Property investment can be a great opportunity, but it’s one that requires a smart investment strategy to realise.
Real estate investing should be built on a comprehensive understanding of the markets, alongside an honest assessment of your own financial resources and goals.
So how do you take that first step towards becoming a successful property investor? It all starts with finding the right opportunity!
The key elements of opportunity in property
Property is a major financial investment, particularly for investors making a first step into the market.
That means it’s vital to understand the key elements that contribute to a good opportunity. Here are some property investment tips on what to look for.
Location is a balance between mature, desirable area at a higher cost, versus up-and-coming neighbourhood with potential larger growth value.
Research the area in detail, understand who lives there, the demographics, the property types that are popular, the level of current development and land under development, the proximity to nearby amenities such as schools, the area’s reputation etc.
2) Market value
Is the property above, level with, or below market value? If it’s below market value, you could be on to a winner when it comes to capital growth!
If it’s level or above, market value, there may be room to negotiate for a better investment opportunity.
Either way, the bigger the sample size you have to compare against, the better informed your decision can be.
3) Rental market
If you’re considering buy-to-let, you need to understand the local rental potential. Research current rental prices in the area, and get to grips with who might be renting, and why.
Is it a quick turnover student area with natural rental cycles, or a popular family area with long-term rent? How does the rental yield potential factor up against house prices?
4) Property quality
Is the property completed to a high-quality, and does it look like it has been maintained well?
A high-quality property is instantly available to deliver rental yields; a poorly maintained property may be a chance to generate value from substantial improvements, although could come with unforeseen challenges.
5) Local market
Is the local market on the rise? Buying in an up-and-coming area is a great way to maximise your investment returns.
These are the golden tickets that everyone is looking for, so make sure to do your research as much as possible, and don’t be caught unaware by a good sales pitch from the seller’s real estate agent.
6) Future growth
Is there planned growth in the area? New shopping malls, upcoming MRT lines, connections to a new highway to improve infrastructure?
Property prices may have been moderately adjusted already, but good foresight can identify great market opportunities before growing demand has substantially driven up prices.
Researching the right opportunity
Understanding how to invest in real estate means understanding where to search for information to inform your investment decisions.
Let’s take a closer look at the property factors we mentioned above, and some great ways to keep informed.
- Word-of-mouth: Speak to locals, friends, anyone with a connection to the area to understand a bit more about what it’s like on the ground.
- Newspapers: Search online for newspaper stories that refer to the area, they may help inform your understanding.
- Explore: Explore the area on-foot and in a car, help get a grip on how the roads are, where public transport might be, and what and where local amenities are placed.
- Analyse: Analyse the current level of development and upcoming development by searching for new launches, as well as historical information on the area.
2) Market Value
- Compare: Check listings of similar properties, giving you an idea of current prices for comparable properties.
- Understand: Analyse whether below market value properties are actually what they say. Sometimes this designation is used less accurately than it should be.
- Assess: Understand the range of property prices listed and transacted for similar properties in the area. This can offer insight into the potential to negotiate on price.
3) Rental Value
- Compare: Check current rental prices in the area by searching rentals on online sites to give you a rough idea of a pricing benchmark.
- Understand: Research the local rental demographics by understanding the area. Is there a link to a major commuter route? Is it a family-friendly area? Is there a major university nearby? Check maps and speak to locals to understand who might be renting.
4) Property Quality
- Investigate thoroughly: Investigate the property thoroughly, inside and out, before any purchase. Check the hard-to-reach places for some good insight, things like beneath cupboards, inside maintenance areas, behind taps. This won’t give you a professional assessment, but should give you a bit of insight on how well it has been built or maintained.
- Ask questions: Be bold and ask the owner/real estate agent/developers. They shouldn’t lie to you, but they might be economical with the truth.
- Undertake a survey: If in doubt, undertake a valuation or survey using a qualified and registered professional.
- Speak to people: Neighbours are a great source of information. If you’re polite and respectful, they may offer you some great insight on the property, and similar properties in the neighbourhood.
