Property investment gives you not only passive income but also capital gains. In other words, even when you are sleeping, you can sleep well knowing that your property investment is not only earning money for you but also increasing in value. The passive income not only liberates you from working from paycheck to paycheck, but more importantly gives you more choices in life and time freedom.Why Invest In Property Click To Tweet
The following are some of the reasons why property is the preferred investment by many rich people.
1 ) Low risk
Every type of investment involves some risk. People believe that for investments, the higher the risk, the higher the rewards. However, we need to consider the fact that risk may be reduced by having the relevant knowledge in your type of investment. For example, investors who do not possess the basic knowledge of property investment as outlined in this website may lose a lot of money buying property in poor locations and not being able to manage their portfolio efficiently. Table 2.1 shows the perceived risks of different classes of investments.
Fixed Deposit (FD) gives relatively low interest but comes with almost no risk as it is guaranteed by banks. But FD gives no capital gains and expecting wealth from FD savings is an impossible dream.
Property gives rental income and potential capital gain. It is relatively low risk. However, property investment is very illiquid, meaning that your investment may not be easily converted to cash. For income-producing properties, the chances for success are a hundred times better than starting a business. Property is also protected with insurance. In this respect, investing in properties yielding rental income is a low-risk investment with good potential for high gains. No wonder it is the most popular investment vehicle in the world.
Business income is a profit. There is no obvious capital gain except some possible royalties from an established business. However, statistics show that more than 80% of all start-ups businesses fail within their first five years. Most businesses are not protected with insurance as business risk is not insurable. I have been involved in a few businesses but most of them failed because the profits were not even enough to pay the rental for the business premises. That motivated me to invest in commercial property.
Stocks are very liquid; you can buy and sell whenever there is a trading day. Stocks are not protected with insurance. Stocks have high capital gain potential but a majority of stocks in the stock market yield relatively low income in terms of dividends. The stock market is very efficient, whenever there is a change in the price of a stock, the whole world will know. The prices of most stocks are very volatile and sensitive to the changes in economy, political and social environment of a country.
In many ways property investment has the lowest risk compared to investing in business and stocks. The property market may be considered the most inefficient amongst all the common investments. The prices of a same type of property in the same location can be very different for buyers and sellers alike. But properties generally give a better and more stable return over longer periods of time.
2 ) The power of leverage
Leverage means you can control a large investment with a small amount of money. You can borrow money easily from a bank by using the property you are going to buy as collateral. At least 50% of the household sector’s loans from banks is for property financing.
It is difficult to borrow money for starting a new business which does not have any real track record and proven experience of the business owner. Unless you have a very good business plan, most banks will not lend you money.
You may buy more shares from your margin account using shares as collateral. From my observation, a share cannot hedge against another share effectively because when the market goes down, most shares, if not all, go down in tandem. Investing using margin account as a leverage to buy stocks is very risky.
You can easily borrow money from a bank to purchase a property. Most of the money in the bank is for property loans. For example, if you have RM10,000, you can purchase a piece of property worth RM100,000. The RM90,000 can be borrowed from bank easily. If the monthly rental from your property is more than the loan repayment, you should have nothing to worry about. Therefore, property not only relatively easier to obtain financing but also less risky if it yields rental income for you.
3 ) Equity buildup
Equity buildup is the increase in net worth of your property portfolio. The increased net worth is from the monthly mortgage payments, which reduce your mortgage debt. Your property equity increases as your tenants helps you pay off your monthly instalments to the bank. You can also increase the equity of your properties by upgrading it. The improvements can increase the rental income and the value of the property. For example, the net value of a property is RM100,000. After two years, the monthly mortgage payments by the tenant may add up to RM 10,000. After upgrading the property with a fresh coat of paint and doing some landscaping works the net value may increase by another RM50,000. The equity buildup after two years would then be RM60,000.
4 ) Liquidity
Despite the fact that properties take time to sell and be converted to cash, you can change the illiquid nature of properties to be highly liquid by attaching an overdraft (OD) or a flexi-loan facility to it. For example, you can secure an OD of RM100,000, based on the current market value of the property. You can use the facility of RM100,000 as and when you want and there is no interest if you choose not to use the facility. For example, you may use the OD account for emergency financial needs and invest in more properties.
5 ) Full control and power to increase value
Ownership of properties gives you full control over your investment and you are the decision maker who can help increase the value of the property. You can increase the property value by cosmetic repairs. If you require additional finances, you may want to re-mortgage the property to get a bigger loan when the property value has increased or you may want to sell it. You have the full control and power to increase value of your property.
6 ) Safe investment
When you buy a piece of property, the property market price does not drop drastically over a day or two. It takes a while to see the trend and any significant changes. This is unlike the stock market which has a far more efficient information system and changes can be seen overnight or even within seconds on the online trading screen. As such, investing in property is relatively safe.
Property can be further protected with insurance. No matter what happens, the value is still there. Even if the Government acquires your property for a certain community project the property owner will be compensated based on the market value at the point of acquisition.
7 ) Real useful value
Property has a real useful value unlike paper assets such as stocks, unit trusts, bonds or savings. If you buy a residential or commercial property, its real useful value as an investment is that you can physically see, touch, work and live in it. The rental income increases in proportion to the real useful value of a property. The more useful the property is to the tenant, the higher the rental will be.
8 ) Pride of ownership
Real property such as residential or commercial property is an investment that you can live and work in. Having properties which are properly maintained and in good locations generate a sense of pride of ownership. For example, your own home or your own shop office. Your self worth may be affected by the property you own.
