Having spent half a decade in this field helping families and individuals looking to invest in real estate, I’ve had the opportunity to compile some of the most common questions on “how to invest in real estate”.
To put it simply, real estate represents the utilization of real space that can be used for shelter or to display goods for sale. In some cases, it becomes a great investment opportunity where an owner of the space will lease it out to occupants for their shelter or to display their goods and services.
On the other hand, real estate investing is a focused effort in using space to generate income in the short and long term. It is a great investment opportunity with numerous strategies available to begin making money. While many real estate investors started out making this vehicle their preferred side hustle, it does have the potential of one day becoming your main source of income.
If you’re new to real estate investing and have no idea how to get started, don’t worry, you are not alone.
Real estate investing is a great way to achieve your financial goals, but as with life, things are always trickier to navigate as novices. That is why I’m putting together this resource, offering tips, advice, beginner-friendly strategies, terminology, and mistakes to avoid.
If this resource has been a real value-add to you, do share it with your friends and family.
How does Real Estate Investing compare with Equity Investing?
#1 Predictable passive income through rent collection
One common story I gather from my time working with seasoned investors with more than RM100m of net worth in real estate is that the primary advantage of real estate investing is the potential for passive income through rental income. When you’ve accumulated enough assets and have them managed in an organized manner, it is quite possible to turn rental income into a main income but it will require time for the rental yield to offset enough interest payment.
With equity investing, it is still possible to earn income through dividends, but the amount is not as predictable or reliable as rental income. When you sign a 3-year lease with a tenant, it is possible to estimate your cash flow and cash position for the next 3 years. This is not possible with dividends gained from equity investing.
Additionally, real estate investing can offer tax benefits, such as deductions for mortgage interest and property taxes.
#2 Capital appreciation and leveraging
Another main advantage of long-term real estate investing is the potential for appreciation in property value over time. Some of my wealthiest networks in real estate investing have held onto their portfolio for more than 30-40 years. In their experience, real estate tends to be a more stable investment over the long term.
Other than supply and demand, property values can also be influenced by external factors such as inflation, population growth, and the overall state of the economy.
Besides that, they felt more in control when investing in real estate. With stocks, your portfolio performance is basically at the mercy of market forces and the decisions of the companies you invest in. With real estate, most successful investors would have made improvements to the property to increase its value, negotiate rental agreements, and make strategic decisions to maximize the return on their investment portfolio.
#3 Leveraging on Other People’s Money (OPM)
When you’re starting out, every Malaysian has the opportunity to leverage 1:10 from the bank. What it means is that for every RM100k of the property price, you can borrow RM90k from the bank to finance the property.
Take for example, if the property you plan to invest in has a bank valuation of RM600k, you can borrow up to RM540k from the bank. That will mean you only need to fork out RM60k plus the closing cost to be able to afford the property. Can you imagine if you will need to pay RM600k to buy the property instead? I don’t think property investing will be as enjoyable if that were the case.
The good thing about being able to leverage is that whenever the property appreciates by 10% or 20%, say the RM600k property appreciated by 20% from your purchase price to RM720k in 5 years. You actually made RM120k in 5 years on an RM60k investment, this is netting you a 200% return on investment (ROI).
Compared to the equity market, the 200% return on investment over 5 years is equivalent to a 40% return on investment (ROI) every year. While it is a general top-down approach, it does poise to have superior returns than equity investing.
#4 Drawbacks of real estate investing
Of course, real estate investing does have its potential drawbacks, such as higher upfront costs and ongoing maintenance expenses. Additionally, real estate can be less liquid than stocks, meaning it will take some time to list and sell the property before you can realize your profits.
Unlike investing in stocks, anyone with RM100 can begin their equity investing journey. However, in real estate investing, you will need to be able to qualify for a loan before you can actually begin investing. Often, this means you will need to have a monthly income of at least RM3,500 to qualify for a new property that costs RM500k.
Challenges when starting out in Real Estate Investing
#1 Initial capital required (10% downpayment + closing cost)
This is a really common challenge I observed working with individuals looking to get started in real estate investing – not having the initial capital required to make a purchase. Having said that, I do understand why it happens and it’s really not your fault.
Society today is pressuring younger folks to spend unnecessarily on materials that adds no value to our life while we all struggle to make ends meet every month. Yes, I’m talking about the brand-new Peugeot that you may not need or the Gucci bag you want.
