“Buy land, they’re not making it anymore” Mark Twain
When people ask me about how i started out in the hostel/hotel industry, one popular question that always pops up is, “When is the right time to buy property?”
The ideal answer is “When its cheap”! Of course if life was that perfect, we wouldn’t have to hustle so hard.
There are many factors/aspects that you need to study before you come to a conclusion of weather it is the right time to buy. Try answering these questions;
- Home, Investment or Business ? Will the property you are buying be a home? Are you planning to rent it out? Are you planning to sit and wait, and sell it when the price is right? Or are you planning to develop it into a business?
- Cash Flow 1. What is your commitment level? Is your family expecting a baby? How many kids do you have? Is your wife working? Have you got money saved up for emergency days? i.e Hospital, Children’s Education, etc.
- Cash Flow 2. How much cash do you have now? If you are taking a loan, are you able to service the loan amount in the future, should the economy go to recession, and you lose your job? (Sorry to bring this up, but this is one of the worst case scenarios that I see happen to most people nowadays.
The answers above are more of gauging how ready you are financially. Then we need to move on to the “RIGHT TIME to buy”. Here’s my own personal check list.
- What type of property are you planning to buy? Landed Property, *Multi-home, High-rise, or Land?
- Check around the city and nearby areas of how many types of similar development are there? What are their occupancy levels like? Are they all sold out, rented out? What are their selling/rental prices?
**If there are similar developments around, that are left empty, then chances are there is over-saturation. This will lead to competition of prices, so you may possibly score a deal.
**If they are rented out, are they rented out monthly or daily? If a market has a high daily rental rate, then this location enjoys high business/tourist volumes. Then this is a good location to buy.
- Situation of the countries economy. When the countries economy is good, everybody has money, and therefore most likely all the good buys will all be taken. This is a good time to sell your property if you have any. If the economy is going into recession, chances are that most people will also be jobless and have less disposable income. If you have strong financial background, then this is the time to buy.
*Multi-home is a term that they use in the US, where you buy up a building or a home, and you split it into many rooms, allowing you to rent them out as separate entities.
Before we continue, do understand that, buying a property as a HOME isn’t the same as buying a property as an investment. When people buy a home, the primary reason is for providing shelter. One of the most basic factors that makes an investment an investment is your ability to control the timing of your ownership. That means that you can buy it and sell it at times and under circumstances that are likely to maximize your investment return. We can think of traditional investments, such as stocks, bonds, mutual funds — even rental real estate — as providing this ability.
Since your house is your personal residence, you will have little control over the purchase and sale from an investment perspective. You’ll purchase the house when it is needed for shelter purposes, and sell it only when it no longer serves that purpose, and it’s time to move on.
The lack of control over the timing of buying and selling a house had a major negative effect on houses as investments during the financial meltdown. Many people bought houses at the top of the market because that was the time that they needed a home for their families. But still others were stuck having to sell after the market collapse, due to a negative change in their own personal financial situations.
That forced them to buy high, and sell low. That’s not unusual when it comes to residences, and largely disqualifies a house as an investment.
Making money from buying and selling? “Flipping”
Flipping is defined as “Profits from flipping real estate come from either buying low and selling high (often in a rapidly rising market), or buying a house that needs repair and fixing it up before reselling it for a profit (“fix and flip”)”
My first Property
My story starts something like this. Coming out fresh from University, I landed my first job working as an Engineer in a Factory. My first pay was around RM 2800 (750 USD) a month. I came from a middle class family. Dad worked as a Valuer, and Mum was a housewife. I thought that my dad being a land valuer, would have trained me or imparted his knowledge of property investing to me. Sadly this did not happen.
I lived with my parents to save rent, as many of us would do. However things started getting expensive when i had a girlfriend, and we started staying at hotels. (Yeah, we were enjoying their breakfast buffets*). My parents place only had nasi lemak.
My monthly expenses soared. Obviously i couldn’t cope. So i decided to buy a house. Fortunately for me, the house prices was still very stagnant at that time. So i bought my first beach-view property for RM 180k.
Before we all get too excited on what happens in this Sub Sale, Beach View, 890 ft2 Resort Condominium. Lets take a moment to discuss this. I will be taking property prices in Penang, Malaysia as a reference point because this was where i started off. So i bought the property in 2006 ( 180k) and then in 2015 the price went up to 500k (Economy Peaked). This property saw a 177% increase in 10 years. Meaning to say, around 17.7% per year. Of course this all Capital Appreciation. If I sold it off right now, i wouldnt get Property Tax by the government because I have already held it for over 5years. Read also: RPGT will hurt your pocket.
It is now 2017. Malaysia’s Economy is suffering from many factors aside from the Global Economical Slowdown. The last i checked the asking price for my Sub Sale, Beach View, 890 ft2 Resort Condominium is priced at 400k. Last recent transaction is 370k.
But then again, remember what i said before, a home is not an investment!
This is a good example of why a home isn’t an Investment. Right now, the market value of my Beach View home is lower than the peaked price. If it was an investment, i would only sell it at a high price. Now what if I am facing some financial difficulties, and i needed to scale down. I would have to be forced to sell off this property even though the price is low.
Therefore A HOME IS NOT AN INVESTMENT.
So lets do a quick recap of what we have discussed today. Double check this checklist, before you proceed to buy your FIRST PROPERTY, or ANY PROPERTY for that matter.
