Real Estate Monetization Strategies: What You Need To Know

Melissa Chan @GoodPlaceHQ

Just last week an old high school friend of mine came down from Taiping and we met up for a teh tarik session in Setiawalk, Puchong where I work. The last time I saw him was when I took my SPM results back in the mid 1990’s (yes, I’m that old), and so I was surprised that he would come and catch up with me after so many years (two decades!).

And so Willie Loong (that’s this real name – don’t laugh) had come over to ask me about a couple of “opportunities” that were pitched to his family by a group of agents last month in Taiping. He was from a well-to-do family in Taiping (his great grandfather was in the mining business during the Ghee Hin vs Hai San days – remember your Sejarah Tingkatan Lima?), and naturally when you’re flushed with moolah then you don’t need to go look for deals – they would naturally come to you.

Usually I would just direct people who ask for advice to my blog as I couldn’t afford the time to provide personalized advice (there’s only so many hours in a day), but for Willie, I had to make an exception because (1) he sat next to me in Form Four and therefore was my de facto best friend at that time, (2) we would ponteng together to go to play Street Fighter at the notorious Pusat Hiburan Loo Foo Chi, and (3) he had once set me up with his cute cousin Clarice whom I had this mega, mega crush on. Long story short, I had to oblige because, well, he had the dirt on me. 😉

pretty

First World Problems

“Khai Yin, the number of visitors to my house has tripled over the past month or so,” Willie told me. “I used to get developers coming over to offer us money to buy our land, but now property agencies from KL are turning up to pitch us deals. I’ve got this stack of proposals that my dad has asked me to look at. I’m so stressed out!” he sighed.

I rolled my eyes and drew him this –

Willie Long from Taiping

He looked at it and laughed. “Touche. But seriously, man, you gotta help me. As you know, after all these years I’ve finally convinced my dad to set up a family office to manage our money. You know how old fashioned he is. I mean, I can’t ask him to invest in fookin’ bitcoins, you know what I’m saying?”

The thought of asking his father to give me money for GoodPlace then flew across my mind. But then I pictured getting grilled like a bak kwa by the 82-year-old man in his trademark guttural Taiping Hokkien (“Ah boy, lu kong hamee lu??”) and I quickly dropped the idea like a hot potato.

“And so I thought I’d get him some property deals instead. Pretty safe bet, I would think, since it’s property. And the word gone out, and before we knew it we were getting calls from all these agents from KL, Penang and Singapore. I need help vetting these deals.”

“OK. I guess your old man will have the final say over these things. Let’s start from the basics. Have you asked him what he wanted?”

He shrugged. “It’s all about the bottom line, I guess. When I first talked to him about setting a family office, his brief to me was simple – make the most out of the little that he gave me. You know how kedekut he can be.”

Who's your mofo, Jerry??

I remembered how Willie used to bitch to me about his 50 sen / day allowance, and that he would make me pay for his bowl of asam laksa at the Lido cinema canteen which we would go to after our Boy Scout activities on Saturday mornings. At least Clarice would insist that we go dutch during our rendezvous sessions at the kopitiam after tuition. 😉

“A crucial part of any property investment strategy is monetization,” I took out a fresh leaf of paper from my notebook. “Ways to make money from property can be summarized in this simple diagram,” I said while I sketched the following –

GoodPlace.my

Willie looked at the diagram. “This is… it?”

I smiled. “Don’t be fooled by its simplicity. There are more complicated stuff, but for most people this is all there is needed to know.”

The Three (3) Paths To Money In Property

Ther are three ways to make money in property, and they are the following:

  1. Buy/Flip. This is the “wham-bam-thank-you-m’am” strategy. You’ll need to be good at spotting properties which will appreciate quickly post purchase (typically from the developer) – this was easy during the bull years; not so now. This method is short-term at its best.
  2. Buy/Hold/Sell. This is the “longer” flip where you’d pay off the mortgage while wait for the value to appreciate. Usually this strategy involves buying a property at below market value, fixing / enhancing it, and then selling it at a premium. This method is medium-term, and will require an ability to find good value deals, and the effort to restore the property in order to command a premium over its last transacted price.
  3. Buy/Hold/Rent. This is a cash flow play, and for many long-term players it’s the default strategy. The property generates cash flow through rental which contributes towards mortgage payments. You will then benefit from the capital appreciation over the years. This method requires the ability to generate yield which matches or even exceed mortgage payments.”

