, Cheras and Balakong as you would not be familiar with the ins and outs of these places. 

Make a list of properties that fit into your price range in your target area. To do this, you may use a range of property websites (iProperty, PropertyGuru, … etc) or you can use Brickz.my, a website that records actual transacted price of each property. Out of which, you may calculate the average price of these properties and their available sizes and thus, allowing you to move onto: 


Step 4: Price Per Square Foot (psf)

Let’s use Subang Jaya as an example. 

We have two places where you could hunt for properties within the price range of RM 300,000 – RM 400,000. The first place is at Goodyear Court 7 or 8 where the properties measuring 860 sq. ft. are priced around RM 350,000. The second place is at Main Place where the units measuring 614 sq. ft. are offered around RM 350,000. So, which is better? 

For me, one of the key metrics is to calculate the price psf of a property. Hence, in this case, I would say properties at Goodyear Court 7 or 8 are cheaper than a unit at Main Place as the price psf for units at Goodyear Court 7 or 8 are lower. 


Price psf (Goodyear Court 7 & 8) 

= Property Price (Average) / Size 

= RM 350,000 / 861 sq. ft. 

= RM 407 psf 


Price psf (Main Place) 

= Property Price (Average) / Size 

= RM 350,000 / 614 sq. ft. 

= RM 570 psf 


Thus, based on this metric, I shall hunt for properties at Goodyear Court 7 & 8. 


Step 5: Inspect and Offer 

The next step is to engage a real estate negotiator to look for property deals for you. The negotiator may help you to filter out all advertised units and list down the final 3-5 units that are more presentable or suit your criteria. 

Then, you can pay a visit to view these units and if you find three out of the five units are investment-worthy, you can make offers to these sellers. 

Typically, if the seller is asking, let’s say, RM 360,000 and you know that his unit is worth around RM 350,000, you could make an offer at 10-15% discount from RM 350,000, which is somewhere between RM 300,000-RM 315,000 and leave the offer as it is. Then, you move on to make similar offers to other units. 

Let’s say, over time, you visited more places and have made around 10 offers. It is possible for 2-3 of them to come back to you to either accept your offer or to negotiate further. In this case, it means that these sellers are more motivated in selling off their properties to you. This enables you to negotiate with them and thus, allowing you to get the best price of your property. 

Otherwise, it is okay. Just move on to the next property deal. 


Conclusion: 

In summary, the process of finding a property that is priced below its valuation is as follows: 


1. Find Properties in the Secondary Market (or Auction Market if you’re loaded)

2. Estimate Your Property Price Point (based on the 25% Rule, DSR and the Rule of 200). 

3. Find Properties within a 15-20 minutes drive from where you live or work. 

4. Select Properties with lower price psf within the vicinity. 

5. Pay a visit, inspect, and keep on making offers. 


All the best to buying your next property deal! 


Ian Tai
Ian Tai

Financial Content Machine. Dividend Investor. Produced 450+ Financial Articles featured in KCLau.com in Malaysia and the Fifth Person, Value Invest Asia, and Small Cap Asia in Singapore. Regular Host and Presenter of a Weekly Financial Webinar with KCLau.com. Co-Founded DividendVault.com, an online membership site that empowers retail investors to build a stock portfolio that pays rising dividends year after year in Malaysia and Singapore.

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