Hear me out, the marketing world today is significantly more successful and they are doing a good job at telling you what you should buy, who you should impress, and ultimately, defining who you are. Your subconscious spending habits are often driven by these really successful marketing campaigns but if you take a step back, you’ll realize that it is possible to save up and plan for your long-term investment.
Unlike other forms of investing, such as stocks, bonds, or mutual funds, real estate typically requires a significant upfront investment. Without the habit of saving, this can be a major barrier to entry for many potential investors, especially those who are just starting out in their professional careers.
Alternatively, it is possible to consider new projects where the rebates provided by developers can help with the upfront payment. However, you do need to realize that buying into new projects can be highly speculative if the developer does not have a reputable track record or the prices are much higher than the subsales units.
#2 Choosing a suitable strategy that aligns with your goals and risk tolerance
If you’re just starting out and you’ve done a fair work of research, then you do know there is a range of investing strategies and sometimes, that can be overwhelming. Ideally, you will want to study a strategy model that best aligns with your financial goals and risk tolerance.
Real estate investing can take many forms, I’m talking about the conventional (but most successful investors use this) strategy of buying and holding rental properties. Otherwise, those with a knack for aggressive investing can consider flipping new properties by buying at a significant rebate and selling it off upon completion.
Besides that, those with limited funds can also consider real estate investment trusts (REITs), or participate in real estate syndications. I’ve written a comprehensive article about investing in REITs and whether it’s possible to live off the dividends.
One thing I want you to notice is that each strategy comes with its own unique risks and potential rewards, and it can be overwhelming for new investors to navigate the various options and choose the right approach. I was fortunate enough to have started my real estate investing journey under a good mentorship – I would recommend you look for a mentor who is willing to journey with you.
#3 Not having a mentor to journey with you
Finally, real estate investing can be complex and it does require a certain level of expertise and knowledge to be successful. Investors need to understand market trends, property values, financing options, legal requirements, and property management.
However, this knowledge can take years to acquire and mistakes made can be costly. Having a mentor who has walked the path before to journey with you is extremely important. Personally, I’ve benefitted greatly from my mentor just by hearing about his real estate investing journey, his biggest wins and deepest losses are eye-openers to reality.
Learning from the lessons of others can greatly reduce the pain and monetary loss you’ll experience. But it does not beat the need of taking action and getting on your own two feet.
6 Real Estate Investing Strategies You Can Apply
In case I have not mentioned enough, investing in real estate or breaking into the industry can be intimidating and capital-heavy. It took me several years before I could finally feel comfortable and confident in the industry and rely on my own analysis.
Having an idea of how seasoned investors are managing their real estate portfolios has given me clarity on what can be achieved in my journey as a young upstart investor. I hope by laying down the top 10 strategies used by my network of real estate investors can give you clarity on what might work for you.
#1 Buy, Hold, Collect Rent
The Buy and Hold strategy in real estate investing involves buying a property with the intention of holding it for an extended period, typically with the goal of generating rental income and long-term appreciation. In some cases, the family may even hold the property beyond 2 generations.
Depending on your preference, freehold or leasehold may not necessarily matter to your real estate investing strategy. Assuming you intend to only hold the property for 10-15 years, purchasing a property with 95 years lease would still leave you with 80 years upon disposal. This will not hinder your buyer or the financing process.
However, if you intend to keep the property in the family across multiple generations, from you to your grandchildren, then it’d be ideal to acquire a freehold property. At the same time, it might be better to consider landed residential properties instead of high-rise condominiums as capital appreciation has always proven to be stronger with landed properties.
For leasehold property being held across generations, you would want to plan on lease renewal and have that instruction cascaded to the next generation and so on. If you do not intend to dispose of the asset, it is possible to renew your lease for only RM1,000. Otherwise, you can always refer to this lease premium calculator to estimate the cost involved to renew the lease.
#2 House flipping
The House Flipping strategy in real estate investing involves buying a property in poor condition, renovating it, and selling it quickly for a profit. The RPGT incurred will then be treated as a business cost. The core of this strategy relies on the speed and cost of renovation and looking for a buyer.
This is a rather popular strategy for seasoned investors with strong capital positions and cash flow. It is important for the investor to accurately manage renovation budgets and timelines and this often comes with the experience of being in the field.
If you’re just starting out, it is still possible to do a house flipping but it will be tremendously beneficial if you partner up with a seasoned investor who is genuine and willing to take you on as his mentee. Otherwise, it can be a painful journey should the venture collapse because of poor estimates on renovation costs and cash positions.
