How to select residential properties

How to select residential properties (21 January 2019)


I bought my first residential property at the age of 24. I visited a property showroom on my own, fell in love with the decor, and bringing my parents for a return visit, proceeded to make a down payment for it. That was the start of a long journey which included the initial developer abandoning the project, the buyers engaging a lawyer to sue for compensation, and by the time I got the unit, I had no interest to stay there. It was rented out, initially to good tenants, but later on to a tenant that owed me months of rental. To eject him from the apartment, I sold off the unit. In retrospect, if I had not acted hastily, I would be spared some of the troubles attached to my first property.

Now that I myself am involved in the property industry, I felt it is necessary to share some tips, to help you become more prudent in selecting the residential property, whether for your own stay, or for investment. But before we leap into that, perhaps it's worth examining why we should be buying residential properties at all.

For own stay

Unless you have someone to give you the roof over your head, there will come a point in time when you would like to own that roof above you. Owning your own home gives you both the freedom as well as the sense of security. It's the place where you can decorate any which way you like, and you don't have to fear situation where someone else dictates the terms of your dwelling.

Not having to pay rent is also a valid reason for buying your own property. When the property is not yours, you are at the mercy of rent increase, which means you will always have to have the money to pay rent.

For investment

With today's low interest rate, buying residential property for investment makes sense as the value of your property is likely to increase over time, whereas the money you keep in the bank diminishes in value. On top of that, you can collect rent on your property, until such time that you dispose it. And at any time, if the need arises, you can decide to dwell in the property you bought for investment (which is exactly what I am doing now).

Having established that buying residential properties is a good idea, let's look at the best strategy in selecting residential properties.

Selecting location

In order to profit from buying residential properties, nothing compares to doing your own homework. (If you can't do that yourself, the second best thing is to get a reliable, knowledgeable realtor, and at All Malaysia Properties, we train our realtors to be the second best thing after yourself.)

On the question of location, there are several variables to consider:

1. Maturity of the Neighbourhood
In a mature neighbourhood, including the city centre, you can expect high per-square-foot price for real estate, and depending on demand, there could be attractive built-in capital gains and rental yield.

2. Fast Developing Township
Newly developed township often offer attractive property prices, but there are risk factors to consider. The future capital gains and rental yield will depend on how well the township develop, which will determine demand for property in that township.

3. City or Country
Although the price of property in the countryside or small town may be much lower than in the cities, due to limited demand for properties there, capital gains and rental yields are correspondingly unattractive.

Your Residential Property Acquisition Strategy

Let me spell it out simply: the whole purpose of investing in residential property is own something that will help you retain the value of your wealth and beat other forms of holding that wealth. The "other forms" may including putting the money in fixed deposit, buying shares, mutual funds or other financial instruments. Fixed deposit might be the most stable, but the yield is so small, the value of your money in fixed deposit is eroded by inflation.

Your strategy for residential property acquisition should be a combination of capital gain and rental yield. Some properties will give you high capital gain while rental yield is mediocre, while others is the opposite. There are also plenty offering lousy capital gain and rental yield, and you are probably better off keeping your money under your pillow than to invest in them. Your challenge therefore is to seek out properties that offer the best combination of capital gain and rental yield.

If having two juggle two variables seem overwhelming, my suggestion is to develop a Total Gain Percentage that combines the two. Take the percentage in capital gain over a specific period add that with the expected rental yield over the same period. This will give you a better idea of the value of each acquisition. Do this for a selection of properties you are consideration (which should be at least 5-10 different properties). The top 3 properties are the "finalists" in your consideration.

How to determine capital gain and rental yield for a given time in the future? This is not an exact science, but you will need to depend on historical data as well as existing information. For example, study the past transaction data from Brickz. Also look at how much a similar property - one of the similar characteristics or in the same neighbourhood - is renting out.

Example Calculations

Joseph purchased a condominium for RM1,000,000. In addition, he paid another RM200,000 for all related fees, from SPA to renovations, so in total, he spent RM1,200,000. He rented out the unit at RM2,000 per month. Five years later, he sold the property for RM1,500,000, but after deducted all related fees, he receive a nett amount of RM1,400,000. How much capital gain and rental yield did Joseph achieve?

Real capital gains: RM1,400,000 - RM1,200,000 = RM200,000 Percentage capital gains: RM200,000/RM1,200,000 x 100% = 16.67%

Real rental yield gains: RM2,000 x 12 months x 5 years = RM120,000
Percental rental yield gains: RM120,000/RM1,200,000 x 100% = 10%

Total Gain Percentage: 16.67% + 10% = 26.67%

Jason is buying a new condominium from the developer for RM880,000. He expects to spend RM130,000 for related fees, giving a total spent of RM1,010,000. The condominium will only be completed in two years, after which he intends to rent it out for RM2,100 per month. Based on current prediction, Jason intends to sell it off five years from not for RM1,200,000 and after deducting related fees, he expects to receive a nett amount of RM1,100,000 for the property.

Real capital gains: RM1,100,000 - RM1,010,000 = RM90,000
Percentage capital gains: RM90,000/RM1,100,000 X 100% = 8.18%

Real rental yield gains: RM2,100 x 12 months x 3 years = RM75,600
Percentage rental yield gains: RM75,600/RM1,100,000 x 100% = 6.87%

Total Gain Percentage: 8.18% + 6.87% = 15.05%

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Please use the information on this page as guidance only. The author endeavours to update the information on this page from time to time, but regrets any inaccuracies if there be any.