In property investment field, you might heard about investment-grade property. What does it means? Let us short explain to you.
Investment-Grade
Investment-grade is a credit rating that show that a company/ corporate’s ability to repay its obligations. It use the different designations composed of upper and lower case letters, for example, “A” and “B” to identify a corporate’s credit quality rating. Normally, investment-grade of “AAA” and “AA” are stand at a high credit quality rating while “A” and “BBB” are stand at a medium credit quality rating. Typically, only the larger and national companies could be able to maintain these stronger credit quality ratings.
Ok now, we come back to the property investment topic. How does investment-grade can affect a property? Well, a good investment-grade property can gives us higher rental income as well as gives us high potential capital gains. Let us continue to discuss about what are the features of the property that can be considered as an investment-grade property;
➊ Ready-built Property
It is a completed property from the second-hand or sub-sale market. Purchase a ready-build property can reduce the risks of developer such as abandoned projects. You may hire an inspector to check on the ready-build property conditions and estimate its repairing cost.
In addition, you will need to check what type of businesses of your neighbor shops do. Do avoid the neighbor shop that selling coffins or any funeral services as it is really “Pantang”, unless your business is related to these. Besides that, try to avoid the shops that will produce lot of noise and pollution such as car or motorbike repair shops. It is advisable to search for the neighbor shops are supermarkets, franchise retail outlets and restaurants. For your information, there are no any holding costs and interest cost for a ready-build property which mean you can use it or rent it out straightaway.
➋ Property with Ready Tenant
Purchase a property with ready tenant because they often come with a rental income. Tenants are able to help you to pay part/ full of your monthly loan repayments. Every property investor always take good care of their tenants and treat them as their customers because without tenants, they’re unable to earn profits from rental business.
➌ Property with High Occupancy Rate
Purchase a property that located in an area with high occupancy which mean 9 out of 10 properties are have been occupied. This is because the demand for property in this area is very high and you can rent/ sold out easily with no any worries even during economy fall. (Commercial property is quite sensitive to economic market compare to residential property)
➍ Purchase The Property at Below Market Price
Purchase the property at below market price can help yourself to save or earn lot of money.
Here we show you an example;
Current market price: RM 800K
Final purchase price: RM 600K (after bargain with the seller)
Save/ Earn: RM 200K
Or:/
Re-sell the property: RM 800K (current market price)
Final selling price: RM 780K (included all the transaction costs)
Save/ Earn: RM 150K
Be a wise property investor, do always negotiate the property price with the seller or buyer and only buy in the property at below market price at below market price and sell it off at higher price.
➎ Apply For A Maximum Loan Amount or Longest Loan Tenure
Do remember, investment is a business that use as little of your own money as possible. Borrow the maximum loan amount from bank and stretching the loan tenure as long as possible. The longer the loan tenure is, the lower monthly repayment you need to pay to the bank and increase the cash flow from your property.
Besides, the younger you are, the longer that you can extend your loan tenure. By doing so, make sure you’re taking the loan with fixed interest rate so that you are able to predict the monthly loan repayment and easier for you to do the financial planning.
➏ Positive Cash Flow From The Property
The main key of survival in property investment field is monthly positive cash flow from the property. You may putting up a higher down payment for a property or extend the loan tenure, you can then reduce the monthly repayment to generate positive cash flow from rental yield.
A positive cash flow property is one with remainder income after deducting all the related costs. Let’s take a 2-storey office as an example;
Rental Income: RM 3,000/ month
Loan Repayment: RM 2,300/ month
Maintenance & Miscellaneous Costs: RM 200/ month
Total Cash Flow: RM 500/ month (RM 3,000 – RM 2,300 – RM 200)
➐ High Return on Investment (ROI)
In order to get the good return from property investment, it should be at least a double from the borrowing amount. For example, if the borrowing amount is 6%, the return on investment should be at least 12%.
Let’s take a 3-storey office as an example;
Purchase Price: RM 900,000
Total Borrowing Amount: RM 700,000
Down Payment: RM 200,000
Positive Cash Flow: RM 2,000 /month
Return of Investment (ROI): 12% (RM 2,000 x 12 (one year) / RM 200,000 x 100%
➑ A Property with High Potential Capital Gains
A property nearby or in the big city has higher potential capital gains. Especially landed property such as terrace house, semi-detached bungalow and shop office can appreciate faster than high-rise property such as apartments and condos. While, high-rise property can generate higher rental income than landed property.
➒ Increase the Value of Property
Purchase a property and do a proper renovation/ repairing work can increase the value of property itself. For example, simple landscaping, painting and repairs costing @ RM 5,000 may increase the property value by more than RM 50,000.
➓ Property with Good Neighborhood
Purchase a property with good neighborhood can often appreciates faster. Good neighborhood could be defined as clean, peaceful, safe and secure environment. Good environment included greenery places, water features and beautiful views such as city, sea or mountain view.
The above 10 features of property are considered as good investment-grade property as these features can increase a property valuation so it can appreciates faster and get higher return.
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