Updated: Dec 5, 2019
Since writing my book, The Ultimate Guide to Buying Property, I have been meeting and speaking quite regularly to a diverse group of property investors. They range from newbies to seasoned professionals.
The more experienced property investors in general have found a strategy that suits their temperament and financial capability. This is really important - whatever strategy you employ to invest in property, it must suit YOU.
You will see as we go along in this post, that not every strategy may be right for you. For example, you may find one appealing, but it may be very risky for you if you do not have sufficient capital. Always remember...
The essence of strategy is choosing what not to do - Michael Porter
Before listing down the different strategies, I want to stress that this is not a comprehensive guide. It is meant to expose you to the different strategies investors employ. It will not make you an expert. You must do your own research and build expertise before attempting to embark on a strategy that is new to you.
One of the safest methods to build expertise is to find a mentor who employs a strategy you like. This mentor can save you a lot in mistakes that I call "tuition fees."
So let's dig in shall we?
The "Forced Saving" Strategy
I have written about this idea in a post on property investment for employees. It is a long-term approach to property investment that is simple, fairly safe, and does not eat up too much of your time.
In this method, your cash-flow may be negative but you're not negatively geared. You should never be negatively geared. If you're wondering what's the difference, read on.
Negative cash-flow is a situation where your total outgoings on the property is more than your total income from it. Your outgoings include mortgage repayments and every running cost (taxes, insurance, repairs, maintenance, agent fees, insurance, etc) but excludes capital expenditure (initial renovation, closing costs, property price, etc).
The calculation for gearing on the other hand does not include capital re-payments from your mortgage. It only includes the interest portion of your mortgage.
So, you can have negative cash-flow but you may not be negatively geared.
Ok, back to the forced saving strategy.
In this strategy, the goal is to maximise borrowing so your capital outlay is minimal; and to leverage capital appreciation over the long-term. The rental income you collect, must cover your interest payments and at the very least, 30% of your running cost. This combination helps you maximise ROI if there is good capital appreciation.
Although your cash-flow is negative here, the combination of proportionate rental income and capital appreciation is building equity for you. It's like forcing yourself to set aside a small investment every month, for high returns in the future. Hence, the phrase "forced saving."
The annualised ROI from this strategy over the long-term (upon a sale) can average 11%. This is much better than the 4% return that banks would give you.
The biggest risk to this strategy is that if you lose your source of income (i.e your job), you may not be able to hold the property for long. Hence, it is very important to ensure that you have savings and that you're focused on growing your income (read excelling at your work).
If you don't like the long-term approach, the next strategy may appeal to you...
The Lease Option Strategy
If you can't get a mortgage and you're low on capital, this is one of the best ways to get invested in property. It is a very creative method but requires work. However, with more effort comes bigger results. The potential for high returns here in a relatively short-term is promising.
How does it work? Let me illustrate with a hypothetical example.
You actively look for home owners who cannot afford to service their mortgages anymore. They have defaulted or are at risk of defaulting. Usually the property is going for a 2nd or 3rd round of auction bidding.
You find one such owner, Mr. Jeremy. Jeremy's property is a double-storey terrace house with a market value of RM500,000. His outstanding balance with the bank is RM280,000 and the monthly instalment payment is RM1,500.
The property has a reserve price of RM300,000 in an upcoming auction.
You approach Jeremy and tell him that you're willing to buy his house at RM320,000. However, you will only pay him for the house in 1-year. In the meantime, you will pay his monthly instalments for the period of 1-year. He can live in the house rent-free.
You are effectively leasing his house with an option to buy within 1 year.
During this 1-year period, you will look for a buyer at RM420,000 (16% below market value). The difference between the sale price and what you have to pay Jeremy plus other costs is your profit.
Jeremy agrees and you negotiate commencement of monthly instalment payments with his bank. A lawyer helps you draft an air-tight agreement with Jeremy.
During the 1-year period, your costs are as follows:
Monthly instalment to bank - RM18,000
Legal fees - RM3,000
12-months into your lease option with Jeremy and you find a buyer for RM420,000. After paying Jeremy RM320,000 and deducting your costs amounting to RM21,000, you have a profit of RM79,000.