9 ) Protection of purchasing power
As property appreciates with inflation, it preserves and protects purchasing power. When inflation rises, the price of a property goes up in tandem. For example, if you keep RM300,000 in fixed deposit (FD) with 5% interests that means you get RM15,000 interests per year. If you invest RM300,000 in the ground floor of a shop which gives you a rental RM 1,250 a month, it would give you RM 15,000 a year. After five years, due to inflation, the price of the shop would have increased to RM450,000. In comparison, income from saving in fixed deposit and the shop is the same RM15,000 per year but the same cash invested in the shop has appreciated to RM450,ooo. You can sell the appreciated property and convert it back to cash. You will have RM150,000 more cash investing in property compared to fixed deposit.
10 ) Make money when you buy
Money in property investment is made when one buys. For example, after looking through the advertisement in the newspapers and calling up several of the listings, you discover that there is a unit which has a price much lower compared to similar properties in the same neighborhood. Arrange an appointment to inspect the property. If there are no major defects or bad historical background after asking about the property, you may consider investing.
The property may be for sale due to the owner migrating overseas, moving to another state, business squabbles or it may be that the owner needs cash quickly. In other words, due to inefficiencies in the property market you can purchase a property for say, RM150,000 when the market price is RM200,000. You have created money worth about RM40,000 after transaction costs of about RM10,000. You can even start advertising to sell the property for RM200,000. Money is made when you buy the property. How can you go wrong if you buy a piece of property at below market price?
11 ) Buy using other people’s money (OPM)
Buy property below market price using other people’s money. Savers put their money in a bank for 3-5 % interest. You can borrow their money at 8-12% interest to purchase an investment property which can generate an average yearly return on investment (ROI) of more than 20%.
When the income from the borrowing is higher than the cost of borrowing, this is called good debt. Property investment is a business using other people’s money (OPM) with loans up to 100% of the purchase price.
12 ) Make money using other people’s time (OPT).
You can build and pyramid your property portfolio. Eventually, the cash flow from your property portfolio would be sufficient to employ a manager to help you manage your tenants and maintain your property. For example, when the cash flow from your property is RM10,000/month and salary of manager is RM3,000/ month. The balance of the cash flow after paying your manager is RM7,000. If the net worth of your property is RM3 million, after 10 years it may appreciate to RM5 Millions. The cash flow would increase proportionally.
In other words, you have created a system of wealth, which can function by itself and eventually the net worth and cash flow of your properties will also increase. You have created a money making machine using other people’s time (OPT) and other people’s money (OPM).
13 ) Tax saving
You may form a private limited property holding company to hold your properties for tax-saving purposes. Rental can be considered as business income when you either have four residential properties or two commercial properties. The benefit of forming such a company is that it is taxed only after deducting all allowable operational expenses of your property business.
14 ) Rental income
It is the tenant’s responsibility to pay monthly rental to the property owner or landlord. The tenant pays you a rental deposit and advance rental before using your property. Thereafter, the tenant pays monthly advance rental or rental before using the property. In contrast, salary is paid after the work done.
15 ) Capital gain
Capital gain means an increase in property price over a period of time. This is due to the increase in its useful value or rental income, and expected future value.
In reality, the property is still the same property; the price increase is partly due to more demand than supply. More importantly, the increase in inflation has lowered the real value of money or cash. In other words, the higher the inflation, the higher the price of property will be. For example, the purchase price of a bungalow is RM1,000,000. After 10 years, its price may increase to RM1,500,000. The capital gain for this property is RM500,000.
16 ) Passive income
Passive income is making money when you sleep. For example, the rental income of a condominium is RM4,000 a month, The instalment payment to the bank is RM2,500 per month and average monthly maintenance is RM500. This property will have a positive cash flow of RM1,000 a month. The passive income from this property is RM1,000/month.
17 ) Perpetual income
The cash flow from your property is a perpetual income. For example, Property A’s rental is RM2,000 a month and repayment to bank is RM1,500 a month; the cash flow is RM500 a month. After the loan is fully paid (by the tenants), the cash flow increases to RM2000 a month. Perpetual income increases from RM500 to RM2,000. A perpetual income from a property will continue even after the investor is not around. It is therefore worth the initial effort to invest in properties for perpetual income.
18 ) Financial freedom
You are financially free when your passive income from your property is greater than your total expenses. Passive income is the key to financial freedom. For example, the passive income from your property is RM25,000 a month. Your total expenses may be RM10,000 a month. The surplus cash flow is RM15,000 a month. If you want to accelerate your financial freedom, increase your passive income and reduce your total expenses and when your passive income is more than your total expenses, you are financially free!
19) Become wealthy
The key to becoming wealthy in property investment is mainly from capital gains. For example, you buy a two-storey shop office for RM600,000. You invest RM200,000 with the balance of RM450,000 financed by the bank. The rental income is more than enough to pay for the bank instalment and average monthly maintenance. After say, 15 years, when the instalment payment is fully paid by your tenants, your shop would have appreciated to RM950,000. The capital gain for your property would be RM300,000 (RM950,000 – RM650,000). Your initial investment has appreciated to RM950,000, which is an increase of RM650,000! If you have two of such properties, your net worth would be RM650,000 x 2 = RM1.3 million. You not only have become a millionaire in net worth but you are also having monthly passive income forever.
Most people cannot move forward in life financially due to fear of the unknown. I hope, the 19 reasons outlined above can help you reduce your fear and increase your confidence in getting started and to increase your property portfolios gradually for many years to come.