Wealth building requires time. Those with small capital can always start by investing in conventional investment such as stocks and mutual fund. But eventually, you need to build your wealth via alternative investment such as real property and businesses alike. From what I see, real property is one of the best investments out there. In this article, I’m going to share my personal view on why invest in real estate especially in Malaysia.
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Of course, the primary reason why we invest in the first place is to build a long term wealth. Investing in rental properties is a great way to build wealth, but it’s relatively slow as to compare with stocks. But property investment is meant for long term anyway. I don’t believe in short term property investment. This is because as I mentioned before, property investment is slow. If you hoping to make 30% capital appreciation from property over one to three years, then I would confidently say that the chances for your investment to be failed is high.
Your wealth will grow when your liability is gradually reducing. This is basically the value of the property increase while the mortgage loan reduces. Your wealth is essentially the equity on the property. The longer you keep the property, the higher your equity will be as illustrated in the table below.
Consistent rental for cash flow
The best part in rental property over stocks investment is the consistent cash flow from rental income every month. This is not something stocks could offer (with the exception to Real Estate Investment Trusts - REITs). But consistent cash flow is only possible if you invested in the right property.
Get tips on how to find the right investment property with rental here.
If you are thinking to retire with cash flow from rental property, then buying one rental property will not give you enough money to retire. You will need multiple properties providing cash flow every month to provide enough to retire. In order to achieve multiple properties with enough cash flow, then you would need to start to invest as early as possible. Simply because your mortgage takes time to be paid off. The sooner you start investing, the sooner your mortgages to be paid off.
Just look at the Equity Table above, regardless if your loan is at the beginning or at the end, you will have to pay the same amount of instalment. Instalment will never change drastically over the tenure of the mortgage loan. So, the only way you could increase your cash flow is to clear your mortgage loans as early as possible. But don’t be despair as your rental would increase in the course of the loan tenure. Meaning that you will have more cash flow in the future even though the mortgage repayment remains the same.
Cheapest value in Southeast Asia
If you look at the insta post below, the price for Malaysia’s property is slightly more than the property price in Bangkok. But price is not the only thing that we look into when we evaluate the value of the property. We have to look into many other factors such as political stability, economical growth, legal, financial system, infrastructures etc. In Malaysia, our legal system is mainly based on the common law legal system. This was a direct result of the colonisation of Malaya, Sarawak, and North Borneo by Britain between the early 19th century to 1960s. Buying and selling properties is more transparent, secure and easy to understood as it is not much different from other commonwealth countries. Other countries legal system particularly in buying and selling properties are rather relax such as Cambodia and Thailand.
Ability to leverage (with asset backed)
Leverage is a great way to increase our return on investment. Leverage basically means that we use other people’s money to do our investment. The leverage in stocks investing is called margin trading or buying on margin. Margin trading refers to the process whereby individual investors buy more stocks than they can afford to. Buying on margin expose you to the risk of margin call. A margin call occurs when the value of an investor’s margin account falls below the broker’s required amount. An investor’s margin account contains securities bought with borrowed money (typically a combination of the investor’s own money and money borrowed from the investor’s broker). A margin call refers specifically to a broker’s demand that an investor deposit additional money or securities into the account so that it is brought up to the minimum value, known as the maintenance margin.
Unlike margin trading in stocks, there is no margin call in property. If the value of the property decrease, you will still need to pay for the instalment. But the difference is that you will have rentals to support any shortfall. End of the day, regardless what happens to the market, you will still need to pay the instalments until the mortgage is fully paid off. Both margin trading and mortgage loans are debts. But the debts in property is much more safer than stocks.
Stable price (no speculation)
Property prices around the world are relatively stable. We don’t see much fluctuation as to compare with stocks market. The property prices in Malaysia is even more stable in other countries in Asia. One of the reasons is the Malaysian government do not favour speculative property market. Properties in Malaysia take about minimum three months to nine months to complete the transfer of ownership. This makes property trading’ is not attractive as it takes longer to realise the gain. With stable prices and transfer of ownership regulations, makes Malaysia one of the best place for long term investment and growing wealth. 5 Things you need to know before flipping a property.
Can turn into a business
The first thing when it comes to running a business is to understand all processes. Since you already bought properties and you know in and out by talking to owners and agents, you can actually turn this into a business. You might have deals on hand that they are not properties that you want to invest or maybe they are not within your investment portfolio. These deals you can actually pass to your network. From there, you can earn some referral fee. Find out how you can start a business via wholesale property here.
Tax benefits
One of the goals to investing in property is to generate rental income with tax deferred profits, and build up equity or ownership of property over time as prices appreciate. Best part is that your expenses can be deducted from your rental income. Expenses such as assessment tax, quit rent, interest on home loan, fire insurance premium, expenses incurred on rent collection, expenses incurred on rent renewal, expenses on repairs and property maintenance are all tax deductible.
I specifically highlighted the phrase interest on loan’ above for good reason. The example below shows an amortisation schedule for loan of RM648k with 30 years loan tenure at 3.18% interest rate per annum. The monthly instalment is about RM2.7k. The best thing about property investment in terms of tax benefits most of our tax will be offset by the expenses. This is especially relevant to those that have mortgage loans. The schedule below shows at the beginning of the loan tenure, the interest accounted for more than 60% of instalment paid.
Property investors do not need to pay for much tax at the beginning. And of course, when the loan balance decreases overtime then the investors will need to start to pay tax from rental income. But this will only happen 10 - 15 years in the future. And that is one of the reasons why we invest in real estate.
Retirement
One of the reasons why we invest in real estate is to do with rentals. Properties with rentals are good source of retirement income. If you need to borrow to buy a rental property, do so before you retire. My book Best Time to Invest in Property - Yesterday (it is never too early to invest) specifically highlights the importance to invest in real estate as early as possible. it is much harder for people to buy or invest in real estate when they are reaching the age of 50. As buying or investing after this age will become a major decision that is sure to impact your retirement. The reason is simply because your instalment is much higher due to shorter loan tenure.
Key fundamental when invest in real estate is to choose a good location. In which it is more important than finding the cheapest property. You should look to earn about minimum 5% per year on your investment, after costs. Not everyone can do this. But if you are able, then perhaps consider to pay off your mortgage loans. Paying off the mortgage on your rental property can provide instant cash flow and increase your monthly income leading into retirement. Additionally, if you decide to sell the property at any point, with 100% equity, you’ll see a nice cash return.
Conclusion
In order to be able to build wealth through property as asset is to invest only in the right property. The right property means the property with rentals. The process and finding the right property is not easy. One must invest in knowledge first. Property is great tool to build wealth but one mistake could land the investor in huge liability. Word of advice:- start small and scale accordingly. End of the day, a small flat with positive cash flow is still an asset regardless how you look at it!
「If this article is useful to you, feel free to buy me a coffee ☕」
Danny KO @ RPC
If this article is useful to you, feel free to buy me a coffee ☕
