If you are buying your first property as I was many years ago, there is a chance you have not developed your own ideal cheat sheet of what works as an investment property in your portfolio. Here in this article, I will be writing on the 4 key factors I use to filter out potential purchases which I am considering for my property investment portfolio.
As a general rule, the 4 key factors to consider in any new property are location, developer, concept and prices. Each of the factors above plays a key role in property valuation and have helped me filter out some of the most valuable purchases in my journey as a property investor.
The 4 factors are something that has worked extremely well for me and I hope they will help you the same in your journey as an aspiring property investor.
1. Property location has a direct effect on its market valuation
As a bull market continues, almost anything you buy goes up. It makes you feel that investing in stocks is very easy and safe and that you’re a financial genius.
Ron Chernow
This is the same in a real estate boom as we saw before the subprime bubble, the turnover rate for a property listing is at an all-time high with home buyers clamouring for any property that hits the market. The euphoria is always great while it lasts, but when the party is over, only property investors who chose the best location will retain its high market valuation. This difference in value is typically due to the property’s location.
“Location, location, location” is a common mantra all real estate gurus will emphasize. It is genuinely good advice. However, it is with very little context and substance to help the young aspiring investors make informed decisions.
A good location must fulfil a set of objective factors that affect a property’s valuation. The next time you are out hunting for a new property, do keep in mind the following pointers,
#1 Great neighbourhood appeals to potential tenants
A great neighbourhood will generally have good amenities, accessibility and appearance. This will largely determine the local demographics within the neighbourhood which in turn attracts the right tenant for your rental properties.
Typical amenities I would expect in a location will be easy access to grocery stores, shops, and restaurants. These are the type of places most people will frequent for general day-to-day necessities. Korean expatriates are drawn to successful neighbourhoods such as Mont Kiara because of the quick convenience to Korean grocery stores and restaurants. Not to mention, the neighbourhood is also well equipped with hospitals and schools. Even if you do not plan to have kids, you may want to take into consideration of your potential buyers with families who are on the lookout for good schools. The quality of schools and the distance from home can both be important factors to consider.
When it comes to accessibilities, I would want a neighbourhood that is not too far away from major highways with multiple entries connecting to the main business hubs. This allows for easy access to roads and many quick shortcuts out of the neighbourhood, avoiding traffic jams and saving on commuting time. This will make the location more desirable than having it tucked away and can only be accessed via a single point of entry. Besides, having more traffic throughout the neighbourhood is also indicative of how practical and convenient the location is for the locals.
When it comes to the appearance of a neighbourhood, believe it or not, studies have concluded better-looking neighbourhoods tend to have better property valuations. Quality landscaping, well-maintained buildings, large trees, central parks and community halls were shown to improve desirability. A well planned and maintained neighbourhood tend to indicate the better living quality of the neighbours and a sense of belonging.
One little trick I picked up over the years to understand a location’s desirability is to look at how long a property is being listed on the market; if the average property listing is short, it indicates a quick turnover, hinting the location is highly desired by others.
#2 Future development and centrality will affect the location’s desirability
When considering the location for your new property, it is not only the present amenities that matters but those being planned for the future as well. Any plans to improve infrastructures such as highways or future development for public transportation can dramatically improve property valuation in the area. It is common knowledge in Malaysia that MRT or railway public transportation will dramatically improve property valuation in the area as long as it improves local connectivity, allowing for easy movement of the masses.
Whenever I am out hunting for new properties, I will do my best to find out if the council has plans for any public, commercial or residential developments within the area and how these additions can help in improving the location’s desirability.
2. A good developer should deliver quality on time
As a general rule, a good developer is favoured for their good workmanship, fair pricing, reputable track record and the ability to deliver on time. In the past, Sunrise was well-known as a property developer for their exquisite understanding of community planning, construction quality, financial security and a good appreciation for helping investors realise a good return on investment.
When I first started my journey as a property investor, to be honest, choosing a good developer was never on my checklist for hunting new properties. I was extremely focused on getting the right location at the right price without realising how big of an impact the right developer can bring to a property’s valuation. It was only with guidance from my mentor and other seasoned investors that I realise a developer’s workmanship and reputation has a huge impact on the property’s value over a longer time frame.
#1 Properties with good workmanship is built to last decades
As a property investor, fretting over poor workmanship and high maintenance costs is the very last thing you want to spend your time on. When a property is built to last decades, naturally, the design of the building will retain its’ pristine looks for a longer period of time. This also translates into a longer time in between maintenance and reduced annual maintenance costs. In other words, it means less cost to the investment portfolio and a higher return on investment.
