Think Before You Buy
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When it comes to property investment, everyone should make buying their own home as the first move.
Business magnate Warren Buffett once said: “If you are unlucky and make your purchase just prior to a property downturn, at least you will be able to live in the property and save rent.”
Hence before we proceed any further, let’s take a look at five property planning mistakes that people tend to make with investments and how these mistakes can be avoided.
- ‘THINGS WILL WORK OUT’
VKA Wealth Planners financial planner Kevin K.M. Neoh urges consumers to realise that property purchase is not as simple as investing in the stock market or any other investment assets that can be sold off easily.
Even if one is able to match the price between a seller and buyer, it would still take time before the proceeds of sales are received.
Kevin says people also tend to believe “prices will go up in future” or “I will be able to rent it out later”, hence the decision of “buy first, think later”.
If you speak to the right person, however, you may find that there are times when investors fail to rent out (especially properties in a new township) what seemed to be the next hotspot properties, but in the end things, did not work out.
Case and point, as per what has happened to NZX in Ara Damansara which is now considered a “white elephant” locale.
Even if you manage to rent it out, you may still have to close a considerably huge gap between your instalments and the rental income you collect.
- ‘LACK OF RESEARCH
Since property investment is considered ‘financially overwhelming’ for most people, it is only right that you, as an investor, spend time to understand the industry before venturing into the game.
As pointed out by Neoh, study the rental market if you plan to rent it out, be realistic if you buy and wish to flip; ask yourself these questions — “If Plan A fails, what’s next?” or “Do I have the flexibility and power to hold on to it, even when faced with difficulties?”
Neoh also says investors need to be wary about the management of the debts incurred from property investing, be it by leveraging on other people’s money (bank’s), which can be both a boon and bane at the same time. The only certainty is we know that it is a sword that hurts you most when things turn bad, which by then, is too late to do anything to redeem yourself.
- ‘BUYING TOO MANY PROPERTIES
Cheng & Co Wealth Management founder Ng Chee Yong often advise his clients to follow the ‘4-4-2’ approach.
The approach, however, is not a football strategy, but rather, represents the optimum financial position that one should prepare before embarking on the challenging journey.
Property investment may be rewarding, it is illiquid in nature, needing big capital outlays in each investment. Hence, having a proper property planning process is a requisite rather that an option now for each investor.
The 4-4-2 reflects each person’s cash flow position, i.e. 40% expenditure in lifestyle, 40% expenses in loan repayment and 20% savings.
Excessive lifestyle and expenses can cause tremendous pressure for someone who intends to commit further in their new loan repayment. Most banks had adopted the responsible financing criteria, factoring in an applicant’s exposure in lifestyle and expenses to evaluate their qualifications for money-lending purposes.
Secondly, why 40% in current loan repayment or Debt Service Ratio (DSR)? The higher DSR means the higher current exposure to debt repayment. Usually banks would perceive someone who has higher DSR to be in a weak position to repay their debt, hence may refuse a loan grant to them.
In fact, the 40% DSR is a widely acceptable level for most banks.
Finally, the higher the savings ratio (SA), the better position for someone to enter into the property market, especially when new investment opportunities knock at their doors without affecting their current lifestyle and repayment obligation.
- ‘NO TAX PLANNING
Valuation and Property Services Department director-general Datuk Faizan Abdul Rahman emphasises that property buyers must not forget to include costs and fees involved in the investment.
There are all kinds of costs involved when it comes to buying a property — mortgage, insurance, renovation and improvements, utility bills, council tax, among others.
For a property investment which is going to be let out, there will be tax to pay on the rental income.
Before each investment, it is necessary to survey the property, which is also part of the additional cost.
- ‘BUYING BUILDING WITHOUT CF
Faizan urges buyers to ask a lot of questions and discounts. As long as discussions with the real estate agents or developers are kept cordial, no one will get upset if you seek such answers.
It is vital that you gather all information pertaining the property and observe any defects whenever you are viewing the potential property — all these will allow you to justify the discounts.
Avoid buying any unit without a proper Certificate of Fitness, as not only you will not be able to move into the premises until the government’s approval, but also are required pay the loan each month.
Finally, be wary of developers who have been blacklisted, as you do not want to become their next scam victim!
