The Paradox Of Money Making In Property

Joanne Chong GoodPlace.my Mentor

When we published our guide on unconventional strategies of uber successful investors couple of weeks back, I have received a flurry of comments specifically on Munirah’s pearl of wisdom presented in the article:-

If you’re in this just to make money and “achieve financial independence“, you’re doing it wrong.
Munirah

Harry, a long-time GoodPlace.my (and KLCCcondominiums.my) reader posted the following in the comments section –

harry-munirah

After a couple of weeks, I have finally managed to track down Munirah (she travels a lot as she invests internationally and manages a family office in Singapore) and she has emailed me a reply which is reprinted here below with zero editing –


RE: GoodPlace reader query – why not chase the money?

Khai Yin,

To me, chasing success holds more appeal than chasing the dollars. Over the years, I am also convinced that the whole “make the buck” mentality is counterproductive to the investor’s success in the long run.

I don’t make myself known out there to the world, but I receive emails from people who know me from somewhere frequently enough (including emails from your readers through your website). Often they tell me they want to make lots of money, buy a huge house in Damansara Heights and drive a Ferrari someday. And they want to invest in property to get them there.

I guess this is perhaps why most people want to invest in property. But they are missing the point. I really believe that the goals that we set for ourselves must be related to our true calling in life, and money should come only as a reward when we draw close to our passion.

That may be a little wishy washy for many people and so here’s something practical to consider. Chasing the money will make you make poor decisions because it makes you myopic to the real opportunities beyond what’s clear and present to you. Also, the pressing need to make money NOW puts you in a low leverage position which reduces your ability to negotiate for the best deal. I’ve screwed up many times getting fixated with how much money I am going to make in the deal in hand and completely missing out on what holds for me in the next deal and beyond.

You got to be strategic in this game, and chasing the money will force you to be tactical.

I remembered the conversation we had when we met with the group about the property industry in Malaysia where everyone seemed to be chasing the deal while missing out on the bigger picture. Chasing the money is short sighted, and in many ways this mentality is what making the industry worse by the day. Under-the-table deals, deception, fraud are all consequences of this short-sightedness.

Looking BEYOND money will help you make money. This concept is paradoxical and may be hard to grasp for some, but any seasoned investor will tell you that it’s true.

M. Z.


Addendum: Munirah also sent me this book which is highly relevant to her points presented above –  Obliquity by John Kay. Obliquity is the idea that complex goals are often best pursued indirectly. In our context, this means that money making through property investment is best done obliquely.

And finally, for the record, I agree completely with Munirah.

How To Deal With Agents – An Insider’s Guide

GoodPlace Property Agent

This GoodPlace guide is a continuation of sorts from the last guide on how to find a good property deal. The tip in particular on dealing with real estate agents was admittedly rather short, and so I’m deciding to do it justice by writing a full fledged mini-guide on the topic.

An anonymous GoodPlace Digest subscriber emailed me this morning:-

How to find an agent

WHERE THE HECK CAN YOU FIND GOOD AGENTS! Well, there’s an easy way, and a hard way.

  • Easy Way: Tell me the properties you want through the GoodPlace Dealmatcher, and then let me go hunt for an agent I know and can vouch for.
  • Hard Way: Follow the rest of this guide.

The Problem With Property Agents

I remembered two years back when I was in a car ride with this property negotiator named Carlo on the way to see a client, and he remarked to me, “The biggest problem of the (Malaysia) property industry is that we suffer from bad reputation caused by the actions of a minority of bad agents.”

The problem when you meet up with agents is that you don’t know them from Joe. And that’s why I usually recommend to home buyers to deal with agents from well-established, branded agencies, and who are referred to you by someone you know and trust. If you’ve found an agent through an online classifieds site like iProperty or Prop Wall, you’ll need to be extra cautious 1.

Bad agents are bad news

No matter what, it’s important to understand these few “truths” when it comes to property agents no matter where you found them:-

  1. They have their own agenda. They want to make money.
  2. For (1) to happen, you will need to buy. They only get paid if they close the deal.

