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.
#1 Generate More Leads
Your leads are your prospective tenants and buyers. To generate more prospects, you want to leverage the marketing machinery available to you. This marketing machinery comprises real estate negotiators (RENs) and platforms like Speed Rent and AirBnB.
Every property investor should have between 5-8 good RENs representing them in every location that they have an investment property in. By doing so, you automatically increase your pool of leads.
You don't want to have more than 8 RENs working for you at once because the saying that, "too many cooks spoil the broth," holds very true here. When you have too many RENs marketing your property, price wars can start to happen. The leads also start to overlap significantly and in the tug of war for the same lead between different agents, it can become messy.
A REN may also be less motivated to market your property if there's too much competition from other RENs.
Instead, select 5 RENs then replace those that are not performing until eventually you have the best performing 5 with you. When you do have the best, keep them close and treat them well. They're your strategic marketing team.
#2 Increase Conversion Rate
In property investment, increasing your conversion rate can also dramatically reduce your vacancy cost. You want to be aware of this even before you buy your investment property.
Every time you want to invest in a property ask these questions:
Will prospective tenants covet this property?
Will prospective buyers lust for this property?
You must dedicate all your resources to answering these important questions. Find out how fast properties in this area sell or get tenanted. Dig for information on occupancy rates. Check if asking prices in the location are in tandem with the general income of the local population.
Only proceed to buy an investment property if you can answer "YES" to the two questions above.
After you've acquired the property, you must also ensure that prospective buyers and tenants are impressed with your property. This will further increase your conversion rate.
You therefore have to ensure that the property is stunning. Your renovations must do this. You also need to put effort towards keeping the property stunning. This means deliberate maintenance, repairs, and upgrades where necessary.
#3 Increase Average Dollar Sale
In a nutshell, you want to ensure that you can charge a higher premium on rent and fetch a better price at sale.
For you to be able to charge a higher premium, your property must be stunning. All the factors that help increase your conversion will also help you increase the average dollar sale.
On top of that, want to think about capital appreciation potential and rental demand before you invest in a property. Study the property and the location. Look at factors that can affect them.
Is the property well-maintained?
If it is a stratified property, is it well-managed?
Is access to job centres very good?
Are the amenities within the vicinity great?
Are there many other similar properties being built nearby (potential competition)?
Is the property's design and aesthetics great?
These are just some questions you should be asking. Be very thorough in assessing the appreciation potential and rental demand.
Finally, for investment properties you already own, you want to increase your rent periodically and when possible. This is an art. You don't want to increase it at the expense of lowering conversion or losing a tenant.
#4 Increase Number of Transactions
This is tied to 2 key areas that you want to increase:
the duration of your tenancies, and
the number of properties that you invest in
Increasing the duration of your tenancies helps you to reduce vacancy periods and improve your ROI. For example, instead of getting a 1-year tenancy on your investment property, you want to try and get 2-year tenancies.
You want to entice your tenants to stay for as long as possible. To do this, you need to be an awesome landlord. Filter prospective tenants with caution before you sign the tenancy agreement. But after that, aim to be good to your tenants. Keep them happy.
A good tenant who is happy, is more likely to stay with you many years.
By increasing the number of properties you own, you will be making more of your money earn income for you. Properties that generate rental income can either provide you with additional cash every month or significantly lower your costs. If your earned income is growing as well, your financial position improves and allows you to add on more properties.
This puts more of your money at work giving. you better equity in the long-term.
#5 Lower Cost
This is a no brainer. There are a number of cost components with property investment and maintenance. You want to aim to reduce as much of these costs as possible.
Your costs are divided into 2 categories - capital costs and operational costs.
Your capital costs include:
Legal fees (Sales & Purchase Agreement and Loan Agreement)
Stamp duties (SPA, LA, and Memorandum of Transfer)
Your operations costs on the other hand include:
Taxes (quit rent, assessment, rental income)
Building maintenance fees (stratified properties)
Your goal is to reduce every cost component. You may not be able to reduce things like quit rent, assessment tax and stamp duties, but all your energies of mind must go towards finding ways to reduce the other costs.
Negotiate the purchase price. Look for bargains or below market value properties. Lawyers do and can offer discounts on their services. Ask for it. Optimise your renovation costs without hampering quality and beauty. Keep your property for more than 5 years to greatly reduce your RPGT.
Ask your bank to reduce interest rates. Yes, they can do that. It'll only happen if you ask. Also, compare interest rates between banks and go for the best deal.
Ask your insurance agent how you can pay less on MLTA. Focus on attracting good tenants and keeping them to reduce vacancy costs.
Before you invest in any property, have it inspected by professionals. This will help you reduce repair costs later. Use furniture and parts that are of good quality and last long. Ensure professional and regular maintenance of your property. This will optimise your maintenance expenses.
In a nutshell, go through every cost item in the list above and find ways to reduce them. The property investment calculator that comes with my free book, The Ultimate Guide to Buying Property, will help you see how reducing these cost elements will improve your bottom line.
An Illustration With Nearly 50% Improvement!
The 2 measurements that are useful in gauging your ROI on an investment property are the cap rate (yield from net operating income) and the annualised ROI upon a sale.
Using my property investment calculator, let's see how the business chassis can improve these 2 metrics. You can test my results on your own with the calculator.
In this example, you buy an apartment under the following conditions:
Size: 1,200 sq. ft.
Purchase Price: RM900,000
Loan Tenure: 30 years
Bank Interest Rate: 4.3%
Renovation Cost: RM80,000
Monthly Rental Income: RM3,800
Annual Vacancy: 1 month
Annual Improvements: RM3,800
Annual Repairs: RM700
This property's annual appreciation averages 5% over an 8-year period.
Your cap rate for this property is therefore 2.9% and if you sell it in after completing the 8th year, your annualised ROI is 9.37%. In terms of value, your monthly cash flow is -RM2,132. Your net cash gain after selling the property is RM225,941.
Now let's see how this changes once you apply use the business chassis to make improvements on your investment.
For this purpose, let's assume you've applied the framework to your investment and get these revised results:
Purchase Price after negotiation: RM850,000
Loan Tenure: 30 years
Bank Interest Rate: 4%
Optimised Renovation Cost: RM70,000
Monthly Rental Income: RM3,900 (increased by optimising renovations so the apartment looks very impressive)
Annual Vacancy: 0.5 months (2 weeks)
Annual Improvements after optimisation: RM3,000
Annual Repairs after optimisation: RM500
You revised the location and development you invested into. As a result, this property's annual appreciation averages 6% over an 8-year period.
Your new cap rate is 3.2% and if you sell it in after completing the 8th year, your annualised ROI is 13.88%. In terms of value, your monthly cash flow is now -RM1,609. Your net cash gain after selling the property is RM361,849.
By making small tweaks, That's nearly RM136,000 added on to your gain! Your cash flow also improved by RM523 every month.
Pretty darn good? Of course.
If you've been unsure about how to make money as a property investor. If all your property investments thus far have been misadventures. If you don't have a proper plan for generating good returns, this is the point where you can breathe a sigh of relief.
Now you have a solid framework available to you. Simply get used to applying this framework for every property you plan to invest in. Do it deliberately. That means you should write down the 5 components of the business chassis for every property you think of investing in.
Make the business chassis something you know by heart. Something that becomes a natural part of your investment habit. You'll greatly improve your chances of investing successfully.