What About Investing in Property?

Objectives

There only two ways to get income from property: Capital appreciation gain or passive income stream via rental. Which is better? The answer is at an individual's level. Personally I would prefer a steady cash flow from the latter because at the same time the property being rented will also have appreciation gain over the years. Not everyone makes $$ or invest correctly from venturing into property, the same goes to every investment option available.

Consider a person who buys an apartment from loaning RM250,000 for 30 years loan has to pay approximately RM800/month to the bank. He/she decides to rent it out at RM650/month only. Most people will think that this is investing since you have an apartment that is rented to people BUT you do not technically own the apartment until you have settled all outstanding amount in the loan. In addition you are sapping RM150/month just to top up the payment, this becomes a liability instead.

He/she could sell for capital gain but with RPGT it is only wise to do it after the 5th year onwards. A prudent way is to generate rental income with a positive cash flow which is the main deciding factor before you say buy. A positive cash flow means rental received exceeds mortgage payments. If he/she managed to rent our RM1000/month, there will be a surplus of RM200/month. Within a year it could accumulate into RM2400 and if used to offset loan, could save 3-4 years in the 30 years loan.

Benefits

Tremendous leverage capability, in simple words means making money from money you did not have but which is borrowed. If you made the right choice, rental would help pay off installments and capital gain from value appreciation in the long run. This is the single most advantageous benefit over investing in the stock market.

Because you can leverage OPM (other people's money) a.k.a bank, the banker would be glad to take your property as collateral. This is also something that cannot be achieved in the world of stock market. If you borrow money for stock trading and lose it, you will need to dig more money out to pay it off.

Certainty of growing urban population in cities. With more people being brought into this world, cities will continue to grow creating demand. This has commonality with consumer stocks which are my favourites as many of you know.

Other lesser benefits:

Property will always have value. Well the same goes to stock if you choose a right company. I agree that a property might lose value but zero value, the question is; Will someone buy it from you? Unlike shares you can sell it easier.

Hedge against inflation. As long as the returns are better than FD you can say it is a good hedge. Same goes to stocks, 15% compounded growth rate is more or less an ideal percentage in property as well. Though people will say they earn more than 20%-30% in the case of buy before launch and sell later, I really think people are jumping into greed without knowing the consequences. See what happened in the US housing market. This is exactly why our government imposed RPGT back again and why Bank Negara is mulling over 80:20 LVR and disallow 100% or 95:5 financing. Kudos to them!

Real Property Gain Tax (RPGT)

Announced during 2010 Budget, RPGT will only be applicable to properties that are sold within five years of their purchase. This is an attempt to curb speculation activities in Malaysia. RPGT will only take effect if you make a profit from disposing your properties within five years of purchase. The tax is on the profit made after deducting allowable expenses such as legal fees and stamp duty paid.

RPGT Tax Structure

But if the property loses value, tax relief is provided for the allowable loss if disposal price is equal or less than acquisition price. There are also exceptions from being taxed which includes:

• Transfer of ownership from husband or wive & vice versa.
• Transfer of ownership from individual to company if you hold shares in the company.
• Transfer of property as collateral to loaner.
• Inheritance of the property.
• Disposal of assets as charity.
• Acquition of property by government under any law.

Citizens and permanent residents also enjoy an exemption of RM5,000 or 10% of the gains whichever is the greater, besides a one-time tax exemption on the gains arising from the disposal of one private residence. This one-time tax exemption is most useful to us and can only be used for one residential property but with a catch. Husband and wife can only be exempted only once jointly. This means that upon ROM, the wife will automatically lose her individual right for exemption if she had not exercised it yet. So for those not yet married but considering to go into property for the 1st time please so do before you go off a anxiously signing your cert as you will lose one right!

Having explained RPGT, tax rates and exemptions might change from year to year especially during budget announcements so keep an ear to it. The next budget for 2011 will be tabled on 15th October 2010.

Is there a bubble brewing? 
Unlike stock market, it is difficult to comprehend whether there is a bubble in making for the real estate market. Thus we need to be on the lookout for signs or clues that gives us possible hints on the current market condition. One of them is from NAPIC (National Property Information Centre). There is a wealth of information in its website, do check the publications section.

