Different Types Of Property Investment In Malaysia, And How To Earn From Them

Real estate investment has a few different types, namely residential, commercial, retail, industrial, as well as Real Estate Investment Trusts (REITs). If you're looking to earn from a property investment, you can either buy-to-rent or use flipping/buy-to-sell.
property investment, REITS

This article was contributed by Gary Chua from Smart Financing

 

Property investment is an investment on land, an increasingly scarce resource similar to gold and silver.

There are several ways to investing into this resource, in the form of different types of properties, with each one carrying its own pros and cons.

Below are the 5 major types of property investment: Residential, Commercial, Retail, Industrial, and REITs.

 

1) Residential Investments

Residential investments are investments into Residential titled properties such as terrace houses, apartments, condominiums and other types of properties that come with Residential land titles.

The exception to this rule is commercial land titled properties which are protected under the Housing Development Act (HDA).

These property types may be commercial titled but are considered to be residential titled because they are protected under the HDA.

These commercial property types are such as SoHo (small office home office) developments, which are the most common and popular form of investment.

The purpose it has a lower entry price point where investors and home buyers can obtain higher loan margins (margin of financing up to 90%) as compared to the other commercial property investment options.

However, not all investments will yield the same monetary results due to many factors – the main one being the location of the property.

Hence, proper research is crucial because if the place that you acquire is not in high demand or is not located in a “preferred” area, the rental received may not be enough to cover the loan instalments and interest, and the sale prices will not be optimized.

From the rental end, owners typically need to pay all the bills for the properties including maintenance fee, sinking fee, assessment fee and sewerage fee.

With higher maintenance cost monthly, this property investment could be a burden and deficit for the investor if the rental collected is below the instalment and maintenance amount.

 

2) Commercial Investments

The properties in this category are with Commercial land title and comprises mainly of office buildings, small office versatile office (SOVO), small office flexible office (SOFO), small office lease office (SOLO), small office smart office (SOSO) and so on.

What's The Difference Between SoHo, SoFo, And SoVo?

Relevant Guide

What's The Difference Between SoHo, SoFo, And SoVo?

Shop lots and retail fall under this category too. Commercial titled properties are for business usage only, which the units are typically leased out to companies and small business owners.

It is common for commercial properties to be involved in multi-year leasing. This leads to a greater and more stable cash flow even when the market rental rates decline.

When investing in commercial properties, a factor to consider is the higher upfront capital outlays because unlike residential properties, the margin of financing is less at 70% – 80% most of the time.

Commercial property investments requires stronger holding power, because commercial units are highly dependent on occupancy rates within the building / shop lots, surrounding township occupancy, public transportation efficiency as well as the quality of the building maintenance.

The key attractive upside to commercial investments are that costs such as utilities, management fees are typically borne by the tenant.

Any defects within the property is also on the onus of the tenant to upkeep and fix.

Another plus point is that most of the time the unit can be rented out unfurnished, which will save its owners a lot in terms of cost.

 

3) Retail Investments

When we speak about retail property investments, they are similar to commercial property investment but with different mechanics and prime locations.

The retail properties here are located in malls and other retail storefronts.

In some cases, the landlord receives a percentage of profits by the tenant in addition to the base rent to keep the property in top-notch condition.

This investment is a combination of property and business investments.

 

4) Industrial Investments

Industrial real estate investments are investments from industrial warehouses to firms as distribution centres over long term agreements, and to storage units and other various special purposes that generates unique level of income from rental or resale.

Industrial real estate investments often have significant fee and service revenue streams to increase the return on investment for the owner.

Nevertheless it’s a very niche market and requires specialised professionals’ help to maintain and to manage it, as well as a bigger upfront capital investment.

Industrial property investments are generally considered to be more risky as compared to residential and commercial property investments.

 

5) Real Estate Investment Trusts (REITs)

Real estate investment trusts, or REITs, are particularly new in the property investment community with its key attractiveness of affordability and ease of entry.

Investing through REITs means you are buying shares of a corporation that owns real estate properties that distributes its income as dividend. It will even match your desired industry.

For example, if you want to own hotels, you can invest in hotel REITs.

The downside to this is that you do not actually own the said property, have little or no decision making power in how the whole piece of property is to be run or managed.

Getting financing or bank loans are often difficult as it is viewed just like a typical common stock.

 

How To Make Money From Your Properties?

1) Buy-To-Rent

When investing in properties, you can opt to buy the properties and earn rental income from it. In order to determine your return of investment (ROI) from your property, you'll need to know the type of property you are buying, your potential tenants and location of the property.

Some tips you may want to look at are to get a property in a high demand area, possibly closer to you so you can monitor easily if problems arise.

You may also need to do some profile and background check on your tenants to ensure you have secure agreements and do monthly visits to avoid any tenant form damaging your property or running away without paying rent.

Secondly you will need to calculate your Gross Rental Yield. You will only need simple figures to calculate your gross rental yield making it a less accurate indicator for future performance. In short, you will only need to know this formula:

Annual Rental Income = Monthly rent x 12
Property Value = Purchase price/ Market Value

image1

As for your Net Rental Yield, calculating it will give you a more accurate prediction on your ROI. On top of the annual rental income and property value, you will need to have the annual property costs and ongoing expenses.

The more costs and expenses you add, the more accurate your net rental yield is.

The figure as below:

image2

In a nutshell, if the rental collected is above the instalment and maintenance fee you have paid, this property is giving you double income with positive monthly cashflow and capital appreciation.

 

2) Flipping / Buy-To-Sell

This is to capture the demand for sub sale property ownerships which has several factors why consumers purchase sub sales. Among of the key reasons which generates demands for sub sale properties are:

  • A mature township with great public amenities which creates confidence in that location compared to during it was under construction
  • High occupancy rates leading to better consumer confidence of that area
  • Location
  • Immediate ownership and move in condition
  • Potential of rental return
  • Good property management. (A lot of buyers still chooses sub-sale properties as its something which they know exactly what they are buying as it can be seen compared to properties under constructions

While taking into account the above when you are buying to sell a property, there are other factors which are important.

The other factors which are important is that you will need to prepare your self with having the holding power to continue to hold the property until it is sold, dedicated time to maintain the condition of the property and spending time to source for potential buyers.

An important thing to note, be it any of the strategies you have chosen, it is of paramount importance.

That your end to end strategies are well thought through from property selection to getting the right financing for your property, to getting the right people to either renovate, rent, maintain or sell your unit.

Any breakdown in processes along the way will only cause financial distress to your potential income earning from property investment.

What makes a successful property investment journey always boils down to the right strategy and getting the right professional help to make it happen.

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About SMART Financing

SMART Financing was formed with the primary objective of helping consumers to stay abreast on the latest banking policies especially towards Mortgage Financing. It was inspired to be a one-stop centre for property investment, where it covers mortgage financing, research and buying great properties, interior design for the properties and properties management. For more info, visit their website www.smartfinancingco.com

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