Some of the best developers in the market will have a good track record for delivering promises on quality projects to their customers. Due to their strong network to raw material suppliers and construction contractors, you as the investor will highly likely benefit from a well-built property in the end.
When I look at a developer’s portfolio, I tend to focus on their track record in the particular niche I’m in and how well did they deliver on those developments. In other words, if I am hunting for a condominium unit being developed by X developer, I want to understand the track record they have in developing condominiums in the past and how well were those developments delivered. There are also times where I will go to one of their completed development to appreciate how well their workmanship is.
#2 A developer’s reputation can also affect the property’s desirability
Good reputation and brand recognition is something you do not want to overlook when you are shopping for new properties. Having a developer with a good reputation can be a good thing as they are driven to ensure the development is delivered on time without faults. At the same time, they are also more motivated to fix any construction defects that may arise during the vacant possession, all for the purpose of preventing any unfavourable comments.
Having strong brand recognition also means a developer will less likely risk their image. Avoiding repairs and customer complaints is less common with developers trying to maintain their brand recognition. One interesting observation, it is also significantly easier to dispose of properties built by reputable developers during their peak. There seems to be a market sentiment on how well these properties are built to last, warranting its higher valuation as compared to their surrounding development.
I know having a good sense of reputable developers can be difficult at the beginning. Trust me, this will quickly become common knowledge when you immerse yourself in the property industry. What I did was to speak with seasoned investors, friends, families and even the local residents on how they feel about the home they live in. If the property developer is terrible, their customers will have a ton of nasty feedbacks to share with you.
One thing to note, good marketing does not mean good workmanship. Young investors are often bought into the fancy marketing and showrooms but fail to realise the terrible track record a developer may have.
3. Design and concept is important to the local community
The property industry has gone through many years of evolution with the buildings today being more efficient, aesthetically unique while beautiful, and meaningful. Today, anybody can “build” something, but the practical function itself is no longer sufficient to be competitive in the property industry.
For a new development to be competitive, developers must create spaces that do more than house activities, to create sustainable places while remaining financially feasible. To do so, architects are required to carefully orientate their design to the home buyers and those who are impacted by the space, albeit do not utilize it.
To put into perspective, homes in the past is simply a practical space for living and shelter. Architecture design is not too crucial but having it is a symbol of prosperity and luxury. Today, this mentality has changed as we live in a world with a complex combination of real and virtual space. Socializing is no longer defined to a physical meet up but is now made available over long-range conferencing at the very comfort of our homes. With this change in behaviour, building design and concept is required to adapt in order to remain competitive and desirable in the future. Residential spaces today are typically designed with communal activity in mind while maintaining a good sense of individuality.
Now, what does that mean for me as a property investor? Whenever I’m out exploring showrooms, I really want to understand how this development will stand out in comparison to those around it. Are the common facilities unique and timeless for the different ages? At the same time, is the living space designed to cater for communal activity, visitation by friends and loved ones? If the development is solely focused on creating a living space similar to those around it, then there really is little to no uniqueness. In that case, what other factors are there that allows it to be competitive?
To highlight some example, Condominium A is well designed to have a unique living experience by providing top-tiered common facilities such as a sky pool and sky garden. Compared to the surrounding condominiums, Condominium A is the only development with such facilities despite its’ competitive pricing. This will be something I consider as a plus point for Condominium A since it is a unique living experience no other surrounding condominiums can provide.
There are many perspectives to identify if a development is providing a competitive edge against the surrounding buildings, I will list a few below which I commonly use in my studies,
- What is the flavour of this development? Is there a common theme across the common facilities and residential units?
- As a residential development, are there many other similar residential towers within close proximity? Can the commercial market bring in sufficient tenants to improve demand for residential units?
- Is the unit is designed well for my potential tenant? If I desire to service my rental properties to medium-sized families, will this unit be a good fit?
- Is there any close promixity central park or greenery that my tenants can enjoy?
Understanding a new development’s design and concept does take a bit more effort as it requires you to study not only the development you are considering, but those around it as well. However, by doing such a study, you will have an in-depth understanding of the location, neighbourhood and surrounding buildings that can be competitive against your investment consideration.
4. Property prices is compared at cost per square foot
Now that factor 1 till 3 is satisfied, the final factor you want to consider is the pricing.