Average agents will want to close the deal quickly, and after this is done, chances are that you’ll never see them again. This means that the average agent will try to paint a rosy picture of the property while hiding the deficiencies. These are the people who’ll tell you that a certain “Mont Kiara serviced apartment” is in an upmarket neighbourhood even though in reality it’s next to the infamous Segambut slums and a dirty river. You know these people.

On the other hand, a good agent looks further ahead into the future – if he provides a good service then the customer will return with more deals, and with some referrals to boot. These are agents with integrity and a sense of service which you will need to work with, and from personal experience, these tend to belong to branded or boutique agencies where reputation is well safeguarded. I know I’ll get some hate mail over this, and sorry to piss off some of my negotiator friends from smaller agencies but it’s true.

The Mentor: How To Pick A Kickass Agent

When I talked to The Mentor last Saturday I asked him about screening for good agents, and his method was remarkably simple.

Easy. I ask them, “What’s bad about this property?” Nine times out of ten I get the usual, “Nothing much. This property is perfect!”. Nothing is perfect. My best agents know what I am looking for, and they help me look at a property with a critical eye instead of just wanting to sell me.
The Mentor

He then provided me with a list of questions and the “correct” answers that he used to screen agents:-

QuestionGood AnswerBad Answer
Why is this a good buy?It's good because... however, also watch out for...It's good because ... (only positive answers)
Is there anything bad about this property?Yes, watch out for...It's perfect. Nothing bad at all.
Can you show me a property in this neighbourhood you just sold?Yes (or no, I have not sold a property here).
I sold a unit here just last week, but I can't show you because...

When I was learning the trade I used to follow The Mentor while he called up random agents he found in the classifieds sections of newspapers, and he would purposely ask to look at “dud” properties – so that he can gauge the honesty of the agents that he dealt with.

You don’t have to go to that extreme obviously, but this shows that it pays to do the due diligence – if you are in this for the long term, then having a team of good agents bringing deals to you is the biggest competitive advantage that you can ever have in the real estate investment game.

  1. It’s not the fault of the property sites of course, but the openness of the platform means that anyone can join and post anything with minimal moderation.

Property Prospecting 101: Is This Place Gonna Be Hot? (Part 2)

Picture of a nice looking girl posing for GoodPlace.my

Note: This is the continuation of the previous guide on property prospecting (or, the art of predicting if an area is going to be ‘hot’). In the first part, we have discussed about the two major drivers of demand: population growth and adjacency (if you have not read Part 1 yet, click here). In the second part of this mini-guide, we will delve into the other three factors: availability of jobs, income levels and ease of doing business.

Step #3: Are Jobs Available?

As the ‘fringe’ townships begin to grow in the Klang Valley (think Puchong South, Cyberjaya, Putrajaya, Nilai, Equine Park, Seri Pajam, Rawang, Kajang) we expect that jobs will be more “localized”. This means that workers will have stronger preferences for jobs which are near (within 30 minutes) from where they live. Traveling to downtown Kuala Lumpur to work may not be feasible anymore especially when you are in the aforementioned fringe areas.

Late memeIt took me two full hours to reach Pusat Bandar Damansara for a meeting from SetiaWalk last week; to say that the traffic was horrendous would be an understatement. I could never bring myself to spend hours on the road each day to commute to work, and this means that I will always choose to live near where my office is (in this case, central Puchong). And with more “self contained” townships in development (as well as mixed projects such as Gateway Kiaramas) we expect people to want to stay off the roads as much as possible. This means that they will want to live near where they work.

For an upcoming area, there must be employers that bring the money flow INTO the area. My Mentor has got a handy checklist that he uses when he assesses the economic prospects of a new area which you can also use below.

