Buying home during turbulent times (4): Ten mistakes to avoid

Part 1: Buying home during turbulent times: Ten mistakes to avoid
Part 2: Buying home during turbulent times (2): Ten mistakes to avoid
Part 3: Buying home during turbulent times (3): Ten mistakes to avoid
Part 3: Buying home during turbulent times (4): Ten mistakes to avoid

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7. Types/ classes of home & areas

a. For the sake of investment, today, I would choose landed property over condominium or apartment as my home. Land is a scarce resource. Its price goes up when demand increases. Prices of condominiums or apartments may stay as demand can be easily fulfilled by further supply built. This may be different for other countries where land for bungalows is abundant but with limited sea view city condominiums. But the principle is the same - the force of supply and demand.

b. First choose area, then specific property within the area. We cannot change area but we can improve our house. Growth usually leads to appreciation of house prices of the entire area. So choose growth area, choose hot development area, choose high quality neighbourhood, etc. Even if you buy a lower end house at a good area, your house price will go up when the area's prices go up.

c. Within your budget, choose low end of higher range property over high end of lower range property. For instance, choose a small landed house over big apartment.

We made all 3 mistakes above. We chose condominium over landed property. We did not choose a good neighbourhood, but a good unit within a so-so neighbourhood. We chose higher end of lower range property, i.e. a big condominium (instead of lower end of a higher range property, i.e. a small landed house). Our condo price had never gone back to the price we paid for. Don't get me wrong, it is in fact a lovely place as home. However, it was a bad choice as investment.

Believe me, there is nothing stopping you to get a lovely place as your dream home AND at the same time this place becomes your best ever financial investment as the house price doubled in one year. Therefore, when you choose your dream home, chose those that can also give you a good investment return few years down the road.

8. Feng Shui and other beliefs

Even if you don't believe in Feng Shui, if a big part of your culture believe in it, your home value will be affected by Feng Shui and local beliefs.

We bought the 14th Floor unit. In Cantonese, 14 is pronounced as "sure die". In Malaysia and probably Hong Kong, most Chinese don't buy houses, apartments or cars with number 4 ("die").

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Buying home during turbulent times (3): Ten mistakes to avoid

Part 1: Buying home during turbulent times: Ten mistakes to avoid
Part 2: Buying home during turbulent times (2): Ten mistakes to avoid
Part 3: Buying home during turbulent times (3): Ten mistakes to avoid
Part 4: Buying home during turbulent times (4): Ten mistakes to avoid

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5. Don't believe seller/ agent's bluff. Savvy sellers know how to create sense of urgency. You will be told despite current economy conditions, another potential buyer is rushing to close this deal.

As buyer, the one who pay money, remember, you make the call. Don't let the seller dictate your pace. When you are in control of the pace of negotiation, you get the fair price you want. When you cannot dictate negotiation pace, most likely this is not a good deal. Forget about the deal.

What if the "bluff" is for real, you ask. I once read "deal of a life time comes every two weeks" from either Robert Kiyosaki or Dolf De Roo. We should not worry about losing one deal. If you are not in a desperate position you have time to explore and compare. See hundred places, shortlist a few "dream home" and negotiate at the same time.

This leads to the next point...

6. You must see more properties and compare

When you have seen sufficient alternatives, you will learn there are many ways to imagine how a dream home can be. It leads to abundance mentality. You will know there are many places as good as the one you are seeing now. There are many places you can design to be your dream home. There are many ways to design most places to become your dream home. You will not stuck your mind to just-this-one.

Once you are exposed to many possibilities of a dream home, abundance mentality kick in. With abundance mentality instead of desperate or just-this-one mentality, you will be more equipped to negotiate. Savvy sellers will sense your solid position (on many options available to you, sensible financial choices, etc.) and become more willing to back down on price.

I was the one reluctant to explore more houses and condominiums offered in the market. I just wanted to get a good place and quickly got it done. We checked less than a dozen of places. The moment we found one good place within, though stretched to the limit of, our budget, we became desperate for this particular place. We were in scarcity mentally. We did not want to lose this deal. The seller's agent held firmed of the property's price (at its ever peak).

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Part 1: Buying home during turbulent times: Ten mistakes to avoid
Part 2: Buying home during turbulent times: Ten mistakes to avoid
Part 3: Buying home during turbulent times (3): Ten mistakes to avoid
Part 4: Buying home during turbulent times (4): Ten mistakes to avoid

Buying home during turbulent times (2): Ten mistakes to avoid

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Part 1: Buying home during turbulent times: Ten mistakes to avoid
Part 2: Buying home during turbulent times (2): Ten mistakes to avoid
Part 3: Buying home during turbulent times (3): Ten mistakes to avoid
Part 4: Buying home during turbulent times (4): Ten mistakes to avoid

Your position

2. Don't stretch to your financial limit

If your financial position is not strong, you are taking greater risk to buy a property during economy slowdown. By stretching to your limit of affordability, you left yourselves no buffer for unexpected adverse scenario, i.e. job loss, interest hike (until recently the central bank reaction to inflation pressure is to tighten monetary policy and increase interest rate) that lead to higher instalment.

