Things you need to consider before buying investment property
by Speedprop on May 3, 2018
So, you’re ready to buy an investment property? Congratulations! Wait, before you do that, there are a number of factors you need to consider first. Yes, buying an investment property might not be as easy you might think. There are things you should know. But, don’t worry. This blog will walk you through couples of major questions you might want to ask yourself first before considering to buy an investment property.
Housing market
It is of utmost importance for any real estate investor to have a better understanding of the local real estate market before considering buying investment property. This is important because every area or neighbourhood in Malaysia has a different set of metrics to consider. How to obtain a thorough understanding of any real estate market for that matter? You first need to conduct real estate market analysis in order to accurately identify the values of the properties you intended to invest in. With this information, decide when it is best to buy investment property. Real estate market analysis is useful considering the inherent unpredictability of Malaysia Property Investment. Without such insightful analysis, you will find it hard to foresee the increase and drop in Malaysian properties’ prices. It is therefore crucial that you’re to constantly check and study the Malaysian housing market from time to time. Those in the know will find it easy to identify such places with promising return on investment and low in risk. The analysis also helps you decide the amount of charge for rent can you opt to when investing in rental properties.
Expected return on investment
There are several important factors to consider when expecting a return on investment on the property that you bought. Financing the purchase of investment property alone is not enough. Annual property taxes, insurance, regular maintenance, repair expenses and unexpected damage costs are some of the several key factors you need to consider. In an effort to decide whether a specific property is worth investing or not, calculate its cash on cash return and the total return on investment.
- Cash on cash return
Cash on cash return is a simple measure of investment performance, referring to the rate of return on real estate investment. It’s calculated by dividing the cash flow before tax over the equity invested. For example, if a rental property’s value is $2,000,000 and you paid 25% of its cost which is $500,000, and its NOI is $20,000, then the cash on cash return is 4%. Cash on cash return is commonly used to measure money earned on the money used for a real estate investment. Why calculating the estimated cash on cash return before buying investment property is important? It’s important because the calculation will be able to tell you whether the property you planned to invest in is able to generate positive cash flow or not.
- Total return on investment
The total return on investment (ROI) is the total of net profit earned (minus cost of investment) after having bought an investment. The return on investment formula is:
ROI = (Net Profit / Cost of Investment) x 100
In an attempt to calculate the expected total return on investment, predict its annual cash flow. Doing this will give you an idea whether or not the property is worth buying. This is perhaps the best you could do to minimise any risk of losses.
The best type of investment property to invest in?
Choose a type of investment that best suits you. In what way? Think about your budget and your long and short terms plans. Rental investment property is the most popular if not the most common type of property investment real estate investors in Malaysia commonly go to. This strategy affords real estate investors with regular income. Airbnb or traditional renting investments are a good case in point. If you opted to invest in rental properties, be mindful of its risks, namely its regular maintenance, damage costs, different types of tenants, and lastly, your commitment. Another strategy of property investment you could possibly explore is Buy to Sell strategy. Buy a property and sell it later at a much higher price.
Where to buy?
Location is important when considering buying an investment property. Location plays a huge role in determining the total return on investment. It’s crucial that you plan what sort of investment you want to get into. Here, let’s imagine two identical properties, one in the middle of Kuala Lumpur, where public transportation hubs and malls are within walking distance, the other one is in Rawang, away from malls and transportation means. The market value of the first property rental may be far expensive than the latters due to its location.
How to search for investment property?
It goes without saying, the more research you conduct, the more your chances of getting the right property increase. First, find a specific area whose property in it you’re interested to invest in. A sort of place with high demand forces and lucrative occupancy rate. Next, make use of online database and services to its full potential. These online services can help you navigate through your options. Getting to know other experienced real estate investors will definitely help. Good networking opens more options for you to buy good investment property.
Bottom line
Buying investment property is no easy task. The process is hectic. It can sometimes overwhelm you that you might overlook some of its known crucial factors in the investment property. That’s why SpeedProp is here. We aimed to minimise the risk of you overlooking these important factors. SpeedProp will navigate you through the property investment world whether you’re a first-time investor or an inveterate.
