May 23, 2011
Three biggest errors people make when investing in properties
“You cannot make money buying properties in Malaysia!” exclaimed a relatively disgruntled investor from Singapore. It was a statement made when we made a visit to our neighboring country. We were in Singapore in collaboration with Malaysian Property Incorporated (MPI) to promote real estate investment in Malaysia.
We ended up having a meal with the gentleman and listening to his experience of investing in properties in Malaysia. To my surprise, he was an extremely well informed person with amicable knowledge of investments and had invested in other countries as well. However, his ventures have had somewhat mixed results. Some turned out mediocre results, some incurred losses and some were profitable ventures. He concluded saying: “Nothing beats investing in your own country”.
His story is not uncommon. I have had similar encounters with many foreign investors - both in Malaysia and abroad. After some research, I realised there were some fundamental errors that most investors made when they ventured into unknown territories or countries. I would like to share three of the most common errors made by foreign (and even some local) investors.
1st common error: To FLIP or to KEEP?
The first common mistake most investors committed is to invest without figuring out who their target market is.
First things first. Are you investing to FLIP or to KEEP? What’s flipping or keeping? Well, flipping is buying with the intention to sell with profit. Keeping is buying with the intention of profiting from renting the property out.
Properties for flipping are usually the ones with has the highest capital appreciation in the shortest amount of time. These are usually the landed properties.
Here’s a simple formula to calculate capital returns:
The returns will be the total returns you would get. Assuming you achieved 30% returns in 3 years, the next thing you need to do is to divide that to determine your simple returns per year (as compared to compounded returns)
Properties for keeping are the ones that fetch rental returns higher than 6%. These are usually high-rise in nature.
Here’s the formula for rental returns:
It is key that you decide what strategy to adopt before deciding what type of property to invest into. Also, it’s crucial to estimate the returns of investment you desire and the timeline of which to exit. Having exit strategies prior to starting is critical to your success.
Knowing your strategy before investing is crucial. Assuming you are planning to flip, next question is, who is your target market?
2nd common error: Not getting to know the area well.
“I bought into an apartment in the city center (worth RM1.8mil) three years back and I couldn’t sell it out till today!” claimed the Singaporean investor. “Who were you planning to sell it to?” I asked then. “Anyone la!” he replied.
If you go around with a strategy like that, you might end up including the super natural market as well! Look, if you don’t know who you are going to sell or rent your properties out to, why buy it in the first place?
You should know your target market very well before even investing into real estate in the area. Understand what the market needs, and what it is lack of.
What I see most investors do is to trust the developer or the agents to do the research for them. Why would you trust someone else with hundreds of thousands of ringgit (if not millions) of your own money?! Even if they were right, you still need to verify it. Remember, regardless of whether the developer or agent is right or wrong, they make their money when they sell their properties to you, and their liability stops there!
My advice for both locals and foreigners investing in Malaysia is to make the effort to visit the places of interest for you over and over again. Study the market and get to know the locals before you finally make the decision to invest.
3rd common error: Not understanding the locals
How many of you would invest into a RM14.5mil condominium near the city center with the intention to rent? How many of you would invest RM10.5mil for 1,250 sq ft of retail space in a new retail mall in Dengkil?
While there may be some sane reasons to do so, majority would agree that you wouldn’t do either one of the deals. Although the examples are extreme, the common errors people do in investment are obvious here.
Some investors lose money because of this error - not understanding the lifestyle of the locals. You should always study the lifestyle of the locals.
Allow me to give a couple of examples:
I once met an investor who focused only into FLIPPING properties. I asked him how he’s able to consistently make returns of 50% to 70% in the market, regardless of whether it was an up market or a down market.
He shared with me that he only invests in properties of RM500k to RM700k. He focuses on the trends of the people buying in the area. In other words, he focuses on the lifestyle of homeowners and what they were seeking. He further shared: “I usually ask my working colleagues, around the age group of 30 to 40, where they would buy to stay. I take note of the areas and the type of properties they would buy, should they be able to afford properties within my investment range.”
“I also keep track on the latest types of properties the developers are rolling out into the market. They usually have done their research before investing millions into marketing and developing such properties. Then I look into the areas and types and buy the best deal.”
“I never guess. I always make sure that whatever I invest into, I am 99% sure that its going to give me at least 30% returns or more, before I even bother to go it. It’s all in the research and it’s all in the network. If you want to make money, must consistently be in the market la. There’s no such thing as a good time, only a good buy!” he added with a smile.
So, if you want to make money investing to FLIP or to KEEP, does he’s advice make good investment sense? Again, most of us fail to do any sort of research prior to investing into the properties. The key to successful investment is to gather enough good information from the marketplace and make the money in the difference.
In many of my talks that I give these days, I mention to people that while it can be a good time to make money in the market, invest wisely. Keep yourself grounded and stick to the fundamentals. The best way of losing money is when you start speculating in the market.
Last advise, always remember to focus on the bottom line. Define your entry and exit points, keep to your strategies and always focus on making money.