#3 Value-add
The Value-Add strategy in real estate investing involves buying a property that has potential for improvement or renovation, making the necessary changes, and then renting it out for a higher rental yield. This is applicable to properties in poor condition or in cases where rent is far below market value.
Taking for example, it can be a case where an office building with ample common space is not fully utilized to increase occupancy. As a value-add investor, we would want to take another look at the office layout and reorganize it so that we can reduce the office space footprint per employee by 20% – 30%. This would also mean being able to house 20% – 30% more people in the same office space, allowing us to cater to bigger MNCs or businesses who can afford a higher rent.
On the other hand, we can also look into the common space and introduce vending machines or pop-up stalls. Depending on the nature of foot traffic in the building, these new introductions to the building should add value to the occupants in order to have a symbiotic relationship. As the asset owner, this also means better rental returns from vending machine operators and stall operators.
#4 Rent to rent
The rent-to-rent strategy in the real estate world is where you take an interest in a property for a period of time from a landlord with a guaranteed fixed rent. On the flip side, the landlord gives you permission to rent the property out to other tenants, often in the form of rooms.
This strategy will only work if the lease you’re getting from the landlord is far below market rate and you’re able to get better rent. Otherwise, you will need to consider other ways to improve rent and in most cases, it only makes sense if you put in additional capital to divide the unit into smaller rooms and sublet it out.
While it is not quite an “investment” strategy since you are not acquiring any asset, it is a rather popular business model today where whole unit rent rates are still considered low but the demand for individual rooms is high. On top of that, the risk involved in renting a unit and introducing new rooms is much lower than acquiring an asset that does not perform.
#5 Short-term rentals
Short-term rentals in real estate investments involve renting out a property on a short-term basis, such as through Airbnb or other vacation rental platforms. As an investor, you can choose to acquire assets suitable for this business model or lease them from homeowners willing to participate in such business models.
The main challenge to short-term rental is to consider the demographic and room rates per night. This will affect your expected revenue per month and whether it is justifiable as a business model over the long term, especially if you are renting from homeowners.
Otherwise, if you intend to acquire the property and manage it for short-term rentals, the revenue from the short-term rentals should at the very least cover the monthly housing installments, maintenance, and necessary business expenditures.
#6 Real Estate Investment Trusts (REITs)
REITs investing has one of the lowest capital barriers to real estate investing. REITs are publicly traded companies that own and operate income-producing real estate and investing in them allows you to invest in real estate without owning the property directly.
Having said that, it is always important to study the performance of the REITs you are interested in and how they’ve performed over the past 10 years. In other words, investing in REITs is similar to investing in the equity market where you are relying on the business to be profitable in order to benefit from any capital appreciation or dividend distributed.
4 Real Estate Terms You Should Know
Jargons, acronyms, technical words. When learning how to invest in real estate, you’ll find yourself bombarded with acronyms you may never have heard before and it’s okay, we all got to start somewhere.
Here are some of the real estate terminology I feel you should understand,
#1 Capitalization Rate
The capitalization rate, also known as the “cap rate”, is used to calculate the value of an investment deal. We hear this more often with seasoned investors who look at the value of a deal seriously. Most times, this is expressed as a percentage of how much capital is returned (from net operating income (NOI)) into the property against the current market value of the property.
Take for example, if the commercial building is giving you a net operating income of 130,000 a year and it has an investment value of 2,000,000. Then the capitalization rate is 6.5% which is considered good.
#2 Cash Flow
Cash flow is a concept used in all businesses and personal finances that describes the inflows and outflows of cash. If the outflows are more than the inflows of cash, then you have a net negative cash flow which is detrimental to your business.
Ideally, investors will search for properties that will provide a positive cash flow but it can be tricky in the current property market. Instead, most investors consider the performance of the property against the cost of mortgage interest. Any additional outflow is considered to build into equity ownership.
#3 Net Operating Income (NOI)
Net operating income is a congruent part of cash flow calculation. Once you have subtracted all the monthly expenses from the monthly rental revenue, the leftover monies are the net operating income. If you have a positive net operating income, then you are profitable in your operation.
#4 Return on Investment (ROI)
The most common way to measure if a real estate investment is relatively successful is by measuring the return on investment (ROI). ROI is determined by the ratio between the net profit and how much capital was used for the investment. In some cases, it is similar to the cash-on-cash return calculation.
However, in Malaysia, ROI is often confused as the rental yield against the property value at the time of purchase. This does not take into consideration the actual cash capital that was invested into the property.
Final Words
That is all from me in this article. If you wish to clarify any of the items above, do drop me an email here!
