Real Estate I Currently Own
It is not in my nature to write about things I do not own or understand. Unlike most ‘experts’ out there who preach and sell products that they themselves would not invest in. So, full disclosure here, apart from my investments in the stock market, my humble real estate portfolio consists of 2 low-cost rental apartment units in Kuala Lumpur.
A brief summary on my properties:
- I’ve managed to secure stand-up tenants;
- Both properties are financed by banks; and
- Both properties are held under a Sdn Bhd I own.
- RM224 a month positive cash flow translating to an ROI of 17.74% p.a. (I’ve factored in the relevant maintenance costs etc);
- Appreciated roughly RM25K in value as at March 2016;
- I bought Property A through an auction about a year and a half ago, I managed to gain access to the property and rented it out for almost a year before I started paying my loan (will have a separate article on how I did it soon);
- Currently tenanted at RM700 per month.
- RM183 a month positive cash flow translating to an ROI of 8.08% p.a. (I’ve factored in the relevant maintenance costs etc);
- Appreciated roughly RM20K in value as at March 2016;
- I bought Property B through as a subsale unit;
- Currently tenanted at RM750 per month.
So, why real estate? I was hesitant to invest in real estate because I knew it would take up a lot of my time and effort to maintain a rental property. What made me take the plunge was the leverage I was able to get from banks to invest in real estate. Essentially, I only needed to put up 10% of my own money for the property and the bank would fork out the remaining 90%. This would have been impossible for stocks, even margin accounts don’t give you that much leverage for your money.
I decided from the start that the properties I own will have to be close to where I live to facilitate monthly inspections and the likes. I also made sure that I would be able to get a surplus income after deducting all related expenses. Which is why I ended up with low cost apartments because only those made financial sense to me.
1. Cash flow, cash flow, cash flow!
Cash flow is the extra profit left over after all of the expenses have been paid on a property. Using my properties as an example, my rental properties produced RM1,450 in income and my estimated expenses came to RM1,050, this would leave me with a positive cash flow of RM400 per month.
Now, I know a lot of you are saying, “Four hundred dollars is not going to make me a millionaire.”
Probably not. But remember, we are just talking about one of my asset classes.
Additionally, that RM300 might be from just one property. If I owned ten similar units with the same cash flow, that’s RM3,000 per month. If I owned 100 units, that’s RM30,000 per month. This cash flow can go a long way toward helping you quit your job — or helping you save for a future big purchase, or retire wealthier.
When I talk about appreciation, I am not referring to how much I like you (though I do appreciate you!). I’m in fact referring to the rise in value that real estate experiences. For example, if you purchased a property for RM200,000 ten years ago, and today that property is worth RM300,000, the appreciation made you RM100,000 richer!
Of course, appreciation doesn’t cause values to increase every year (consider the U.S.’ housing market in 2007!). However, historically, real estate prices have appreciated over the long term. So, again, appreciation alone is not likely going to make you a millionaire, which is why I don’t recommend that people purchase bad deals hoping that appreciation bails of them out.
It has never made sense to me when people purchase properties in the hopes of the making capital gains on it while servicing their mortgages every single month. Just like how I am acquiring shares with awesome dividends, I buy my properties that provide me with essentially the same thing – postitive cash flow. That way, my tenants will help me service my mortgage and I receive the remaining dollars.
3. Tax deductions
Finally, one of the more overlooked parts of real estate investment.
Back in 2014 I incorporated a Sdn Bhd for as a holding company for my investments and decided that the way forward for my real estate portfolio was to park them all under the company.
Although I had initially planned to only park my commercial properties under a Sdn Bhd, I realised that the low cost apartments will always be investment properties for me. (A side note: please do consult your solicitors or counsels on the pros and cons of placing your real estate under a Sdn Bhd before you attempt it.) I will have a comprehensive article on why I chose to have my properties all registered under my company in the future.
Putting it all together
So far, my main source of passive income comes from my Freedom Fund‘s dividends, earning me a total of RM7,544.14 last year. My real estate portfolio should earn my about RM4.9K per annum this year. I hope to snap up a medium cost apartment or a commercial property in the future and bring my annual real estate income up to RM10K p.a. in the foreseeable future.
Instead of a physical property, some of you may be interested in investing in Real Estate Investment Trusts (REITs) in the stock market. You are able to get access to large real estate including shopping malls, office towers as well as hotel chains through REITs. Learn more about them here in my Complete Guide to REITs in Malaysia.