We borrowed to our limit to buy our home in 1997. Asia financial crisis changed our view on risk for good. There is no solid ground in the stock market. Nothing is impossible, i.e. free fall of stock market index to 20% or less of original height. The company that I worked for was going through redundancy exercise. We lived through the period with financial fears knowing that just one of us losing our job we would have problem in repaying home loan. We learned, bit our teeth, went through the period safely and repaid the home loan in 7 years. I know I will never want to risk myself in such situation again.

3. Don't be a desperate buyer

Because if you are desperate buyer you cut yourselves from many money saving options, you can be "squeezed" by the seller, you left yourselves with little corner to turn away from a deal and get the best out of negotiation.

We were desperate buyer then because my wife refused to rent, I refused to move in to my in-laws house (lose face ;-) , and give her the power over me), and our earlier home purchase was delayed for about a year and was called off (not approved by local authorities due to developer own problem. Our deposit was refunded). The worst part is the seller agent knew our position.

This lead us to next section on negotiation.

Negotiation

4. Don't show it on your face.

If you like the property, don't show it on your face in front of the seller or his/her agent. If you are desperate to live at this place, don't show it on your face. Working in stock market industry, I used to think there is a fair market price blinking on the wall for anything. I thought mind game or pretensions is unnecessary for negotiation, as there must be a fair market price. I was wrong. The only fair market price in property is how desperate the seller want to sell and how desperate the buyer want this specific property.

We were naive, we wanted to let the seller know that we were genuine buyer and not just tires kicker. We revealed our "desperate" position. We discussed our true likeness or dis-likeness of specific property in front of her. When she brought us to a condominium, she saw the sparkles in our eyes. We did not hide our excitements. When negotiate, we could not reduce a single cent even in the midst of Asia financial crisis. Actually there was no reason for her to reduce the price. She knew how desperate we nedded a place quickly, she knew how much we like the property.

We can always be friendly yet tightly guarding our position. Play your cards close to your chest.

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Part 1: Buying home during turbulent times: Ten mistakes to avoid
Part 2: Buying home during turbulent times (2): Ten mistakes to avoid
Part 3: Buying home during turbulent times (3): Ten mistakes to avoid
Part 4: Buying home during turbulent times (4): Ten mistakes to avoid

Buying home during turbulent times: Ten mistakes to avoid

Part 1: Buying home during turbulent times: Ten mistakes to avoid
Part 2: Buying home during turbulent times (2): Ten mistakes to avoid
Part 3: Buying home during turbulent times (3): Ten mistakes to avoid
Part 4: Buying home during turbulent times (4): Ten mistakes to avoid

Buying a home during turbulent times?

Share prices are falling. Inflation is rising. Property prices remains uncertain. Financial and banking system have never been seen as fragile before. Job market seems bleak. However, you (and your partner) have decided to buy a place call home. Below are the top ten mistakes you can avoid in buying a home.

We bought our home, a condominium, at the midst of Asian financial crisis in December 1997. The share market had fell by half. Future of property market seemed fragile but had without sign of cracking, yet. We made most of the mistakes listed below. Therefore, despite the economy conditions, the seller's agent was able to hold tight to the price offered. We did not manage to reduce a single cent. Looking back, we were lucky to go through that difficult period. However, if we were not so naive, we could have saved huge.

Market Timing

1. Not now, just delay for a while. In the time of fragile economy and slowing growth, you are taking greater risk to buy a property.

a. Property prices
Property prices may stay or fall further, while it is unlike to go up in near term. If the property prices had not fell or had not fell significantly, it does not hurt just to wait for while (3 - 6 months) and see.

b. Banks are reluctant to lend during this period
Your bank marketing officer assure you that you can get loan for this property. You happily place your 10% down payment to the seller. A week later, the bank credit department reject your loan application. You are left to scrabble for financing or risk losing your 10% down payment. Banks are simply reluctant to lend during economy slowdown.

In other scenario, your bank may want you to pay higher down payment and take less loan.

c. Depends on Central Bank strategies, interest may go up.

After just one year, the property market crashed (selectively) too. If we waited for just a while, we would have paid 30% lower.

We were lucky enough to get a loan during that period as I was working for a financial Group. The bank within the same group has got no problem in lending us home loan.

However, our first few instalments from July 1998 were lower than the monthly interest expenses due to interest rate hike after the loan was approved. IMF, though its aids was rejected by Malaysia government, was preaching for higher interest rates. All Western media was preaching about market forces and higher interest rates. (In 2000 and Today, US Federal Reserve did the opposite lowering interest rates. Western media kept quiet.)

Our loan principal went up for few months.

