Property for investment how to make money from real estate 1
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There are a handful of ways to create positive cash flow in a real estate segment. Are you interested in property investment or curious about how property investors make money? Well, you’re reading the right article then. Here’s a spoiler - you don’t need to be wealthy to do this.

Do I have your attention now? If you already have a steady job and a little capital, you can already start your investment now. Here are some of the basic ideas to maximise your earnings using property.



1. Buy-To-Let

According to a local news, Malaysian property market is currently quite challenging. You must be wondering if it still makes sense to invest in buy-to-let. The answer is YES! But, only if you make a proper research. Are you a newbie? Take note of these things before you start.


(a) Target Market - Aim for the Right One

This is vital if you want to earn money from your property. Due diligence is needed and you can’t be lazy. You need to know what type of property you’re buying, who will likely rent it and where it is located. These will determine your return-on-investment (ROI). At PropSocial, we have tools for you to make a comparison on which properties are worth buying.

To know whether this is realistically doable, we had a chat with Aziz Omar, a retiree who resides in Bukit Rangin, Kuantan. He used to invest in buy-to-let before he sold off some of his properties. Here’s what he has to divulge based on his experience;

“Buy-to-let is a good investment because you practically get the property for free, but you need to plan it smartly. You first need a property in a high demand area and possibly within 50km from your place so that you can monitor easily when problems arise.

“Other than that, be mindful of your tenants - Do some background check, have secure agreements and do monthly visits. These are to avoid renters from damaging your property or run away without paying the rental fee. You don’t want to end up spending more money than you should.”


(b) Calculate Rental Yield

If you’ve been searching about property investments, you might have stumble upon this term - rental yield. It’s a return rate of your income based on the cost of your investment. It’s usually calculated annually and presented in percentage form. By calculating your rental yield, you’ll have a rough insight on whether your investments will be fruitful; and as sound as a dollar. There are 2 types of rental yield, gross and net. It’s important to understand the difference and how to calculate.


i. Gross Rental Yield

To calculate gross rental yield, you need to have these 2 key figures – the annual rental income and the property value. 

• Annual rental income = monthly rent x 12
• Property value = purchase or market value (this depends what you’re looking at i.e current performance or future potential)

The calculation is very much simple, once you have those figures:

Gross rental yield = (Annual rental income / Property value) x 100

For example, you purchased a property at Urbana Residences @ Ara Damansara for RM550,000 and have it let for RM2,000 a month. Your current potential rental yield would be of 4.36%, which is fairly good.

Do bear in mind that current or historical rental yields are not necessarily accurate indicators of future performance. This is especially true if the prices of property are steep, but rental prices are stagnant. Not only that, gross rental yield doesn’t include any expenses associated with keeping the property. You may have a property with high rental yield, but if it has high expenses, you’ll have a low net rental income. 


ii. Net Rental Yield

Calculating net rental yield gives you a more accurate prediction on rental return. This is because it requires a lot more figures – known or estimated . Besides annual rental income and property value, you will also need know/estimate the annual property costs as well as ongoing expenses. Let us break it down for you.

** You may add/omit more factors where it is necessary. The more factors you add in, the more accurate your net rental yield is.

So once you figure all that out, you can use the formula below to to work out the net rental yield:

Net rental yield = [(Annual rental income – Annual expenses) / Total property cost] x 100

Using the property in the previous example, where the purchase value was RM550,000 and the monthly rent was RM2,000 - if the property’s overall cost of purchase was RM590,000 and the annual expenses are RM6,500, then its current net rental yield would be 2.97%. This is significantly lower than its gross rental yield of 4.36%. From here you can already gauge your ROI.


c. Plan for Void Period

One thing you have to keep in mind when it comes to buy-to-let investment is that you will encounter void periods, where you have no tenant. It’s not necessarily a bad thing if you have plans from the day your tenant send you leave notice to when you found new tenants. To manage your cash properly, you need to keep the vacant period between tenants as short as possible. 