1. Get Finances in Order
This one seems obvious, but it can be more complicated than you think. Prepare for unexpected circumstances that might occur. Examples include
- Sudden shift in bank interest rates
- Economical downturn leading to retrenchment
- Maintenance fees and personal maintenance of the property
For this reason, it is important to have financial stability and a low interest loan.
If you are buying a rental property, financial stability is ensuring you can afford the payments on a house without the rental income. You may not always have renters, and when you don’t, the bank still expects you to make payments on the house. Finally, remember that when you run a rental property business, you are not running a home; you’re running a business. Therefore, it’s wise to have an account separate from your business dealings for your spending related to the care of your income property.
2. Understand the Market
The real estate market is one of the most malleable markets in the country. It is influenced by a number of factors, like the economy, supply and demand of housing or even political decisions.
A better understanding of the market will enable you to gauge the proper times to identify selling and rental prices.
Things you can control, and things you can’t
You’ve no doubt heard the terms “buyer’s market” or “seller’s market.” If you’re house hunting, you want to be on the right side of that equation — in a buyer’s market. Prices are reasonable, there are lots of choices within your budget and financing is a breeze. The Goldilocks Zone. Don’t wait for it. That’s a rare combination of circumstances.
It’s more likely you’ll be house hunting in a “hot market.” Imagine walking into an open house. It’s a great home well within your budget, it’s in your ideal neighborhood — and it’s crammed with more than a dozen other couples, offers already on the table. This happens in a seller’s market.
If you do decide to wade into a hot market, here are some tips for staying sane:
- Be patient. It’s likely you won’t be able to buy the first home you fall in love with. But hang in there; a perfect opportunity may be just around the corner.
- You’ll probably have to pay quite a bit more than the list price. Keep that in mind when checking out neighborhoods that you think might be in your price range.
- Remember, a hot market is often determined by the market segment. In some areas it might be suburban single-family homes; in others it could be urban one-bedroom condos.
A real estate agent can help guide you in learning the ins and outs of your market.
Just how strong is your market?
You can take the pulse of your local market right now and see where it stands. With some inside info, you’ll be able to make a smart decision about whether to buy.
One way to gauge the pulse of your market is to take a look at the local homes-for-sale inventory statistics. The National Association of Realtors publishes a monthly report detailing how many homes are for sale in the top 300 U.S. cities, how long they’ve been on the market and the median asking prices. This listing report allows you to compare your market to the national average and is ranked by volume of searches — a good clue to the level of homebuying interest in your area.
You’ll also get insight about where prices are headed in your city, whether homes are selling quickly or the market is soft and just how tight inventory may be. Useful stuff. Median list price information is eye-opening all by itself.
Investigate comparable sales
An agent can provide you with a comparative market analysis so you can feel comfortable that any offer you make is competitive and reasonable. These comparable neighborhood sales — “comps,” as they’re called — show the value of similar houses in the area, either recently sold, currently listed or whose listings have expired. That can be extremely helpful in fine-tuning your budget and ultimately in making an initial offer.
By researching a property’s last sale — local property tax assessors have databases of such transactions — you can get a rough estimate of the current price of a home. The Federal Housing Finance Agency offers a House Price Calculator that does just that. When you input the last purchase price and date, the tool will provide an estimated value of the home today, based on the average appreciation rate of all homes in an area. It’s a fairly rough estimate, though, because it doesn’t take into consideration the property’s actual condition, improvements that have been made or the state of the local real estate market.
Knowledge is power in a home search
Knowing your local housing market is a basic first step in getting a home you’ll love — and can afford — without overpaying or missing an opportunity. It’s even more critical if you’re moving to a new city and need help in learning the lay of the land. If you’ve done a little recon, you’ll be almost ready to get to some serious house hunting.
3. Begin with the Right Property
Almost every prospect requires that you start out low and work your way up, and real estate investments are no different. It’s important to begin with a solid property before finding a challenge.
Some of their tips include:
- “Buy a property that you love.”
- “Skip the prize properties.”
- “Buy as a personal residence and change to rental.”
- “Buy properties in good shape.”
Each of these options are excellent suggestions for those joining the business. Once you’ve mastered the simpler income properties, you can move on to another challenge, such as flipping a dilapidated property.
4. Caring for the Property
Whether you are deciding to turn it into a short term or long term rental property, these are the pointers that you need to look out for. We also address the current trend of renting out property on AirBnB. There are many criteria’s you will need to consider. It is your responsibility to collect rent, keep the books, file taxes, screen tenants, handle maintenance, work out the insurance plans, write the contracts, and more. Many feel that they’re up to the challenge and try to handle the work themselves.
With long term rental, there isn’t much of a hassle as you only collect rent every months end. For short term rentals additional factors need to be addressed.
- Communication with the guest prior to staying and ensuring that they find the place
- Check in/out of guest
- Emergencies that would occur during the duration of the stay
- Cleaning of the unit
- Theft of items from the unit
- Damage of items in the house
For others, the task is daunting to say the least. If that sounds like you, you’ll probably want to look into hiring a property management company. A property management company can cost anywhere from 5-10 percent of a month’s rent, which decreases your return, but can be well worth the investment.
**it is worth noting that some property managements do not allow short term rentals.
5. Screen Tenants Properly
Once you have sorted out the basics, it is time to rent out the property. Do not be tempted to just rent out to the first person that comes up. Be patient and screen through your possible tenants to ensure that they are reputable people, willing to care for your property and also