For an investment of RM21,000 (monthly instalments and legal fees), you gain RM58,000 (RM79,000 - RM21,000). That is a 276% return in 1-year!
You may ask, why would Jeremy agree to a deal like this?
Because it's a win-win situation. If the bank auction is unsuccessful, there is the risk of the reserve price dropping further. You are offering Jeremy RM20,000 more than the current reserve price plus you're giving him a place to stay rent-free for a year.
This strategy requires that you have a solid agreement and structure in place between yourself and Jeremy. Lease option deals often fail because the owner jeopardises the sale. You MUST have a very experienced lawyer for this.
The best firm for this in Malaysia is Messrs. Elizabeth Siew & Co. I've spoken to their managing partner, Sharon, and I find her to be very skilled at these deals.
What's the risk to you here?
There is a possibility that you may not be able to sell the property within the stipulated timeframe. In the example above, if you don't sell Jeremy's house within a year, your costs go up and the lease may not be extendable.
Your risk however is limited to RM21,000.
The other downside to the lease option strategy is that deals like the example above are not easy to find. They're infrequent and you need a good network of bankers or some degree of marketing to find them.
The Auction Property Strategy
I met one property investor with an annual target of RM600,000 in gross income using this strategy alone. His target is a fraction of some of the bigger players. I find this strategy appealing to me personally. It is actually property flipping in a niche market.
This investment strategy is capital intensive. The most successful people I know who employ this strategy buy their properties in cash. So you should have capital but there's a way around this. You can gather a group of friends and pool your capital.
I feel it's better to focus on medium-cost properties because there is a larger market of buyers and therefore, the turnaround period is shorter. Time is money and the faster you can complete a buy-sell cycle, the better.
How is this strategy optimally employed?
You will need to be actively seeking auction properties. Some of the auction houses in Malaysia have websites with a list of all properties they're auctioning. One such example is www.ngchanmau.com.
You'll have to look for hot deals. You're looking for auctions where the price is ideally 40% below market value. This is where a RM200,000 property is going for RM120,000. If you can successfully purchase it at somewhere close to this price, your next plan of action is to beautify it.
For RM40,000, you could have it fully furnished and make it look amazing. Add to this your closing cost of about RM5,000, and your total cost to buy and makeover the property is RM165,000.
You can then advertise to sell the property at RM220,000. Being a property that is fully furnished, spanking new, with a beautiful look, this shouldn't be too hard to do. Especially since the new buyers would not have to spend any further money on the property.
Your profit? A cool RM50,600 after deducting a 2% real estate agent fee. You'll have to pay RPGT of 30% on this profit though (if you’re selling in less than 4 years), which is a bummer. However, there are ways around it. For example, if you operate as a company and do this regularly, you could pay corporate tax instead of RPGT which can be as low as 17%.
Assuming you can get away with 17% in tax (please consult a tax expert for this), your net ROI on the aforementioned deal would be about 25% in less than 6 months. If you repeat the process again within the year (and assuming everything is the same), that's a 50% per annum return. Pretty darn good eh?
The downside to this strategy is that is it very hands-on. You need to know very good tradesmen to beautify and renovate. You cannot simply use contractors as the renovation cost will balloon. To keep it low, you'd have to assemble your own team.
There's also the possibility that you may have to evict the owner from the property. You would need a court order. This takes time and can set you back.
Are you a passive income person? I personally think passive income is a misnomer but you may like the next strategy...
The Cash Flow Strategy
Many investors believe that building positive cashflow is the primary goal of property investment. Some subscribe to the understanding that if your property is costing you money to keep, it's not an investment but a liability.
While this is not entirely true, there's no denying that positive cashflow has strong merit. A property that is generating net income for you, is a property that you could technically hold forever. That's Warrant Buffet's favourite holding period.
The key to sound property investment is to be able to hold it. If your property is generating income for you, then even if you lose your job, you may not be forced to sell your property. When you are in such a situation, the up and down cycles of the property market have very little impact on you. You can always hold your property until the next boom to sell if you so desire.