GoodPlace.my Sector Prospecting Checklist

SectorDescriptionExamplesCheck?
GovernmentCentres of government which draws in tax ringgit from throughout the country. Also, government led initiatives and growth corridors.Putrajaya, Cyberjaya. To some extent, Iskandar.Yes / No
TourismTravel and tourism hotspots are almost a good bet. Look for new travel destinations.Certain areas in Melaka and Penang.Yes / No
ManufacturingIncrease in manufacturing activity (or FDI) is usually correlated to property price growth.Penang.Yes / No
EducationLook out for new education hubs; colleges, universities AND international schools.Cyberjaya, and certain areas in Petaling Jaya (Subang Jaya, for example).Yes / No
RetailLarge shopping malls and warehouses.IOI Resort City and its surrounding areas (with the impending IOI City Mall)Yes / No

Step #4: Check Income Levels

Income levels are obviously related to availability of jobs, and in a broader sense, the primary sector which drives the local economy. For example, if you are considering a condominium in Cyberjaya next to a cluster of colleges then you’ll most probably be renting out to students. On the other hand, if you’re buying a Mont Kiara or KLCC apartment unit then your return on investment will be largely determined by the expatriate sector.

Cyberjaya used to attract technology companies looking for employees who want to live in an area with a relatively lower cost of living (compared to central Kuala Lumpur). Now with the escalating property prices in Cyberjaya it no longer offers cost advantages, which means that there will be a few “adjacent” hot spots for high tech in the future. Where will these be? Your guess is as good as mine. 🙂

Step #5: Is It Easy To Do Business?

“Brain drain” does not only happen on a national level. Cities or towns suffer from economic decline because entrepreneurial individuals leave to look for places which are conducive for business.

I would stay away from investing in areas outside the major economic centres (Klang Valley, Penang and Iskandar) simply because young people are moving into the cities, not out.
The Mentor

For an area to prosper, the entrepreneur’s drive to create and capitalize on opportunities is as essential as the presence of a qualified workforce in the area. As such, an area’s “friendliness” to business could make or break its long-term prospects. No city (or, to a larger extent, country) can increase its wealth unless it enables the entrepreneur to freely innovate and grow.

To Summarize…

Analyzing “technicalities” like population growth and income levels may be boring to some, but unless the buyer does some simple due diligence like this he or she is just gambling with money. You may have had success without doing the homework, but you might not get that lucky the next time. Trust me, I am speaking from experience. 😉

The Malaysia property market is predictably cyclical, and it’s possible to somewhat “predict” its direction by looking at demand and supply. Be on top of the market by tracking the LEADING demand and supply indicators (and not make the rookie mistake of looking into past trends), and you’ll be at a better place than most property investors.

In a future GoodPlace mini-guide, I will share a simple framework which anyone can use to estimate the SUPPLY side of the equation. It will be in the form of an Excel checklist provided to me by the Mentor (similar to the table above), but I can email the template out to anyone who reads this blog. 🙂 Just leave me a message below.

Property Prospecting 101: Is This Place Gonna Be Hot? (Part 1)

GoodPlace Girl

Unlike guru talks and seminars which often offer nothing more than anecdotes about “upcoming hot property areas”, you can in fact do the prospecting for an area rather accurately – simply by running a set of simple numbers. In fact, you can be assured that most savvy investors are more analytical in their approach; they do not completely “rely on (their) gut” as much as regular folks would think that they do.

I’ve asked The Mentor over last weekend’s tea and scones session at his sprawling estate at Nilai about his opinion on the subject of “gut vs numbers”, and his answer was simple:-

Trust your intuition, but make sure that the numbers add up.
The Mentor

I was thinking of writing up a short guide on prospecting an area when this email came in –

Email from GoodPlace reader

Christopher was one of the earliest readers of the GoodPlace Digest (at the time of publication of this guide, we are already hitting the 2,700+ subscriber point), and someone who I talk to (via email) to get reader feedback. And yes, I read and reply to every email and call that I get 🙂

So here’s what you need to know…

Before you plonk down your hard earned dough on a property, remember that prices of properties, like everything else, are a function of supply and demand. When demand exceeds supply, prices go up. Obviously, the reverse is also true.

pricing-diagram

And so, to figure if a place will be “hot” – and assuming that “hot” here means that prices go up – then you’ll only need to look at the drivers of supply and demand. You will therefore want to invest in places where supply lags demand, which then pushes up prices and rent levels. If you know the elementary techniques of property valuation (an example here), you will be able to ballpark the increase in prices of property in a particular area. Also, the steps outlined in this short guide are relevant whether you are investing for the long term, or if you have the intention to flip.

