Oct 8, 2010

Q&A: Should I invest or not?

Hi Azizi Ali,

I am currently working in Kulim High Tech Park, Kulim, Kedah and am currently renting a single-storey house in Taman Selasih for RM450 a month. It comes with an air conditioner in the bedroom and a water heater in the bathroom.

I am planning to buy a new double-storey terrace house near Kulim High Tech Park for investment which costs RM195,000.

My target renters would be Kulim High Tech Park workers or the Polyteknik students as the the house is situated close to the High Tech Park and beside Polyteknik Kulim. However, I am not sure whether the unit can be rented out or not and I also worry about the rental returns which is not too high (about RM500 to RM600 only!) This means that the gross yield of this passive income is equivalent to ~2 to 3% only.

Should i invest in these kind of properties? Please advise.

Regards,
Miss Tang

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Dear Miss Tang,

Firstly, as you correctly identified, the yield of this property is indeed on the low side. The usual gross yield for houses in Malaysia is between two to six percent, which, yes, you are right, is nothing to shout about. This in turn explains why hardly anyone talks about yield in property investment. Bear in mind that this is gross, which means that the net yield, taking into account all other expenses such as repairs, legal, insurance and quit rents will be even lower!

Next, this assumes that the property is rented out and rented for the full year, which is a mighty high assumption. So that is the theory. Let me share the real life answers now.

As you are buying the property for investment purposes (and not for your own stay), there are two main points to look out for. Namely, you should buy only if (1) the location is hot (demand is a lot higher than the supply) and (2) you can get the property at a price below market value.

If it does not meet these two requirements, then do not buy. There are hundreds of thousands of properties in Malaysia. So even if you miss one, two, ten or even fifty good deals, there are plenty more out there.

I have not been to Kulim lately, so I do not know the actual demand and supply situation there. But since you are staying there, you should have an idea about this. If the supply of properties is a lot and demand is low, then your house may become empty for a long time. Even if you managed to rent it out, the rental may be too low and most likely, it may not even cover your costs.

On the other hand, if the demand is high and the supply is low, then go ahead and buy the property. On top of earning good rentals, the value of the property should also rise, which means you are making money from the rental and also price appreciation.

At the same time, it would be better if you can buy the property below the market value as it will push your yield and cashflow up. If this is the case, why not just buy properties from the secondary market instead of buying from the developer? The property is already completed and ready to be rented out.

One last thing. Do not be in a hurry to make investments, particularly buying properties as they cost a lot of money. If you get it wrong, it can cost a lot more than just money - time, energy, relationship and perhaps even your sanity! So get educated on financial matters, do your homework and double-check everything before parting with your money. You will increase your chances of making money significantly by taking all these steps.