Real Estate Tips #9: Property Investment - General Buying Guide

What are the top three most important factors in property investment? Many used to say, "location, location, location!". This is no longer true, I'm not saying otherwise, but there are actually more things to look at other than location. There are four (4) main factors which i would normally advise my client in property investment:

(1) Location
Things to look at may include accessibilty, visibility, road level, carparkings, pedestrian flows and etc.

(2) Rate of Return
You should be looking at minimum 6%p.a. as a general guide. Please refer to Real Estate Tips #8 on how to calculate Rate of Return.

(3) Tenantability
If the property become vacant, how long will it take to rent it out again?

(4) Property Management
A poor property manager will result in a decreasing in capital value and the rental of your property in long run.

I shall explore further with the above factors with you all stages by stages. Before i end here, do let me highlight to you the paramount rule on property investment, i.e.

"BUY ONLY THOSE PROPERTIES YOU ARE FAMILIAR WITH!"

Real Estate Tips #8: How do you calculate rate of return on property?

By international standard, all property investors should be looking at minimum 6% yearly return when it comes to property investment. Here's how you calculate the rate of return:

Rate of return = Net Annual Rental / Price

Scenario 1. Double Storey Shop House at Taman Johor Jaya
Monthly Rental: RM2000
Price: RM400,000

Therefore,
Rate of return = (RM2000 x 12) / RM400,000
= 0.06 or 6%p.a.

Remarks: Attractive investment.

Scenario 2. 8th Floor Office Suite at City Plaza
Monthly Rental: RM4400
Price: RM600,000
Maintenance Fees (monthly): RM1900

Therefore,
Rate of return = (RM4400 - RM1900) x 12 / RM600,000
= 0.05 or 5%p.a.

Remarks: Less attractive investment.

Let me share with you a rule of thumb i often use without having the hassle of going through the above calculation.

Whenever you see the price, take off the last two digits, if the monthly net rental is at least half of this new figure, then rest assured, as you are getting minimum 6%.

Take scenario 1 for example, the price is RM400,000, after taking out the last 2 digits will be RM4,000, and the monthly net rental is RM2000, which is exactly half of RM4,000, there you are, you have a rate of return of 6%p.a. Try it out with other numbers yourself and verify with the formulae given above using calculators to see if it works.

I've provided you the above the simplest model on rate of return calculation, but please also note that rate of return is only ONE OF THE MANY FACTORS that should taken into consideration when it comes to property investment. I shall share with you in near future on other factors affecting property invesment decision making process.