Now let’s first look at the drivers of demand. The following are some macro factors that drive demand, arranged from possibly the strongest to the weakest:-

  1. Growth in population.
  2. Adjacency factors.
  3. Availability of jobs.
  4. Income levels.
  5. Ease of doing business.

This list may not be exhaustive, but is sufficient for those who want a “screener” of sorts to quickly identify good areas to invest in. Now let’s go through these factors one by one.

Step #1: Check Population Growth

Identify if the population in your area is growing or declining. Are more people moving in or out of the area? Especially in the case of “fringe” townships in the Klang Valley, it’s good to check where the heaviest growth is, and the possible reasons, too.

For example, Cyberjaya was (is?) growing because of multinationals setting up IT shops and the blossoming of colleges which attract local and international students into the area. Also, be wary of “dying” townships, too. In the US, for example, I’ve seen a 2,400+ sq ft landed property being advertised for sale for $1 (yes, one buck) – see the screenshot below.

House in Detroit, Michigan being advertised for sale for $1. Ad seen at Trulia

House in Detroit, Michigan being advertised for sale for $1. Ad seen at Trulia

The house was in Detroit – where the population has fallen from 1.9 million in the 1950’s to merely 700,000 in 2012, and the declining trend is set to continue. To sidetrack a little, here’s some (strangely) beautiful pictures of abandoned buildings in Detroit.

Action Step: Identify the trend by looking at the number of people moving into (or out of) the area.

Step 2: Adjacency Factors

Often, when an area is “bursting at its seams” the adjacent areas will get the (positive) spillover effect. You can easily identify upcoming (adjacent) areas by looking at the evidence that the area is reaching its limit:-

  1. Are there traffic jam problems?
  2. Are the prices or rental rates going (shooting!) upwards?
  3. Is there a perception that “land is running out” in this area?

Emerging adjacent areas often attract people who want to avoid the escalating prices in the “main” area as well as worsening living conditions resulting from rapid growth. An example would be the “North Kiara” as well as the rest of the Segambut area – which is adjacent to Mont Kiara.

Mont Kiara, Segambut

The Mont Kiara enclave is set to get “enlarged”, eating up what’s left of Segambut

Action Step: Do a shortlist of areas which are experiencing rapid growth for the past 24 months, and map out the adjacent areas which may get the spillover.

In the Part 2 of this mini-guide, we’ll talk about the rest of the drivers of demand (economical and income considerations) as well as the supply factors (new + existing developments and infrastructure). Click here to continue…

How To Value A Property (An Intermediate Guide)

Asian lady @GoodPlace

At the time of publication of this mini-guide, we have racked up some 2,700+ downloads of the How To Value A Property guide. It’s worth noting that the guide is NOT meant to replace the professional valuer’s service (yes, we did receive some rather peeved emails from people who probably thought that they would be out of a job soon), but it’s useful to give the prospective buyer an idea if an asking price is “worth it“.

If you haven’t downloaded your free copy of the How To Value A Property guide yet, leave me a message in the comment section below and I will get the latest version emailed to you.

In the property valuation guide, Uncle Patrick has outlined a simple framework on what’s commonly known as the “COMP (short for “comparison”) method” of valuation where the transacted prices of  “comparative” properties are used to estimate a property’s fair market value. In this short essay, we will go through a hypothetical example on how to collate transactional data in order to come up with a property’s fair market value.

Let’s imagine that you’re interested in buying a two-bedded, 831 sq ft apartment at “Stonor Residences” in the KLCC enclave. Remembering Uncle Patrick’s guidelines on choosing a comparative property, you quickly listed down the following criteria:-

  1. Transactional date. You’d narrow down the transactions to the last two to three months, but you’ll also consider older transactions in order to get a sufficiently large number of comparative properties to work with (at least eight).
  2. Size. Ideally the comparative properties should have the same size, or at least in the same range (about 200 sq ft for apartments).
  3. Configuration. Ideally the same number of bedrooms, bathrooms, etc.