“Makes sense,” Willie said. “But how do I choose? From what you said, it depends largely on what time frame I am looking at. Did I miss anything?”

“Time frame is one factor, yes,” I replied. “But more important is how much risk you can take. That will pretty much depends on your style of investing.”

Willie chuckled. “You know how careful my dad is. He’d probably kill me if he found out that I spent the family fortune buying an entire condominium block in Iskandar.”

I laughed. “For sure. Now you need to remember that you do not need to just follow one particular method. And since you’re now building up a portfolio, you have the luxury of adopting all three methods that form a bigger strategy.

“Using all three methods? Is this a form of diversification?”

I shook my head. “No. You can focus on just one property class while adopting all three strategies that I have told you. Diversification is overrated anyways.”

It All Depends On Your Risk Tolerance

“OK. Let’s say that I am the “Wolf of Wall Street”, you know, the money-grubbing kinds with devil-may-care attitude. What would my monetization strategy be?” Willie asked.

I scribbled on the diagram. “Here, look at this.”

GoodPlace.my

“Risk Takers make more deals than the average investor, and they are focused more on upside than the possibility of loss. And as such, they often get attracted to short-term methods like the flip, and as a result, their gearing can be exceedingly high, and there’s always a fine line that they walk on at the risk of the default,” I explained.

“I suppose there are more of these risk takers during the boom years,” Willie said. “That’s very true, because during the bull market, it’s obviously easier to flip. Now with the 30% RPGT, the banning of DIBS and the slowing down of the increase of prices, many of these Risk Takers have been driven out of the market.”

wolfy-shrug

“Got it. Now let’s move on to another example.”

“Let’s take me – a super passive investor. Those who know me well would know that I prefer to plough my money into businesses instead of properties. And as such, I want the biggest return from property with the least amount of work required from me. So here’s how my profile looks.”

GoodPlace.my

Willie looked at the diagram. “I see that you’re the cash flow kinda guy.”

“That’s correct. Cash is underrated. I want to be as liquid as possible because I want the flexibility to scale up my businesses quickly when an opportunity for growth comes. Property is slow burn, and while capital appreciation is great, I’d prefer to enjoy the cash flow on the shorter term.”

“OK, so now back to my case. If you’re in my situation, then how would you structure the portfolio?” asked Willie.

“Family offices are a special case because wealth preservation is usually the primary goal. Wealth growth usually happens elsewhere,” I said while I added more scribbles to the diagram, and handed it to him.

Wilson Loong

Willie looked at the diagram closely. I added, “My friend Munirah runs her own family office, and this is how she does it. “

He put down the notebook. “This sounds great. Seems that buying and holding plays a huge part in this strategy. Can you explain to me why? “

I nodded, “Remember that you primarily want to preserve wealth. And as such, you want to build up a portfolio which locks up value for the long term. Your end goal is to build this “buy and hold” portfolio for the long term. That’s your main objective.”

“I understand. How about flipping deals and medium term sales? How do they figure into the entire strategy?”

“These are purely opportunistic in nature. From time to time, especially when your portfolio has reached a certain critical mass, you’ll come across a short-term deal that you can do to quickly generate extra cash for you. Do this to increase your operational coffers, and to further build up your main portfolio.”

Wrapping It Up

Thanks man, this is great,” Willie enthused. “Now back to my original question. How do I use this then to vet deals?”

“With this overarching strategy, it makes it simple to see if the deal your are considering fits into your strategy or not. Remember that you want SUITABLE deals for your portfolio, not merely GOOD deals. You now have  a quota of each types of deals that you can fit into your portfolio.”

William nodded. “If I may, here’s what I will do:-

  1. Finalize the strategy by locking down the salience of each deal type; for example: 70% Buy/Hold/Rent, 20% Buy/Hold/Sell, 10% Buy/Flip,
  2. Scrutinize each deal based on type based on these few criteria: short vs long term, property class, yield, upside for appreciation, and
  3. Fill up the quota accordingly.”

“You got it.”

ADDENDUM: The fourth way of making money in property can be found here.

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

Comments

  1. “…ponteng together to go to play Street Fighter at the notorious Pusat Hiburan Loo Foo Chi,.. ”

    After that cross the street go to Larut Matang for M Jabardeen popiah… or Sotong Kangkung behind Bomba. Perghh…

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