Investing For Cash: Don’t Fall For These Two (2) Newbie Traps

Nuryana @GoodPlace

Generally speaking, there are two types if property investors: those who invest for capital gain, and those who invest for cash flow. The former is decidedly more popular than the latter because it holds the promise of quick riches (albeit at significantly higher level of risk). You’ll notice that most property investment courses and seminars would promote capital gain investing simply because it’s easier to promote a hype-y program like How To Make $1,278,297.67 In Your Undergarments Flipping Property Before You Take Your Morning Crap” than something more sober like “How To Buy Properties To Rent Out For Cash”. Indeed, no Gurus would teach their flock to “get rich slowly via renting out properties” which is decidedly as un-sexy as, well, Susan Boyle taking her morning crap.

Susan Boyle having a hard time, well, pooping

Here at GoodPlace we never hide our contempt for property Gurus, investment advisors, wealth consultants and lain-lain yang sewaktu dengannya. Interestingly, we found that contrarian positions vis a vis the Guru are usually a good heuristic. In layman terms, we just do the opposite to whatever the Gurus preach! And guess what – it works amazingly well, too!

For example, one of the more jarring differences between the GoodPlace philosophy and your garden variety property guru is that we adopt the more reasonable, conservative and predictable method of investing for cash flow instead of capital gain. Truth be told: I’ve never been a raging fan of property flipping for these two reasons:-

  • It’s getting pretty hard to do for a profit in this day and age of the rampaging bear, and
  • It can be rather meaningless because you’re just exploiting a small, temporal market inefficiency without creating tangible value (the same goes to bullcrap money making schemes like forex and high frequency stock trading).

I know this might sound sacrilegious to those money chaser types, but I’d rather build up my portfolio slowly (but steadily) over time, muchas gracias. Flipping’s not my cup of earl grey.

And it is my hope that the essays that I have published here at GoodPlace.my have somewhat convinced a good number of people to think differently about their property investment goals (i.e. to prioritize cash flow over capital gain). Positive gearing is somewhat passe nowadays, but if we think about it, why would the idea of getting enough money from rentals to offset the loan repayments and expenses not appeal to everyone?

Alas, my uber responsive 10,000+ strong (at the time of writing!) GoodPlace Digest email list gave me the answer I needed; from analyzing the 200+ emails (some through the DealMatcher) that I get from readers of the every month I came to know exactly why most would abandon the idea of long-term / cash flow investing in the favour of capital gain / flipping. Here are the two mistakes that newbies typically make when they look for properties to buy to rent out for cash…

 Mistake #1: Looking For High Rental Yield Properties

So how does one go around identifying good properties which provide superior cash flow? To the layman, it could be as simple as finding locations with the highest rental yield within the stipulated budget. But this is perhaps the most common mistake that the newbie cashflow property investor would make. I’ll tell you why next.

For guidance on how to calculate rental yield, click here.

There are some companies (usually real estate agencies and some property clubs) are distributing “white papers” with lists of “top ten” suburbs with the greatest rental yields in the Klang Valley, Penang and the Iskandar region. However, it’s often a fallacy to choose a location based purely on rental yield because increasing yield does NOT mean that rental rates are necessarily up. On the other hand, remember that yield can go up if the price is going down faster than rental rates.

It therefore shouldn’t surprise you if you find that locations with the highest yield would sometimes be filled with properties which are vacant for long periods of time (cough, Iskandar, cough). I’m this close to discounting rental yield altogether as a property selection criteria because it can be confusing or worse – abused by agents to mislead unsuspecting buyers.

Hot agent!

Still, scanning through rental yield figures can be a good way to quickly filter out the duds, and when you see a property with high rental yield (+6%) remember to ask this crucial question:- are the prices coming down faster than the rental?

Also for this reason, many investors like to look for locations with properties with fairly mid-of-the-range yield which gives them enough headroom to work their magic and turn the properties into major cash flow generators. Read about this particular strategy here.

 Mistake #2: Looking For Rental Guarantee Properties

I‘ll probably won’t be invited by developers to their fancy alchy-laden launch parties with skimpily-dressed waitresses after I publish this, but heck, the truth needs to be told. There are some new launches which comes with “guaranteed yield”, which means that the rent is guaranteed to be paid at least a minimum rate (which corresponds to, say, 6% yield) for an agreed time frame (say, 24 months). I think such properties are a bane to the buyer, and I’ll tell you why.

The appeal of these rental guarantee properties is obvious; since rental income is guaranteed, there’s this feeling that the buyer gets the property for “free” since the rental may cover (sometimes fully) the loan repayment. However, when the guarantee period finishes then an oversupply rental market problem may rear its ugly head, forcing you to reduce your asking rates in order to compete with the other owners facing the same problem.

Of course, I am not saying that all developers are evil like this, but it’s easy to imagine this intellectual tete-a-tete inside their hallowed meeting rooms between some best minds in the Malaysia property development business –

Developer Dude: “There’s already oversupply in this area. How do we get them to buy?”

Developer Boss: “Easy lah. Guarantee them 6% yield for 24 months. Habis cerita.

Developer Dude: “But that will eat into our margin.”

Developer Boss: “Add the guaranteed rental to the total price lah. You’re new to this business or what!?”

Developer Dude: “You is talking loco, and I like it!”

Just joking, developers. Don’t stop sending your cheques to me, please.

What this means for buyers: if you’re considering a rental guarantee property, definitely don’t discount it altogether. Do your homework and check the actual rental demand of the area, and if there have also been properties with similar yield guarantees which have since lapsed – this will give you an indication if you’ll get into oversupply trouble once the guarantee is over.

About Khai Yin

When I am not writing for GoodPlace.my and helping my readers find properties though the DealMatcher service, I spend time doting on my three kids: Wenyi, Qinyi and Eian. My personal stuff, some published essays and contact details can be found at khaiyin.com

Speak Your Mind

*