5) Local Market
- Track trends: Track trends of listing prices or price per square foot on PropertyGuru’s AreaInsider. Compare regional and national trends using the National Property Information Centre statistics.
- Understand history: Analyse genuine transaction prices from previous sales using online tools and analysis.
- Check analysis: Check professional analysis for trends in areas using major news sources. Search the internet for expert insight. Real estate agents are glad to offer their own insight to media companies in order to promote their services, so it’s worth checking for analysis to understand their own predictions.
- Compare previous success: Explore and analyse areas that have seen significant property growth, and understand how that might offer insight on potential up-and-coming markets, and what to look for.
6) Future Growth
- Keep an eye on the news: Keep an eye on upcoming infrastructure projects or developments in the news.
- Search online: Search for key developments in areas you’re considering using online search tools.
- Check trends: Look at trends in previous success areas as noted above, and look at the kind of projects which have triggered significant market growth.
Understand your investment returns
Remember that any investment is only as good as the returns you receive. This can be a complicated question for property.
This journey should start with a comprehensive understanding of the costs that will be required to purchase a property. Here’s a quick summary of potential costs to consider.
- Purchase price: Price you pay for the property.
- Stamp duty: Total stamp duty you are required to pay.
- Legal fees: Fees for completion of legal documents.
- Survey costs: Cost for potential survey of the property.
- Home loan costs: Overall costs of home loan over the period of the loan.
- Home loan insurance: Potential insurance cover for the home loan itself.
- House insurance: On-going insurance costs for building and/or contents.
- Maintenance fees: On-going property maintenance fees.
- Rental charges: Agency charges for rental management.
- Quit rent: Land tax in the form of quit rent.
- Assessment tax: Property ownership tax.
- Water costs: On-going water tariffs for property.
- Upgrade costs: Costs of any potential improvements or renovations.
Don’t forget that these costs represent the ones you can generally predict. You should always take into account the potential for an unseen cost, particularly in rental properties, and build a little understanding into your investment strategy for this potential event.
Once you’ve got your costs, you can take into account your potential returns. Here are three major calculations to consider.
Gross rental yield:
Rental yield is a measure of the annual rental income you receive versus the value of the property. It’s found by taking the total rental income annually, dividing it by the total cost of the property, then multiplying by 100 to find a percentage. In Malaysia, a rental yield for residential property of more than 4-5% would be considered good. This is a simple but effective way to compare potential properties.
Net rental ROI:
Rental yield gives you a guideline figure, but net rental yield is an analysis that also takes into account the costs. So take into account the calculation above, but subtract the total annual costs from the annual income. This can be more challenging to do in advance, which is why gross rental yield is often used as a baseline comparison.
Return on investment takes into account the full costs and value of your property. So if you earn RM10,000 annually on rent, but spend RM2,000 on costs, you earn net RM8,000 in rent. On top of that you’ve bought a RM500,000 property in an area that’s seen huge growth, enjoying a capital increase in value of RM50,000 over the year. That means your ROI would be a function of the total earnings of 58,000, divided by the cost of the property at RM500,000, multiplied by 100, to give an ROI of 11.6%. Remember you have to take into account things like loan repayments in this calculation if you have one.
How to make the most of property investment
We’ll leave you with one of the most important property tips you can get – research, research, research.
Nobody becomes an expert investor by thinking about a topic once and rushing off with a credit card.
You need to understand the landscape, the trends, the market, the financial calculations. And if in doubt, always speak to a professional.
Real estate investment is a popular landscape, which also means it can be a competitive one. The more you know, the better equipped you are to make the most of your own opportunity.
Keep an eye on news stories, property news, and all the relevant sources noted above. With the right information, and the right commitment, you greatly increase your chances of making that smart investment that turns into a truly lucrative opportunity.
This article does not constitute financial or legal advice, but hopefully provides a platform to explore and support an informed opportunity for you. Want to explore more opportunity today? Take a look at the thousands of great properties available on PropertyGuru now.