How To Avoid Traps In Real Estate Investment Part 1/2
Even experienced investors can make mistakes in property investment. Sean Tan, a popular Property YouTuber that I follow on social media, recently shared on “Asking Sean : Almost Bankrupt For A Property “ how he lost money on an investment property in JB. In my blog 360 KLCC, I shared the story how I bought at auction a freehold 1500sf three bedroom apartment at Downtown Condominium @ Bukit Ceylon at “half price”, I.e. about RM200+ psf. What can possibly go wrong buying a bargain price auction property ? I made many mistakes also buying my first auction property. Check out my follow up blog post at 360 KLCC, “5 things that can go wrong when buying auction property (& how to avoid them)“
How To Protect Yourself From The Traps Of Real Estate
Never borrow more money than what you can afford to repay in monthly loan installments
In Malaysia, property buyers can borrow as much as 90% for their first and second properties, for their third property, the maximum loan to value ratio falls to 70%. But many property investors I know have at least 50% equity in their property portfolios, IE they prefer to have a buffer in case rents fall, they can still pay monthly loan installments.
If their properties appreciate in value later, they will refinance and use the surplus to buy more properties. (Some property investors I know are conservative. They buy their properties for cash. )
A good mortgage broker can help investors find a financing package that meets their needs, taking into account their financial capacity.
If buying a property from a developer or where there is no individual title, just a Master Title, get a letter from the developer's financer to exclude the property if the developer goes into foreclosure.
Under the National Land Code 1965 which is based on the Torrens System where registration is everything, registered chargees of the master titles (the bridging financiers) will enjoy priority vis-a-vis purchasers and end financiers, whose rights are based on contracts. In James Edward Buxton & Anor v Supreme Finance (M) Berhad [1992] 4CLJ 1945 the Supreme Court held : “In all these cases, it was held that the interest of a registered chargee is indefeasible by s. 340(1) of the Code unless it is made defeasible by s. 340(2). ………. The interest of a bona fide purchaser for value cannot prevail over that of a registered chargee.” For more information, see the Post Scrip & Disclaimer.
Don't rush to sign anything without first doing a due diligence check
When I bought my first auction property, I did not check out why it was going cheap (the developer was in liquidation, the JMB finances were not in good shape because many owners did not pay service charges) . I also underestimated my holding costs (the monthly service charge was a high RM650 for my 1500sf unit), and overestimated the projected rental.
Understand the risks of property investment
In 2000, when I bought my first KLCC property, I got a bank loan at a fixed rate of 4% for the first year. The following year, the interest rate on my loan was BLR + 1%, IE about 7%.
In the US, rising inflation means mortgage rates are probably going up for the first time in a decade. See the 20 year chart below of BLR that shows the current BLR of 3.5% is the lowest in 20 years. I think but cannot be 100 % sure that over 2023-2024, BLR might go back to 5-6%, levels last seen between 2005-2018. The risk for property investors here who assume their mortgage interest rates will be flat for the next five years is if interest rates were to increase substantially, say by 2-3 % over the next two years, can they still afford to pay much higher monthly loan installments?
In 2000, I did not have to wait too long to find a tenant. But there are many more KLCC condominiums now in 2022 , with more on the way. It is becoming increasingly difficult to find quality tenants. In the aftermath of the pandemic's Movement Control Orders and sharp fall in international travellers and expats, KLCC rents have been on the decline. At many 5* KLCC serviced residences, vacancies have increased. If property investors cannot find a tenant, do they have enough cash reserves to pay service charges, property assessments and loan installments?
To Be Continued - Part 2 on Real Estate Mistakes
Post Script & Disclaimer
My blogs 360 KLCC and Real Estate Marketing 101 have posts on how to find out a property's Unique Selling Propositions, it's Walkability Score, and how to get free 5 year charts of price transactions and rentals PSF.
2 James Edward Buxton & Anor v Supreme Finance (M) Berhad [1992] 4CLJ 1945 is cited on page 58 in a 1993 dissertation for a Master's degree by Syarifah Zubaida binti Syed Abdul Kader . See here