You make a trip to JPPH and you conduct a search. However, for the past three months, there have only been four transactions for the 831 sq ft apartment that you are considering. Therefore, you broaden up your search to include all other sizes as well, and you then collate the data in the following table:-

"Stonor Residences" Transacted Prices & Configurations

NoUnit AddressTransacted PriceSize (SQ FT)Price PSFBedsBaths
1,096
112A-1-3997,2008311,20022
224-1-41,200,3881,20499732
39-2-41,009,0108311,21422
429-3-51,204,0001,2041,00032
522-2-32,304,6452,33598766
614-1-8929,8998311,11922
719-9-11,081,1318311,30122
821-1-31,145,0041,20495132

The average price PSF is RM1,096, but strictly speaking you should only consider the 831 sq ft apartments – the figure then stands to be a little more than RM1,200. This should be rough selling price that you should be comfortable with, but personally I’d revise that down too because the “next up” configuration, the 1,204 sq ft units were sold for a little less in terms of PSF.

What Next?

The “rough selling price” is not be all and end all to everything. With this price range you are now in a better position to filter out many options or listings you see at property portals, and once you are able to go for some on-site viewings then you’ll be able to tweak the price further:-

  1. Views. In the “Stonor Residences” example, does the unit have the coveted Petronas Twin Towers view? Or is it blocked by another condominium? This might also explain the discrepancy of RM100 PSF between transactions (6) and (7) in the table above.
  2. Condition. Will you need to fork out extra monies to fix up the place in order to make it habitable?
  3. Floor Level. This factor is important especially in KL city condominiums. Also, if the condominium sits on top of a retail component, the lower floors may suffer from noise problems.
  4. Neighbourhood. Are there new projects in the neighbourhood that will impact demand? Case in point: KL Trillion and Three28 on Jalan Tun Razak, Star Residences and The Mews on Jalan Yap Kwan Seng.
  5. Available Units. The more (legitimate! 1) listings, the more suppressed the prices would be.

Final tip: Get the overall “feel” for the market by talking to the people who keep their ears to the ground: the AGENTS! They are a wealth of knowledge and information that you will not be able to get by merely looking at transactional data. For example, a good agent will be able to tell you how fast the turnover rate is (i.e. how quickly the units are selling in the neighbourhood).

Building relationships with good agents takes time, but if you’d like me to introduce some (from our verified panel of agents) to you then let me know what your requirements are using our GoodPlace DealMatcher feature.

Remember that the transaction should make financial sense to you, and you should have an exit strategy a few years down the road (depending if you are a long- or short-term investor). In the meantime, working out how to generate cashflow from the property is a worthwhile exercise, and you’ll find yourself a winner if you are able to generate ongoing cash while waiting for capital appreciation.

  1. Beware of bait and switch schemes which are prevalent especially in the luxury property market!

Guide To Renting To Students: Rules To Obey

How to rent to students

Over the past few days there was a discussion at the PropertyTalk section at Lowyat.net about the infamous Ridzuan condominium. The thread starter (one “Axuel”) has asked if it’s a good buy (RM500,000 for a 1,400 sq ft unit, translating to RM357 PSF). See the thread here.

I took the liberty to pull out some numbers from GoodPlace’s internal database of asking prices for the past six months and did a quick trending chart which is quite telling on its own:-

Ridzuan Condominium Price

It’s evident that RM357 PSF might be on a higher side as the asking prices peaked in October last year and has been on a downward trend since. Also in late August the residents of the Condo voted to kick “African tenants” out – see coverage here by the Malay Mail and also at GoodPlace. We are currently crunching the numbers for January, but it’s not likely that the asking prices would breach the RM300-320 PSF level.

Prolific LowYat poster Chris Chew offered an explanation behind the seasonal fluctuations of Ridzuan condo’s price –

chris-chew

Prices of properties where student rentals are prevalent (like Sunway) tend to fluctuate based on student cycles. Apart from pricing, there are also a couple more drivers which are unique to properties which are rented out to students:-

  • Above average turnover rates. Tenure is dependent on the length of study (two to four years?). The high rate of churn will eat into the profit margin. Also, as point out by Chris above, Ridzuan may be seen as a “transit point” where students would move out to neighbouring condominiums like Suriamas which are in better condition albeit at a higher price tag.
  • Higher repair bills. Wear and tear is typically higher in student rented properties.
  • More service calls. Remember that these are typically teenagers who may be on their own for the first time in their lives, and as such, the landlord would expect to get called more often than the regular tenant.

