Updated: Mar 28, 2020
Have you invested in property only to find out that making money from it is not as easy as you thought? Tenants are hard to come by, rental prices are depressed, and your property's value is not appreciating as it should.
How are the property millionaires doing it? What are they doing that you can't seem to get right?
Honestly, there's no big secret to investing in property. Every strategy, every tactic and every method to buy and sell property is accessible to you via the internet, the hundreds of books on the subject, and the never-ending supply of seminars by gurus.
In fact, as you read this you're probably thinking, "I've heard it all before. Buy low, sell high. Location, location, location. Look for drivers like MRT and LRT stations. AirBnB. What's new?"
In this post, I'll give you a new twist - a bankable framework that will almost always guarantee the best returns for you as a property investor. A framework that puts you in the right mindset from the beginning because success as a property investor may depend on things like location, demand drivers and all the other factors you hear rehashed again and again but the numero uno skill you need as a property investor is the right mindset.
Let's first look at why you may be finding it difficult to reap good rewards in property investment.
How Beginners Invest In Real Estate
Typically, beginners have a very short-term approach to property investment, or worst still, they don't have an exit strategy.
Property investment is safest when it is done with a long-term approach. The property market is cyclical. It has ups and downs. This is inevitable and the norm. However, this fact is often forgotten. If you're not familiar with property cycles, this may be a good time for you to read about the 18-year property cycle.
So why is it risky to have a short-term approach? People rush into property investment when the market is at its peak. This is when double-digit growth is the norm, and you see everyone around you making a lot of money flipping houses. These times are literally the "gold rush" period. Everyone wants in on the property market.
It's also when most of the beginners rush in.
The peak of the market expansion is typically followed by a recession. This is where the problem lies. During the buying frenzy of an expansion, prices have appreciated quickly and it's a seller's market. So the majority of people are buying at high prices. When the recession kicks in, prices consolidate or drop.
Everyone who bought for quick gains will now find themselves stuck with houses that have no capital gains. If they didn't have a long-term approach, they may not have given much thought to rental income and their cash-flow. Beginners will find themselves with poor cash flow and no capital appreciation. This leads them to feel disillusioned and may be the end of the road of their property investment journey. At least until the next property boom.
When you have a long-term approach, you enter the market with a completely different mindset. Cash-flow becomes very important. You start to think about how you will hold on to your house and the costs of doing so. You become less obsessed with the cycle itself and more focused on your exit strategy.
Property prices in general always go up. Simply because land is scarce and population is increasing. It's rudimentary economic theory that price will go up when supply is short. Professional property investors are therefore not concerned with short-term cyclical changes. They have long-term outlooks with solid exit strategies. They can afford to hold onto their properties until prices go up.
At this point you may be wondering how long is long-term? For me it's at least 8 years.
Now that we've established how beginners invest in the property market, I want you to focus on doing the exact opposite - think long-term.
This shift in thinking will put you in a different league altogether. It will also prepare you for the framework I'll be getting into soon.
Before we dive into the framework, there is another important consideration you must take stock of.
Capital Appreciation and Rental Income
Your ability to pick a property that maximises both, will determine the degree to which you are successful as a property investor.
There is a funny conundrum with this that I explain in detail in my post, The Complete Guide to Buying a House.
Basically, houses with the best capital appreciation potential usually have low rental yields and houses with the best rental income potential usually have poor capital appreciation.
You therefore need to strike a balance between the two. Ultimately, it's capital appreciation that makes you really wealthy. However, if your rental income is bad, you may not be able to hold on to your property for the long-term and may be forced to sell early.
If you're forced to sell your property, it means you'll not make much profit on the sale.
When you optimise your capital appreciation and rental income potential, you'll strike jackpot in the long-term.
Always keep this in mind. These are the two most important considerations in property investment - capital appreciation and rental income potential.
Now let's get to the interesting part - the framework. This framework is called the business chassis.
How the Business Chassis Works
Just like a car chassis determines the potential of that car's performance, the business chassis determines the potential of a business' performance.
You may be wondering what does business performance have to do with property investment. Everything.
Property investment is a business. It should therefore be treated like a business. Not like a hobby or some part-time interest you pay attention to in your free time.
Property investment is a deliberate activity that deserves your attention, focus, and commitment. Just like a business.
The business chassis is an amazing framework for increasing business profits. It was developed by Brad Sugars from Action Coach.
At the heart of this framework is the idea that small simultaneous improvements in 5 key areas of a business can produce a surprisingly big increase in profits.
Sugars points out that there are only 5 ways a business can increase its profits:
Generate more leads
Increase conversion rate
Increase average dollar sale
Increase the number of transactions
Lower costs (improve profit margins)
Let me demonstrate how small changes in these 5 areas can result in a huge difference to your bottom-line.
Your business makes a profit of RM10,000 per month selling key-chains online. The key-chains are priced at RM10 a piece. The cost of goods sold is RM5. 20,000 people visit your online store every month and 10% out of that number buy a key-chain.
You want to increase your profits and focus on small incremental changes in the 5 key areas that make up the business chassis.
Generate more leads - You optimise your FB ads increase the number of monthly visitors to your site by 10%. You now have 22,000 people visiting your online store in a month.
Increase conversion rate - You improve your website layout, interface, and copy to convert better. Instead of a 10% conversion rate. Now 11% or 2,420 of your monthly visitors become paying customers.
Increase average dollar sale - You raise your price to RM11 per key chain.
Increase number of transactions - You also make an irresistible offer. Customers who buy 3 key-chains in a single transaction, pay RM21 instead of RM33. On average now, every customer buys 1.1 key-chains at RM11.
Lower cost - Through a combination of optimising your marketing costs and renegotiating price with your supplier, you're able to reduce your cost of goods sold to RM4.50 per key-chain.
The improvements in general are about 10% in each area. Here's what your new monthly profit looks like:
2,420 (customers) X RM6.50 (new price - new COGS) X 1.1 (# of key-chains per customer) = RM17,303.
Improving each area that makes up the business chassis by 10% resulted in a 73% improvement to your bottom line!
Interesting? Now let's see how it can work with property investment.
How You Can Maximise Your Property Investment Returns With the Business Chassis
I've pointed out to you that if you're investing in property, then you're pretty much a business person. Property investment is your business and like all businesses, you have profits, costs, and customers.
Your profit is derived from your rental income and the eventual sale of the property (if you have an exit strategy).
Your operation costs include taxes, annual improvements, repairs, vacancy periods, building maintenance charges (if it is a stratified property), insurance, and agent fees.
The price you pay for the property, the legal fees, valuation fees, and duties are capital costs or one-off costs.
Your customers are tenants and buyers.
Now let's translate the business chassis components for property investment.