Property Overhang Statistics by Quarter

The other clues are the government's reintroduction of RPGT and BNM proposed move to enforce a 80:20 loan-to-value ratio for house financing. From NAPIC, checks on developments completed this year also show that vacancy rates remain at 50 per cent or higher. Such high vacancy rates tells me possibly two things: foreigners buying our property and leaving it empty & Malaysian abroad who have higher purchasing power due to foreign currency. The second is quite possibly as we have as much as 350,000 working abroad and they might buy for retirement which explains the higher vacancy rates as well.

What I do know is that most of the units are taken up by employees of the developer hoping to sell for a profit when the development is completed. Act of greed and greed fuels speculation which in turn results in a bubble. With 2/3 of the Malaysian population surviving with less than RM4,000 a month with another 1/3 earning less than RM700 per month how long can the prices be sustainable in the long run? Asians in general have the habit of family helping other members even in their financials. Ask the current generation of young families and some will tell you their house is not entirely financed by them but helped by parents. Again how long can this go on?

A good chart to show whether bubble is forming would be to compare three things: country GDP growth, house property price appreciation and salary increment in a single index chart. As you can see China's property market is still in good shape with property appreciation in line with household income. I really like the Chinese govt's actions in taming speculative activities. Sadly I have not yet finish on getting US and Malaysia's chart. I will post them as soon as possible.

China property vs GDP vs household income

With that in mind, it would be most wise to keep in touch with the property news, perform meticulous research and not follow the herd or listen to rumours. Always buy within your means and don't buy first and regret later. We all know that the rich or to be rich do things differently than the not so rich people. The same goes to investing. In due time I will develop my own strategies just like how I trade in the stock market.

*I did once say that to borrow money to invest is bad but I would like to expand it further by saying that leveraging is ONLY good provided it has a positive cash flow instead of becoming a liability. Don't borrow if it saps your cash flow for other investments or your savings.

Tech Talk Bursa Malaysia WW37

I totally forgot that I am still on holiday where else Bursa already resume trading haha. First, recap on the previous week's tech talk.

1. RSI continues to trend at overbought signals but seeing some profit taking at the end of the week. Still no swing test and no divergence signal. 40-50 support line still unbroken. 
2. MACD start to show profit taking but not big enough to constitute a correction. KLCI not performing anywhere near centerline & no crossover expected.
3. Resistance set at 1450-1470 points while support level is at 1410-1400 points.

Relative Strength Indicator (RSI)

Chart Setting: SMA 1, RSI (14, 20), Mar'10 to Sep'10

Last week we see investors trading at sidelines with gainers as much as losers. Nevertheless no swing test or divergence signal is expected in coming week but investors are beginning to unwind just before the long Raya holidays.

Moving Average Convergence Divergence (MACD)

Chart Setting: EMA 12, EMA 26, MACD (26, 12, 9), Mar'10 to Sep'10

Losing momentum as MACD line is trending towards 20. KLCI still far from the centerline and thus crossover is not expected for the coming week.

Resistance and Support Level

Chart Setting: Mar'10 to Sep'10 (6 months)

New resistance now set at 1460-1480 points while support level is now at 1420-1400 points (the KLCI psychological barrier).

In a Nutshell

Market did not consolidate a lot but KLCI did encounter resistance to go up one notch like in the previous three weeks. From time of writing I know Bursa is now at 1457 points up by 20 points in a single trading day with blue chips soaring higher & our dear Najib's announcement that ringgit might be made tradable offshore again. Nevermind that, my resistance and support levels still stand as above.

My technical skills sucks? Maybe, perhaps, you be the judge but I am only using technical to observe key events such as crossovers and swing tests to see how the overall market is heading. Technical still shows bullish signs but my fundamental calculations in some of the blue chip stocks show the word 'expensive' well except Parkson.

