Pic: Jason Dent
“Don’t wait to buy real estate, buy real estate and wait”
The most common way property investment provides returns: value appreciation and rental income. However, you can increase your return on investment through several ways by adding value to the property or developing a business from real estate. For example, home stays, office space, farming and many others.
Before embracing property investment, you need to have a clear idea on how you can generate returns. This will enable you to decide on which type of property you want to acquire. There are a few categories of property available which comprises residential, commercial, industrial, retail and land. Each one has a unique advantage. In my column last month, I discussed on the mistakes to avoid in property investment. Now, I will share on six reasons why we should include property investment as part of your investment portfolio:
Leverage
Leverage is the use of borrowed capital from financial institutions to buy property. We can use the power of leverage to quickly grow our property investment. In Malaysia, you can get a margin of financing of 90% for your first two properties and 70% for the following properties. Leverage, when used wisely to minimize risk is a powerful advantage of real estate investing. With the current BLR (Based Lending Rate), leverage should be very much an advantage for property investors.
Hedge against inflation
Inflation is the economic reality where prices increase over time due to the value of money decreasing. The annual inflation rate of Malaysia varies depending on the economic situation. Investing in properties is an excellent way to hedge against inflation. As the price of bread goes up, so does the rental income you get from your property and your investment’s value.
Gives you control
We have a lot more control over overall investment success with real estate than with other investing classes. For example, we don’t have any control in stock investment as we can’t sit as the CEO and lead the management decision to influence the value of the stock. In contrast, for property investment we are in the driver’s seat with the ability to make decisions. As a real estate investor, we are in the control of our success or failure. We can develop strategies to make sure the best tenants are captured, and we can make strategic improvements to increase the yield we receive.
Lower risk
In general, real estate investments are considered lower risk compared to other investments such as stocks. Although investing in property often produces a lower profit, investors do not have to worry about the value of their investment dropping dramatically overnight. Real estate will always be worth something. The real estate value will never be zero dollars, in contrast a stock can have no value if things goes wrong. In my opinion, risk also depends on your property investment knowledge and experience.
Building passive income or equity
Real estate investment can provide a steady flow of monthly income or can bed use for major financial goals (children education fund, retirement fund and etc). Once your property is set up, the cash flow provides ongoing, monthly income that is mostly passive, allowing you to spend time with family, travel and reinvest in more real estate. When we buy a rental property using a bank loan, the tenant is the one paying the loan payment, thus increasing our net worth each month. Let’s say today we take a loan of RM500,000 for a property, but next year we owe RM490,000 because the tenant is making the payment for us, building RM10,000 wealth. Thirty years down the road the loan will be paid off and you own the property and the property price may value at RM1,000,000.
Diversification
In any type of investment, diversification is important because it helps spread out risk. Buying an investment property is a proven way to add diversification into your investment portfolio. Diversification is important in investments because markets can be volatile and unpredictable. By diversifying our portfolio, we can minimize the risk of the investment, reduce volatility and safeguard against adverse market cycles. Property investment should be a part of a component in the diversification of investment.
Although the formation of benefits of property investment gives a lot temptation to start investing, my suggestion would be to please plan carefully with considered financial goals and financial planning. The first step for successful property investment is the creation and implementation of a financial plan. Without a financial plan, we may be aimless when it comes to investing and may leave our future investment returns to a chance. The old proverb “Most people don’t plan to fail; they just fail to plan” reminds us on the importance of financial planning.
Gunaseelan Kannan is a content creator under the Newswav Creator programme, where you get to express yourself, be a citizen journalist, and at the same time monetize your content & reach millions of users on Newswav.
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