3 Key Lessons on Property Investment

Very recently I’ve been shopping around for property for own stay. This reminds me of the time I looked for my first investment property over 5 years ago. I am still holding on to that property at a loss – both in cashflow and unrealised capital losses.

As a friend once said, things that happens to us could either be a blessing or a lesson.

This loss making investment has given me 3 very important lessons that I hold close to my heart when it comes to property purchases.

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(1) Avoid new developments

As a professional real estate lawyer friend once told me, “Buy certainty when you are looking at investment property”.

The allure of a new development is apparent = Minimal to no upfront costs (i.e. affordable), a lot of incentives, looks new and nice, etc.

However, every new development that we buy into is a bet. A bet that the developer will not screw up, a bet that the future market is bright so that the value goes up, a bet that it has a market for good rentals.

When I bought mine, it was going to take 3 years to finish building. It was a mixed development that was supposed to come with a mall right in the middle (the 2nd mall in that area). But, it did not happen. The developer (a prominent name) decided to take out the mall from the development, SECRETLY! I only found out about it after it was completed in 3 years. The mall just disappeared from the plan altogether as if it never existed.

Furthermore, more high-density properties started to pop up around that development. Causing supply to skyrocket around that place. So… the value dropped significantly.

Hence, yes. I’ll be avoiding all new developments – even for own stay. Nothing’s stopping them to deliver the property to you hastily and takes forever to fix the defects. Or built up the commercial space, which they promised will be vibrant, but ended up a dead place with only a few tenants.

Rather than buying something so uncertain, it would be better to buy into an existing place, where I can see how good / bad the place actually is.

(2) It’s all about the Maths

From the get-go, it’s all about the calculations when it comes to property investment.

I got suckered in by the sales pitch for my first property and being a newbie then I didn’t do my own calculations.

The obvious part is that the rental income has to be higher than the mortgage payments + management fees.

The not-so obvious part is the indirect costs – agent fees, maintenance fees, assessment tax, income tax, etc. These will eat in to the income and hence reduce the net income that we would get. Which means… we would require a bigger margin in order to cover for all these costs so that it is profitable in the end.

For example:

• Mortgage + management fees = RM1,500
• Rental Income = RM1,700
• Indirect costs = RM140 (RM1,700 / 12 being the agent’s first month fee) + RM200 (misc fees)
• Loss = RM140 per month (= RM1,700 – RM1,500 – RM140 – RM200)

Don’t hope for capital gains because it is uncertain. Ask anyone who bought a new property 5 years ago at the peak of property prices. Most, if not all, are suffering from capital losses now.

Get the Profit Maths right before any investment. If it is cashflow negative, forget it. It will be a pain somewhere down the road.

The saying of, “at least partially it’s being paid by someone” or “It’s breakeven ma!”, is BS at best. Nobody enters an investment to breakeven!

(3) Property investment is semi-passive

When we talk about property investment income, mostly we talk about renting out to tenants to collect rental income. The passive income part is when tenants pay rentals on time throughout the tenancy.

That’s about it.

There is a whole other side of property investment, which demands active participation. Some examples:

• Getting a tenant in involves liaising with the property agents on and off (every month it is not tenanted is a loss to the P&L).
• In between tenancy, there is a period where the property needs to be “cleaned up” and ready for the next tenant. The degree of work (& costs) required depends on how well the previous tenant took care of the place.
• Tenants with issues… can create headaches during their tenancy. This could be delayed payments, pests, broken things, etc. We won’t know any of these for sure until the start of the tenancy.

Some investors, especially those with a big portfolio of properties tend to engage property managers to manage the portfolio to get the headache off their minds. This will bring down the returns but at least it is converted into a mostly passive income portfolio. However, for most of us, this can take up significant brain juice, time, and effort to handle.

However, it is all good as long as the profits from the investment better justifies the effort required. Refer to lesson (2).

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Closing Thoughts

My first property was a headache. Students are potentially one of the worst tenants ever, in my experience.

In contrast to my trading and other investments, I’d rather put in more of my efforts there. The rewards in property can be huge, no doubt, but it isn’t one that I prefer.

It might be obvious for many, but hope this reaches those of you who are looking into your first investment property. It may help you in your journey!