I have read several good books on property investment in 2011. Before we begin looking at JB property or any property for that matter, it is important to have a financial plan.
Yes, whether you like it or not, it all boils down to your cash flow management and your long term plans. The rationale for this is logical. Property investment is illiquid, requires borrowing for most of us and could possibly be the single largest investment.
A healthy cash flow is first of all requirements to ensure that you are able to hold on to it until you reap the fruit of your investment. The last thing you want is to have to force sell your property at a loss during a recession simply because you cannot afford the monthly repayments. This includes having adequate insurance to meet any unexpected large expenses that might come your way.
Having a long term financial plan helps you put your investment into perspective in terms of what kind of cash flow you should be deriving from it, how long to hold on to your property and when to cash in your profits. This is important because we don’t make money for the sake of making money. There should be a purpose for it, be it retirement, children’s education, business capital etc and the investment obviously should be helping you achieve that goal.
How does that apply?
1. Have a budget. List out all your income and expected expenses over the course of a year. I have been doing this for years so I have no problems allocating my money across four categories of expenses –
- fixed such as car instalment, childcare fees, maid wages, cable, etc.,
- variable such as groceries, dining, public transport, handphone bills, etc.,
- fixed savings such as insurance premium (with cash value), regular investment plans etc. and
- discretionary such as entertainment, travel, books, clothes (things I can basically go without).
2. Track your expenses. It would be all good and well if we really spend like we planned but reality is that we seldom do so it is important to still keep track of our actual expenditure just to see our uncontrolled spending patterns. I used to keep a very detailed record of every cent I spent but it got too tiresome. So now I simply take advantage of online bank and credit card statements to get a gist of where my money is going. Tallying this against a family budget helps me to curb my excessive expenditure.
3. Once you’re on track in managing your expenditure and have additional savings to finance your monthly repayment regularly, you can start looking out for good investment opportunity, be it property or otherwise. However as a rule of thumb, banks will give you a loan if you keep your monthly debt repayments within 40% of your gross monthly income.
4. Determine your net asset position. Other than your monthly cash flow, the other important thing to know is the overall state of your financial position. Without going into the long of it, three things to note –
- Enough cash savings to tide you through at least 3 – 6 months of your household expenses
- Enough cash to pay the initial cost of your property investment, i.e. downpayment, stamp and legal fees
- Liabilities should not be more than your assets for really obvious reasons
5. At this point, you should do a quick calculation of an affordable property you can invest in based on your monthly surplus and available cash for downpayment. I hope this makes sense to you that you shouldn’t over commit based on the premise that you will always be able to rent out your property. In my case, I don’t think the rental prospect is great in JB yet, maybe more for a short term holiday home for some, so I won’t be banking too much on rent to supplement my monthly instalment.
To do this, you can use MS Excel PV function to derive, you just need to the following variables –
n = no. of years of mortgage loan to take up
i = prevailing mortgage lending rate; in Malaysia I am looking at about 4.3%
pmt = monthly surplus that you have worked out above multiply by 12 (working on annual basis)
Excel will compute the PV amount for you which is equivalent to the maximum loan amount you should take. Add that to your available cash for downpayment (at least 15% of your property) and voila, you have derived your affordable property purchase price. This works out to be about RM510,000 for me. Just barely passing the requirement for foreign ownership.
Yes foreigners can only buy properties of more than RM500,000 in Malaysia since 2010. It is one of their really simple rule to ensure that the more affordable properties are not snapped up be investors and left for the locals. However seems like developers themselves are working around this rule by pricing their launches at more than RM500,000. Oh well.
6. Now on to the long term planning part. My investment in property is mainly for deriving a passive income during retirement and as an aside, having property overseas is just way cool, you can now go for holidays without having to pay accommodation! Here’s how I determine the net investment portfolio I need to accumulate by the them I retire –
- What is your desired monthly payout in today’s dollar during retirement?
- Use the FV function to compute how much this will be in future dollars using the applicable inflation rate
- Multiply this by 12 to get an annual amount
- Divide the result by your average rental yield on all your properties. Based on my research, it is roughly about 6% for Malaysia property… although I don’t foresee myself being fully invested in Malaysia only
Of course the result you derive is actually an inflated amount. This one is based on holding on to the property till death and then I suppose passing it on to your next generation if they deserve it. Honestly wealth in the hands of the unwise is like water in the hand. My result is about SGD 750,ooo.
7. Now that you know your goal, you will be able to see how your property purchase fit into the picture. This investment that I will be making in Malaysia at RM510,000 works out to be about 28% of my final goal. That means that I will need about about 2 – 3 more investments to reach financial freedom.
8. The tricky but really fun part comes now when you do your projection. It is a bit complicated to talk about it here but it’s basically about determining how many years it takes to purchase your next property based on your available cash surplus, when you can start repaying your loan and how much your property will appreciate in future. It is essentially a repeat of the above steps. But all this is only possible if –
- You have substantial salary revisions or bonus
- You have positive cash flow on your property due to rental
- You have existing investments that give you the necessary cash flow or returns
Based on my really positive projection, by the time I reach 56 years old, I will have four fully paid up property worth a total of SGD 3.3 million!! 4.4 times more than my requirement… so actually, my plan only needs a 22% chance of success to help me reach my goal.
But all this is just in plan. We’ll see how the execution takes place.