Student Rentals – A Bright Spot In A Gloomy Market

Given the impending slowdown of the Malaysia property market, there are buyers who would especially pay attention to student rentals – simply because students are a steady pool of tenants which makes it less affected by the downturn.

Picture of a college girl reading some notes for GoodPlace.myAdditionally, at selected areas around the more upmarket colleges, rents are usually paid by parents (or better still, corporate sponsors) which means that rental delinquency cases are less common.

Now if you are interested in the student rental markets then these are some rules to obey:-

  1. Avoid neighbourhoods which are occupied predominantly by owners. Student rental properties are rather unpopular in owner-occupied neighbourhoods for rather obvious reasons. 🙂
  2. Be wary of the school cycle and know exactly when students are looking for places to stay. Missing this cycle will prove expensive as it might mean that your property may go untenanted for the year!
  3. Factor in the higher-than-average maintenance costs into the yield calculations. If you need help in calculating the rental yield then take a look at this guide.

Some of the areas which you may want to look at: Sunway (an obvious choice), Subang Jaya (where Taylor’s and Inti College are), Damansara Jaya (where KDU is), Cyberjaya (the areas near Limkokwing University and Multimedia University) and areas where international schools are found: Mont Kiara, Setia Eco Park, South Puchong.

If you fancy looking at student properties but don’t know where to start, drop me a line at the DealMatcher page and I’ll check if there are available listings with our panel of agents.

Admittedly, student properties are not for everyone because of the high maintenance factor, but on the positive side this also means that the upside is higher for those who are willing to put in the work.

How To Measure (And Use!) Rental Yield

Resident GoodPlace.my girl with an abacus

I‘ve been intending to write about rental yield calculations in the Homebuyer’s 101 Guide, but here’s the quick-and-dirty version for those who have been wondering about how to derive gross and net yields, and more importantly how to use those numbers.

Yield is the “magic figure” that many investors use as a screening criteria; now with the average yield going down the dumps the shortlist of properties deemed to be invest-able is getting shorter by the day. More on this later.

And so we have received this very timely email following last Saturday’s GoodPlace Digest (click here for the archives) –

Yield Calculation

What’s “yield”, and why is it important?

So Paul, here’s your answer. 🙂

How To Calculate Yield?

Pretty simple, actually. Annual Gross Rental Yield is defined as follows –

Definition of gross yield

Here the Total Purchase Price is the summation of the actual price AND the corresponding expenses, which typically includes stamp duty, sales / purchase agreement fees and other transactional fees. Additionally, we would also include renovation and repairs into the Total Purchase Price as well (some argue otherwise, but we reckon since the cost is essentially “sunk” it should be factored in).

Now if there are ongoing costs (or in the case of high rises there will be maintenance costs that are borne by the landlord for example) then it will make sense to calculate the Net Yield which is defined as follows –

How to calculate net yield

Some of these annual expenses may also include: agent fees, repairs, property taxes, insurance.

Why Is Yield Important?

If you’re familiar with stocks, then think of yield1 as the “price to earnings ratio” of properties – it indicates how “expensive” a property is – in the context of its returns.

Now with the average purchasing price on the uptrend for the past 24-36 months, rental has been struggling to catch up, resulting in suppressed yield. This is especially so in areas where there’s oversupply, particularly in Mont Kiara and also KLCC.

GoodPlace.my

Properties in Mont Kiara suffer from suppressed yield with flat or dipping rental rates

Historically, the “cut off” point for many investors are 5%, and in the present many would be happy with 3% or more. As such, the days when one can entirely “subsidize” a loan with rental are practically over. 🙂

In Summary…

  • The “yield” of a property is an indication of how “expensive” the property is in the context of the returns that it provides.
  • Typically speaking, properties with higher yield will give you higher returns on your investment.
  • Net yield is a more accurate measure than the gross yield because it incorporates the ongoing expenses to maintain the property.
  • In areas where there has been high capital appreciation, yield takes a beating.
  • If you are investing in areas with super low yield, the possibility of market correction is very real.

Questions? Comments? Leave your feedback below.

  1. Strictly speaking, the inverse of yield