Generally, positive cashflow properties are few and far between. Therefore, many investors who subscribe to this strategy skip the usual long-term tenancies in favour of more creative ways to increase the potential income from the property. This includes:
Short-term accommodation (becoming an AirBnB host is one example)
Housing for multiple occupants
The last 2 methods involve subdividing the property further for more rooms that can be rented out separately to different people. This is growing in popularity and is proving to be a feasibly approach for some.
If you are interested in housing for multiple occupants, you can speak to the people from My Casa Homestay. I have known one of the owners, Azmi, for some time and he's good at this.
Here are some pointers if you choose to adopt the cashflow strategy:
First, you can technically make your cashflow positive on most properties simply by reducing your borrowing from the bank. If you take a 50% loan from a bank, your cashflow could most likely be positive but your ROI when you sell will drop significantly.
You should therefore ensure that you can get positive cashflow from your property with a 70% to 90% margin of financing. The best way to do this is to look for below market value properties.
Second, you must be very clear on how you want to maximise your rental income for positive cashflow. If you choose student accommodation for example, then your location should be close to universities. In addition to that, your pricing strategy, furnishing, expectations and amenities should match your student-customers.
This requires that you have very deep knowledge of the particular niche you're getting into.
The downside to this strategy? If you don't understand the market you're getting into, you may not be able to generate the cashflow you projected.
In addition to that, sometimes properties that generate good cashflow, do not have good appreciation. In fact this could be one reason why the cashflow on a property could be so good - because the rate of capital appreciation has been low relative to rent.
What if you're rich and managing students is not your thing? There's this strategy...
The Wealth Preservation Strategy
This strategy is quite common among high net worth individuals (HNIs). It's quite hands-off, can be applied in different countries and carries relatively low risk.
Many years ago, I was speaking to an Indian national who was a heavy property investor. He despised borrowing from the banks to buy residential properties. I told him that leverage would give him better ROI. He agreed but preferred the peace of mind that came with being debt-free.
To him, if a property is bought in cash, he'd never have to worry whether the property was tenanted or not. He'd never have to worry too much about cashflow from the properties and his holding power would be solid.
He viewed property investment as a means of wealth preservation. It's like this: if he had RM10 million in cash, he could keep it in a fixed deposit that paid him 4% every year or he could buy and hold property in Kuala Lumpur where the long-term appreciation has averaged 7.5%.
Over time, his RM10 million would multiply faster.
HNIs usually have a diversified portfolio. Property investment is not where the bulk of their investment goes. They're usually invested in equity markets too. Hence, property is part of a broader strategy and as long as their wealth is growing through it or at the very least, preserved, they're happy.
If you like this approach, you should have strong capital because you would be buying with cash or a very small mortgage. Your focus should be on properties that appreciate well over time. You need to have a very long-term approach.
Over the long-term, the appreciation on condominiums can plateau. This is where the difference between well-managed and poorly-managed condominiums get stark. Luxury condominiums that are very well maintained can continue to appreciate well even after a long period. The Four Seasons and St. Regis are prime examples.
Freehold landed properties in prime or mature locations also tend to do well over the long run.
Essentially, the primary concern is sustained capital appreciation. Since you're not limited to Malaysia, if the medium to long-term appreciation rate in Phnom Penh or London is better, you can move your capital to these cities, provided the financial framework is ideal.
With the wealth preservation strategy, you will be very picky about potential tenants. You don't have mortgage repayments to be worried about and therefore more concerned about getting quality tenants who keep your properties pristine. Rental income helps cover costs like taxes, insurance, and maintenance but is not sought for passive income.
The only major downside to this approach is that you need a lot of capital. The ROI is small, but the strategy is wealth preservation after all so it's of minor significance.
There You Have It...
This list of strategies is not final. There are other variations and hybrids. Some investors employ a combination of 2 or more of these strategies. For example, your strategy could be to buy auction properties for cash flow.
I hope this opens you to different options that you have available. However, do not jump into any one strategy without seeking out people who already have experience doing it and learning from them. The most successful people I've met are refreshingly open with their experience. They're happy to share what they know and contribute to your success. It's your job to find them.