Typically for me, property price comparison is the final piece of the puzzle in any analysis. After you’ve worked out the desirability of the location, accessibility and concept of the new property, the last thing to focus on is the pricing. The main objective here is to answer the question “Is this property worth my money and my time?”
In any transaction, I would want to know what is the fair market value for a certain development I’m looking at. A fair market value is typically a range and I believe there is a scientific approach to comparing property prices while adjusting for other parameters that could throw off the analysis.
#1 To have a fair comparison, compare apple to apple
The biggest challenge to me when I compare property prices is to compare it as apple to apple. No 2 property development is exactly the same and choosing the right property as your benchmark can sometimes be confusing. To make life easier, I would first identify the location, development type (luxury / affordable), layout size, number of rooms, number of carparks and other relevant parameters.
Once I have these common parameters identified, I will compare this against other similar listings within the location. A common question I get a lot is “Should I compare against a property in a different location?”. I would say it is ideally not the case for me since different locations will have different land values and obviously the price will definitely be different. However, if you are comparing 2 different locations of similar attributes and desirability, perhaps it can be a reasonable comparison. After all, the main objective here is to compare prices at apple to apple.
Other factors to consider when selecting properties of similar attributes:
- Similar design concept – If you are considering a luxury development, you do not want to be comparing prices with an affordable development within the location. That is definitely not an apple to apple comparison.
- Built year – If the developments are similar in design concept, sometimes it is worthwhile comparing against subsales property within the location. However, do keep in mind that subsales property will likely come with a lower asking price while costing homebuyers more money to rehabilitate before a potential tenant can move in.
Once I have identified the other developments to compare against, it is a simple calculation to determine the price per square foot. The price per square foot is the easiest form of price comparison as it shows how much a property is priced against per square feet of built-up space.
Price per sqft = Asking price / Built-up space (sqft)
#2 When comparing against subsales property, remember to consider transaction cost and maintenace fees
In the previous segment, we discussed about comparing property prices in terms of price per sqft, to truly understand the price difference against other similar developments within the area. In most of my analysis, this comparison will be against older developments, also known as sub sales properties and very often, there will be other associated costs to consider.
Every property transaction will have legal and stamp duty fees. In some new developments, these cost may be absorbed by the developer which gives us, as the purchasers a significant cost saving. Below are the 3 typical property transaction costs I will consider in my calculation,
- Mortgage loan agreement and stamp duty
- Sales and purchase agreement and stamp duty
- Memorandum of transfer and stamp duty
Property transaction costs can easily add on a 5% – 7% cost on top of the agreed purchase price. If you’re only comparing price per sqft but fail to consider the transaction costs involved, this can easily throw off your calculation by a good margin of 7%.
Another thing, do not forget about the rehabilitation, maintenance and management cost. If you are comparing against an older condominium, you will want to estimate how much the rehabilitation will cost you. For me, I will take a good benchmark of RM 50 – RM 100 per sqft for rehabilitation purposes, depending on the condition and age of the building.
#3 Have an objective comparison in a table form
Finally, it is time to have an objective comparison. The below table is something I typically use to compare prices against other developments within the area.
| Development | Asking Price (per sqft) | Rehabilitation Cost (per sqft) | Transaction Cost (per sqft) | Final Cost (per sqft) | Ranking |
|---|---|---|---|---|---|
| The Condominium I Want to Buy | 620.00 | 20.00 (If it comes furnished, only need simple furniture) | 0.00 (Cost absorbed by the developer, Home Ownership Campaign) | 640.00 | 1 |
| Another New Condominium Nearby | 600.00 | 20.00 | 24.00 (Need to consider MOT cost) | 650.00 | 2 |
| Old but Similar Condominium | 540.00 | 90.00 | 39.00 | 669.00 | 3 |
From the table above, it is clear now that price comparison is not difficult at all. It is all about taking the right product, comparing it to another similar product and dissecting the different costs to truly understand the final acquisition cost.
Real estate is an imperishable asset, ever increasing in value. It is the most solid security that human ingenuity has devised. It is the basis of all security and about the only indestructible security.
Russell Sage
Final Word
Figuring out how to do a property analysis on your own can be a daunting task at first. However, with practise and exposure, I am sure you will be able to determine what works for you when shopping for a new investment property.
With the 4 key factors above, I hope it serves as a good guide to point you in the right direction of your journey. Over time, this may transform as you begin to pick up other parameters in your toolbelt. When that time comes, please let me know what works and it will be interesting if we can share information.
Until then, take care.
