“Don’t wait to buy real estate, buy real estate and wait”
The most common way property investment provides returns: value appreciation and rental income. However, you can increase your return on investment through several ways by adding value to the property or developing a business from real estate. For example, home stays, office space, farming and many others.
Before embracing property investment, you need to have a clear idea on how you can generate returns. This will enable you to decide on which type of property you want to acquire.
There are a few categories of property available which comprises residential, commercial, industrial, retail and land. Each one has a unique advantage. In my previous column, I discussed on the mistakes to avoid in property investment.
Now, I will share on seven reasons why we should include property investment as part of your investment portfolio:
Leverage is the use of borrowed capital from financial institutions to buy property. We can use the power of leverage to quickly grow our property investment. In Malaysia, you can get a margin of financing of 90 per cent for your first two properties and 70 per cent for the following properties.
Leverage, when used wisely to minimise risk is a powerful advantage of real estate investing. With the current BLR (Based Lending Rate), leverage should be very much an advantage for property investors.
The Government through the National Economic Recovery Plan (Penjana) 2020 has come up with several initiatives to stimulate the property market. According to the Ministry of Housing and Local Government, under the Home Ownership Campaign (HOC 2020) initiatives, the government has included some benefits; a minimum of 10 per cent discount given by the developer to the purchase eligible properties that are registered with REHDA Malaysia (for Peninsular Malaysia) and SHEDA or SHAREDA (for Sarawak and Sabah), stamp duty exemptions are granted for instruments of transfer (partial exemption) and loan agreements (full exemption) for sale and purchase agreements signed between June 1, 2020 until May 31, 2021.
The stamp duty exemption on the instrument of transfer is limited to the first RM 1,000,000 of the home price (which translates to a maximum stamp duty saving of RM 24,000 for a property priced at RM1,000,000), while full stamp duty exemption is given to the loan agreement.
The 70 per cent margin of financing limit that is applicable for third residential property valued at RM 600,000 and above will be uplifted. However, the ability to obtain loans is subject to internal risk management and assessment of the respective financial institutions.
Real Property Gains Tax (RPGT) exemption is given upon disposal of residential property, limited to three houses per individual, from June 1, 2020 until Dec 31, 2021. Please take note on the above initiatives which are applicable for residential properties purchased by Malaysian citizens and the purchase must be of a new property from a property developer and not sub-sale.
Gives you control
We have a lot more control over overall investment success with real estate than with other investing classes. For example, we don’t have any control in stock investment as we can’t sit as the CEO and lead the management decision to influence the value of the stock. In contrast, for property investment we are in the driver’s seat with the ability to make decisions.
As a real estate investor, we are in the control of our success or failure. We can develop strategies to make sure the best tenants are captured, and we can make strategic improvements to increase the yield we receive.
In general, real estate investments are considered lower risk compared to other investments such as stocks. Although investing in property often produces a lower profit, investors do not have to worry about the value of their investment dropping dramatically overnight.
Real estate will always be worth something. The real estate value will never be zero dollars, in contrast a stock can have no value if things goes wrong. In my opinion, risk also depends on your property investment knowledge and experience.
Building passive income or equity
Real estate investment can provide a steady flow of monthly income or can bed use for major financial goals (children education fund, retirement fund and etc). Once your property is set up, the cash flow provides ongoing, monthly income that is mostly passive, allowing you to spend time with family, travel and reinvest in more real estate. When we buy a rental property using a bank loan, the tenant is the one paying the loan payment, thus increasing our net worth each month.
In any type of investment, diversification is important because it helps spread out risk. Buying an investment property is a proven way to add diversification into your investment portfolio. Diversification is important in investments because markets can be volatile and unpredictable.
By diversifying our portfolio, we can minimise the risk of the investment, reduce volatility and safeguard against adverse market cycles. Property investment should be a part of a component in the diversification of investment.
Although the formation of benefits of property investment gives a lot temptation to start investing, my suggestion would be to please plan carefully with considered financial goals and financial planning.
The first step for successful property investment is the creation and implementation of a financial plan. Without a financial plan, we may be aimless when it comes to investing and may leave our future investment returns to a chance.
The old proverb “Most people don’t plan to fail; they just fail to plan” reminds us on the importance of financial planning.
The reintroduction of the HOC is part of the RM35 billion PENJANA, economic stimulus plan announced on June 5. The campaign, which applies to properties on the primary residential market, started in June and will end on May 31, 2021.