There’s a popular saying which goes, “You can’t make money, without spending money.''
While real estate investing can turn out to be fairly lucrative when done right, it requires a fair bit of commitment from you. You’ll need time, a good helping of patience, and of course – money!
If you’re thinking about property investment in Malaysia to continually grow your wealth, here’s a blueprint of the steps to take.
1) Make sure your finances are in order
Investments of all kind take money. Property investment is no different, and is particularly expensive to boot.
You’ll need to have substantial funds set aside in order to afford down payments on property, or to buy them outright.
This means all of your finances need to be in good shape. Any consumer debt, which refers to unpaid credit card bills or loans, should be taken care of before you consider investing.
You can also consider automating some of your finances and setting up an emergency fund, which you can tap on for emergencies and unexpected bills.
This will come in helpful for unexpected circumstances such as the loss of a job, or heavy medical bills from a sudden illness.
It’s also advisable to set up another financial reserve that you can pull resources from to use in your investment property. For example, you’ll be able to use it to maintain your property or to renovate it.
2) Have a plan and educate yourself
Benjamin Franklin once said, “If you fail to plan, you plan to fail.” You’ll need a plan for your investments, since there’s going to be a fair bit at stake.
What do you want to achieve? How much money do you want to live off of, and when do you want that money?
When you have that figured out, you can then work out how many properties you’ll need to achieve that monetary goal, and how large your asset base needs to be.
Having a plan also keeps you focused and prevents you from going off course, telling you what opportunities are worth following and which aren’t.
Start small, and keep expenses low. If your goal is the generation of passive income, you don’t need to go big to make it a reality.
You also need to acquire the right skills and knowledge, and that involves learning about things such as property management, the finances involved, and any taxes you’ll be liable for.
If you lack the appropriate skills, the first investment you should make is in getting those skills.
3) Consider REITs
A real estate investment trust, or REIT, is a company that owns and operates income-producing real estate or related assets.
These assets can include office buildings, shopping malls, apartments, hotels and resorts, warehouses and storage facilities, or mortgages and loans.
REITs don’t develop their own real estate properties for resale. Instead, they buy and develop properties to operate them as part of their investment portfolios.
If you’re new to the whole real estate investment thing, a REIT provides exposure to the market without the same time and financial commitment involved in buying your own property.
The most common type of REIT is the equity REIT – they allow investors to pool money to fund the purchase, development, and management of properties.
The annual earnings from the properties are returned to the investors as dividends.
4) Know the local property market
Getting to know the local housing market is important if you’re planning on buying your own investment property.
Do your research on the type of property you want, and how much they are in the area you want. What’s the demand like? What’s the rental yield, for example?
Speak to real estate agents and locals. Get the lowdown on the demographics of the area, and look up the price history of properties.
5) Saving for the down payment on your first property
If you’ve decided that you want to own an investment property yourself, that’s great – but first, you’ll need to save up for the down payment. This is probably the hardest part of the process.
There’s a variety of ways to accomplish it, but the general rule is that you’ll want to spend less than what you earn.
It’ll take some getting used to, but doing it is the key to actually building enough savings to afford your first property.
To do so, you’ll want to analyse your financial habits and keep track of where your money is going.
Knowing where all your money goes is key to understanding where you can cut back so as to free up cash to settle bills and save.
Another way to help yourself save for the down payment is to build an emergency fund. It provides a buffer with which to take care of unexpected expenses, so you don’t have to dip into your savings or rack up credit card debt.
6) Have a risk management strategy...or several
The first rule for investors is not to lose money, as said by Warren Buffet.
Every investment carries some risk to it. Risk management isn’t the same as risk avoidance – if you want to avoid risks, you might as well not invest at all.
Risk management is the process of identifying or analysing uncertainty in investment decisions, and then taking steps to mitigate or minimise them.
Some ways you can lower risks to yourself include:
- Getting landlord insurance
- Making sure you have financial safety nets or buffers in case the economy gets rocky
- Obtaining a variety of perspectives from people who are experienced and well-versed in property investments
7) Always keep an eye on your cash flow
You’ll need to watch your cash flow carefully, and we cannot stress this point enough!
Even though you want to build equity, you need to have a financial buffer in case you go through periods of extended vacancy, or have unexpected repairs crop up.
You will also need to consider any maintenance costs for your property. Have a budget, and live within your means.
8) Give your property time to appreciate in value
Rome was not built in a day, and so it is with property investment – you don’t see money rolling in immediately. It takes time to accumulate wealth through property, and you’ll need to be patient.
It takes a while to get a substantial asset base, so you’ll need to hold your properties long enough to see compounding work its magic.
If you have a mentor you trust, or good advisors, they can speed up the process.
9) Review your portfolio regularly
You should look at your portfolio regularly, and adjust your strategy as needed.
It’s a bad idea to have a “set and forget” mindset with regards to property investments, since circumstances may change suddenly.
Ask yourself questions such as:
- How has this particular property performed over the years?
- Is this property likely to perform well over the next few years?
- Can I improve how well it performs and get a better return on investment?
If your property hasn’t been performing well over a 3 or 4 year period, it may not be a good investment.
It might be time to make a change – either through renovating, or by selling and buying a better performing property.
10) Keep growing your asset base
Keep growing your asset base until it’s as big as you planned it to be.
The desired outcome of your wealth-building plan is to be able to live the lifestyle you want, even if you decide to stop working.
While you don’t have to, it’s nice to know that the option is there if you choose to do so.
Through following these steps, buying the right properties and being patient, you will start seeing your investments pay off, and eventually achieve financial freedom.
Not sure if a property you have your eye is a good deal or not? Check out our article on how to tell if you’ve lucked out, or not.