2. Rent-To-Rent aka Sub-Let

This method is called rent-to-rent. Similar to buy-to-let, it is said to be the fastest way to make passive income. All you have to do is to rent a property cheaply and rent it out for a profit. How you make money out of it? Simple. You make your profit on the difference between the rent you pay to the landlord and the rent you get paid by your tenants.

For instance, you rent a unit of an apartment with 3 bedrooms for RM1000. And then you let out 2 other room to individuals - Master bedroom for RM700 and mid bedroom for RM500. Your gross income will be RM200.

Image Source: www.independent.co.uk

Take note that this example is just on a small scale basis, which is great if you’re looking to make side income or make ends meet. Of course you can do more than this i.e. Airbnb business; and hit the jackpot.

One thing you should bear in mind - Make sure you have the owner's consent. It is important to ensure that your landlord allows subleasing or arrange an agreement with them. To get into trouble is not worth it. So, what do you think? Would you like to give it a shot? Register with us and start your listing on our site.



3. Lease Option aka Rent-To-Own

According to Wonderlist, lease option or rent-to-own is a method when the buyer and seller agree to an option which gives the buyer the right to purchase the home during a set period usually through a tenure period of 3 to 5 years. During this option period, the buyer leases the home from the seller. You must be thinking how is it profitable?

Melvin Ooi, Project Manager of Wonderlist shares: “Wonderlist Lease Option on its own is to help those who either can’t get a loan or sellers who need to liquidate properties that have been sitting vacant. So does it help the seller make good money? Yes, because the monthly option fees are higher than the seller's’ mortgage payments, therefore putting the him/her into a positive cash flow position.”

To those who are not familiar with option fee - it is an amount money ranges between 2.5% and 7% of the purchase price to be given to the seller to lock down your options. In some contracts, all or some of the option money may be applied to the purchase price to close the deal. For instance - a home has a purchase price of RM250,000 and the owner is asking for 7% fee, the buyer would need to pay RM17,500 up front. Again, this arrangement differ based on your agreement with the seller - some may need you to pay upfront, while some allow you to pay monthly together with your rental fee.

Check out the benefits of rent-to-own prepared by Wonderlist team below;


Advantages for the Seller

• Often receives a higher purchase price above the market value.

• Greater access to a larger market of buyers.

• Able to collect rent while the home would otherwise sit vacant.

• Able to sell off the property even when the market is slow or facing a downturn.

• Even if the buyer pulls out of the agreement, the option fees will not be refunded and will be treated as rental.


Advantages for Investors

• It is highly leveraged because you can gain control of a property and profit from it now, even though you don't own it yet.

• The fact that you don't own it, also limits your personal liability and personal responsibility.

• The real estate investor's cost to implement a lease option contract with the owner requires little to no money out of pocket, because it is entirely negotiable between investor and owner. Option holder does not require immediate 10% down payment on interested property like the traditional house purchasing.

• Investors may sub-let the home to another tenant/buyer. Depending on how the lease option agreement is written and structured, the investor could possibly use the tenant-buyer's option fee money to pay any option fee owed to the owner. For example, Investor A signs a lease option agreement to buy the property off Seller B. Investor A, who now has the right to use is allowed to rent/sell to Tenant/Buyer C. In both either the rent or sell situation, Investor A can use the rental or option fee received from Tenant/Buyer C to pay off the monthly option fees owed to Seller B.

• It is low risk financially, because if the property fails to go up enough in value to make a profit, you have the right to change your mind and let the "option to buy" expire.

• Even if your tenant-buyer decides not to buy the property, you have profited by a positive monthly cash flow from the tenant-buyer's rent payments, and upfront non-refundable option fee.



4. Flipping aka Property Speculation

There are two ways to go about this - One, is to buy a cheap or below market value property and sell it off; or two, buy a rundown property at a good price, refurbish and sell it after. Profit is generated either through the price appreciation of the property and/or from renovations and capital improvements made.