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Part 1: Buying home during turbulent times: Ten mistakes to avoid
Part 2: Buying home during turbulent times (2): Ten mistakes to avoid
Part 3: Buying home during turbulent times (3): Ten mistakes to avoid
Part 4: Buying home during turbulent times (4): Ten mistakes to avoid

Return of Investment of cash as down payment of rental property

You are considering whether to invest RM20,000 as down payment of a rental property. The difficult part of the decision is that you don't know whether the return of this RM20,000 is as good as your fixed deposits or unit trust funds.

How to compare? You will need to know the Rate of Return of this investment in order to compare with your fixed deposit rate or your unit trust fund portfolio's rate of return.

The tricky part of the comparison is that you cannot use return over the purchase price of the rental property as what you pay is not the purchase price but only the down payment.

Neither can you use Cash on Cash return of investment, as Cash on Cash ignore the house ownership/ equity you acquire when you slowly pay off the bank loan.

Your pay only the RM20,000 down payment and may be some initial legal fees and stamp duty, etc. So your actual investment is the RM20,000, upfront fees & expenses and, if any, net cash outflow through the years.

Your return is the entire future value of the property after you have paid off all the property loan's instalments and, if any, the net cash inflow through the years.

Yes, through the years...so it involves time value of money. You may download the Return of Investment calculator here.

The biggest assumption of this calculator is the Future Estimated Value of your rental property. We must realise we can never accurately estimate future value of an asset. The calculator also assume that the loan interest rate is constant through out the loan period. This is rather unrealistic viewing current interest rate movement. However, these are the assumptions necessary to calculate the return of investment.

Screenshot of the ROI calculator...

Investing in REITs

When we invest in REITs we are looking for an instrument that provides high, consistent and growing dividend income. The REITs that we invested in must be able to generate sustainable and growing rental incomes from their rental properties business. Without a good rental properties business, the REITs could not distribute sustainable dividends to its shareholders.

Other than dividends income, the fluctuation in REITs share prices enables us to make capital gain. A well-managed and growing rental properties business, for REIT, will inevitably lead to higher dividends payouts and therefore higher share prices. More on reasons to invest in REITs.

The key to invest in REITs successfully is to know the sustainability and potential of their rental income, the management integrity and their intention and competency to improve and grow their rental properties.

A good REIT has

• Sustainable and improving rental incomes
• Good management with integrity in managing the Reit
• Good management with intention and competency to improve and grow the properties in the Reit

For sustainable rental income:

• The properties in the Reits must be well-located, well-managed and well-maintained
• The Reits must have assurance of future income without relying on mere few big tenants
  

For growing rental income:

• Location, location and location of the properties in the Reit
• The management is actively seeking to increase properties held in the Reits
• The management is actively seeking to increase value of the properties in the Reits

Translate the criteria into checklist:

Questions to answer when invest in REITs:
1. Does the Reit have a broad base tenants in diversified industries?
2. Does the Reit have quality tenants with rental contracts more than one year? An average 2.5 to 3 years contract length is good.
3. How is the conditions and the locations of the properties in the REIT?
4. Does the original issuer still hold at least 70% of the REIT? This question is the main reason why management would do good to the REIT. The bigger their stakes in REIT the bigger the incentive for the management to manage the Reit well.

REITs we must avoid are those with properties that dumped by the issuer. The issuer would hold very little stake in the REIT after disposing their unwanted properties into REIT for a good profit and to earn management fees, trustee fees, etc. from the REIT.

To learn more about investing in REIT, check out this guide.

Part 1: Understanding REITs in Malaysia
Part 2: Understanding REITs in Malaysia (2)
Part 3: Investing in REITs

Starhill Reit's IPO Prospectus

Check out today's New Straits Times. It comes with the prospectus of Starhill Reit's IPO. The offer was reported in Yahoo news and Forbes. You may find the book building/ subscribing schedule in YTL's corporate web site. The opening and closing date for retail investors are 22 November 2005 and 29 November 2005 respectively.

Malaysia's YTL Corp. Bhd. (4677.KU) will raise around MYR523.4 million from Starhill Reit. There is an old write up on the Starhill Reit in NST's property times. Forbes's up-to-date write up on Starhill Reit is more comprehensive.

Axis REIT

There were numerous reports on Axis REIT, mostly favourable.

I am not comfortable with Axis REITs because I don’t understand property market well enough. The properties held by Axis REITs are mainly office buildings and warehouses (in Petaling Jaya and Shah Alam) which could be sensitive to market trend. Axis REIT’s rental incomes may fluctuate due to changes in the landscape of property market and the continuation of few existing major tenants, i.e. DHL, etc.

Should I want to invest in Axis REIT I will need to read and understand more about property market trends, I need to know their relationship with the major tenants, I will need to know if any of the major tenants is leaving Malaysia for good, etc. Such information is a bit difficult to get.

However, I can sleep well buying a REIT that holds mainly shopping malls. I don’t need to understand property market or know its trend. I just need to shop at the shopping malls to know whether the REIT is doing well and continuing to do so.

We will just need to be patient and wait for the IPO of SunCity, YTL, Landmark and IGP's REITs.