Getting Your Finances Straight

Some Facts First

40% of Malaysian household earn less than RM2,000 per month. 2/3 of the Malaysian population are surviving with less than RM4,000 a month with another 1/3 earning less than RM700 per month. Adding to that our salaries only increased by 2.6% from 2007 to 2009 while Indonesia is at 10%. If you still think we are superior, reality is that Indonesia is doing much better than Malaysia in many areas but I'll leave that in another story.

There are 7.9 million credit cards in circulation in Malaysia with a total of RM25.73 billion outstanding balances (debts!). Though only 3% default their loans, I really wonder how many people only pay the minimum amount because debt has been increasing year by year. It was only RM23.30 billion in 2008 plus the fact that 50% of bankrupts are those lower than age 30. Surprising isn't it?

Above sources are from statistics released by Bank Negara Malaysia. Luckily BNM has taken notice and is mulling on stricter credit card rules like min RM24,000 annual income to get a card instead of current RM18,000. Two cards per holder if salary is less than RM30,000 annually. Also coming could be loan to value ratio (LVR) for housing loan to 80:20 and disallow 100% and 95:5 financing. I will also post something about property prices in due time. 

Why people can go into debt? Probably because they overspend and do not know how to manage or save some money. My personal view is that:

1. A new grad with no commitments (house and car) can easily save >50% of salary.
2. A experienced worker with decent house and car can still save 30% of his/her salary.
3. A young family with decent house and car can still save 15% of his/her salary.
4. 10% is not really a challenge so please save as much as possible but ensure it is >10%.

Find it hard to save? Here are some of my previous ideas: 8 Simple Ways To Save Money

Delay Gratification

Giving an example of two persons: Amanda and Christy. Amanda at age 18 started to save RM1,000 each year and invest with 10% returns pa until she stops saving at 28 but still continue to invest will have RM230,000 at the age of 55 with just initial capital of RM10,000 from saving just 10 years.

Christy chose to enjoy life at her young age and only start to save RM1,000 each year at the age of 28 to 55 with investment of 10% returns pa as well. Christy only managed to have RM134,000 at the age of 55 despite saving for 27 years with a capital of RM27,000.

This gap of RM230,000 minus RM134,000 of ~RM100,000 comes from deferring spending or prudent financial management. When you get your paycheck, do you spend it now or save it for investments? Amanda deferred her spending for 10 years while Christy deferred for 27 years and still fail to catch up LOL. The question to you is how much can you delay gratification (happiness or satisfaction)?

To invest is risky, true I won't deny it but everything that you do is risky too if you do it WRONG. Drive a car but at reckless speeds, go hiking but not with proper shoes, put money in FD but in a shaky bank, invest in stocks but chose wrong company. What it implies is that whatever you do without prior knowledge is deemed taking unnecessary RISKS with no view of the consequences.

If you don't think how to put your money into good use, will it be enough for retirement? Plan to work part time even after retiring? Depend on your children? (I wouldn't if I do have my own family). Think about it. Starting it young is great, starting it now is still okay but starting it later will only delay your retirement and as you know it, time is limited and scarce.

You could also read my previous post on: Everyone Must Be A Millionaire

Budgeting Tool

With that, it is important to set our financial straight. Formerly I have been using pen and paper quite old school, don't laugh la. But as I have moved my research into the digital world of blog so have I moved my budget into an online tool named MoneyStrands. Click the few pictures below to see how the interface is. If you want to toy with it, I have a dummy account:

Username: nicktest

Password: test100586

Overview (top page)

Overview (bottom page)

Credit Card Details

Expense Analysis

Accounts

The tool is really neat and I can upload my credit card statement via csv files, tag my expenses into categories, set monthly/annual budget, determine my personal cash flow, observe my debt-to-income ratio and personal networth. What really makes it strong and truly useful is that you commit to check and update your expenses and review them accordingly. For me I simply do it every Sunday night which is why I am writing this now coincidentally.

Budgeting is not being stingy, it is the foundation of a sound financial plan. Some people will say you are stingy because you don't treat them enough or that you don't know how to enjoy life. Let them say what they like, when you are financially strong and generating lots of wealth, that is the time you can treat people without stress & also tell them it is not just about present life, it is on having a secure future. This is what you don't learn in school :)