That being said, there is a drawback to this method, The con of this type of investment is when you buy a property that needs too much restoration, which defeats the purpose of flipping, and when the property market value is flat.

Image source: http://mfaridgeo.blogspot.my/

Here are some of the mistakes you need to avoid when pursuing property speculation:


a) Didn’t pay attention to the market

We did mention before that market research is vital if you forge yourself in any type of investments. Be sure to know which city or neighbourhood is best for flipping. Besides that, make sure you keep yourself updated with the latest real estate trend - it will help you make the best decision. Refer back to point 1. On top of that, you can search the neighbourhoods that you’re aiming at PropSocial’s site and look at what the community has to say about the place. That’s what we do best - Real Neighbourhood, Real Reviews.


b) Miscalculated your budget

If your calculation involves the price you are paying for the house, the renovation and the asking price, maybe should you rethink it. Not only you need to figure out what you can spend on both the house and the renovation, but you also need to include the cost of carrying a short-term loan (if you need one), your material costs and labor, taxes, utilities and maintenance on the home for up to a year. Only then you’ll know the right financial move.


c)  Bought your first house to flip at the auction

This is not a smart move. More often than not, any property auction or foreclosure will not allow you to walk through or inspect the property. This can be very challenging. If you’re not lucky, you may end up paying more than you should. Other than that, you might get a little too excited on the bidding and blow off your budget for something that has no guarantee.


d) Went big on your first try

We know you’re all gung-ho about it and that’s an awesome spirit. Nevertheless, it’s always advisable to start small. That unrefurbished mansion from 1980s that you’ve been eyeing looks like a money maker, but without much experience on the process and network you can trust, you’ll face a greater risk.


e) Ignored red flags

Things like water piping damage, mold or foundation issue may seem like small problems that are easy to fix. But, they could also be a disaster that’ll leave your pocket a hole. So, inspect thoroughly and try to look for a property that don’t need severe repair, which can cost you more than your budget.


f) Tried to fix the house yourself

DIYing can save you a lot of money. That’s for sure. However, knowing your skill limits and asks for professional help can make the process smoother. Plus, you can actually see progress. If anything goes wrong, you need to chip in more moolah - remember that. Now, before you tiled the bathroom, ask yourself, “Am I capable to do this without mistakes?”.


g) Didn’t price the property right

Pricing is king when it comes to property market. Pricing the home too high may reduce the number of interested buyers, which can cause your home to sit on the market for too long, while pricing the home too low may raise unwanted questions about the home's true value. How do you know if it’s the right pricing? Here are some tangible factors you can consider;

- Compare your house to other similar homes that have sold in your neighborhood
- Check the listing history
- Get insights about the supply and demand



5. Repossessed property aka Property in Possession (PIP)

Known as “lelong” property in Malaysia, buying PIP’s from banks or auction houses can be a great opportunity for fellow investors. You can get a list of properties available from the banks’ websites or the property portal like LelongTips, AuctionMart or AuctionList

The key is to negotiate with them to get the property at below market value in order to quickly resell at market value or even below market value, so that you are in a position to make a substantial profit.

Nevertheless, there are some shortcomings that you need to be aware of. Read our past article, The Pitfalls of Buying Auction (Lelong) Properties, to know more.



Conclusion

As you can see, there’s no shortage of ways for you to make money in the real estate segment. That being said, you need to do some in-depth research about the ways you’re planning to use to generate income - the risks, location and type of property. The thing about property investments is that the more competent you are, the less risk you’ll face.

So, what do you think? Are you ready to start your own little adventure? Check out the list of properties available here



(Written by: Nisya Aziz, 14th September 2017)

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Great sharing for newbie investors to take note.

Need to bear in mind, even if the rental yield is not that great(only cover mortgage interest), we still have capital appreciation to fall back on. 

Ofcourse we need to have some holding power to rely on capital appreciation, and sell when the price is right! 

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Currently market is "Buyer Market" , if got got holding power , will pick some 

'durian" 1st and rent it out ASAP ... Waiting few years and see how the market ...