Category: Cash flow

Creative Real Estate Financing

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creative real estate financing

 

What can we do when faced with insufficient cash reserve or low margin of finance from bank(s) caused by stringent lending requirements by Bank Negara or short loan tenure due to age factor?

Does this sound familiar to you? Would you think about..

  1. Delaying the purchase until Bank Negara relaxes the lending requirements for banks
  2. Fabricate income for at least 6 months and reapply again(Illegal! Never do this!)
  3. Use creative financing legally

Most people will adopt Option 1, which is basically just – waiting because we will never know when Bank Negara will relax the lending requirements for banks.

In addition, the desired property you have chosen in the right location, right neighborhood and right price would have appreciated to a much higher value (due to inflation) when Bank Negara finally relaxes the lending requirements.

What about Option 2? It sounds like a smart and creative move. but it’s illegal, so don’t even think about it!

What else can the genuine property buyer turn to?

Good news! We can adopt creative financing to solve the above problem.

What does creative financing look like?

There are many ways in using creative financing. We will use a real life story to explain this technique.

Mr Ali (not his real name), 60, lives in Bangsar and has a big family of 8.

Since a number of his children have already started working and will also soon have their own family, he thought it would be a great idea to buy another property in Bangsar for his children so that they can be close to him.

Hence, he went on a search and buy mission. After a few property viewings with his real estate agent, he found a single storey house which had ticked off everything on his list and was just a stone’s throw away from his house.

The house was priced at RM1.2m. To secure his booking, he placed an earnest deposit with the registered estate agent company, and hurried to get his lawyer to prepare the sales and purchase agreement and proceeded to arrange financing for the property.

Since Mr Ali is a prudent investor and buyer, he has consolidated his cash to pay for his purchase.

His initial option was to pay down RM900k from the cash reserve in hand and borrow RM300k over a period of 10 years.

That sounds good and workable but are there better options? Since he is almost 60 years old, the maximum tenure of loan he can obtain is 10 years.

Let us assume the average interest is at 4.2% and the loan tenure is 10 years. The options available are as follow:

  1. Loan sum RM800K: repayment RM8200 per month.
  2. Loan sum RM600K: repayment RM6100 per month
  3. Loan sum RM300K: repayment RM3100 per month.

Should he take option 1 or 2, he will be burdened with heavy monthly repayment and may end up with no disposable cash left from his salary.

If he takes option 3, all his hard earned cash savings would be exhausted leaving him with no excess cash to renovate his property.

With the above challenges in mind, he decided to seek some recommendations and advice from banker and finance savvy friends.

After reviewing his situation above, his banker and finance savvy friends recommended that he takes up a join loan with his son who is 30 years of age. With that the loan tenure is now stretched to 30 years.

Let us assume the average interest at 4.2% and loan tenure 30 years. The NEW options available are as follow:

  1. Loan sum RM800K: repayment RM3900 per month.
  2. Loan sum RM600K: repayment RM2900 per month.
  3. Loan sum RM300K: repayment RM1500 per month.

Now, he has new options to select from. He decided to take option 2. The repayment is manageable with a sizable balance from his salary and he still has RM300k cash reserve for him to enhance and renovate his property.

We have just described one practical and legal approach to assist genuine property buyers when facing the challenges of tightening credit lending by Bank Negara over the last 3 years. There are many ways to finance your property purchase. Should you require further advice on property purchase or investment you can drop us an email at action.e2520@gmail.com

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Action Real Estate copyrights reserved. Do not reproduce or copy the content of this post without first obtaining our consent. 

About the Author

KC LAW

Sr. KC Law is a Registered Valuer, Estate Agent and Property Manager with The Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVEAP) of Malaysia. KC Law is also an electronic engineer registered with the Board of Engineer Malaysia (BEM) and received his engineering training from Tunku Abdul Rahman College Malaysia and later at Hatfield Polytechnic United Kingdom. In the 1990’s he was involved with the digital transformation of Telecommunication infrastructure for Maxis and Telekom Malaysia. His passion for Real Estate in the 2000s led him to practice as a real estate negotiator in Ace Realty and later valuation and property management in Rahim & Co International. Several years later he founded Action Real Estate and Action Valuers & Property Consultants. His areas of expertise are in Real Estate Agency, Property Valuation, Property Management and Business Valuation. He is Member of The International Association of Certified Valuation Specialists of Canada, Member of Royal Institution of Surveyors Malaysia, Member of Malaysia Institute of Estate Agents and Member of Business Valuers Association of Malaysia.

Ways to Improve Rental Yield

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Written by: Sr. KC Law, Principal & Valuer at Action Real Estate & Valuers

Using the example from our previous post, a man had purchased a second property by refinancing his first loan. Now, he has two properties which he can rent out for cash flow gains. However, he realized that if he rented out the two properties as it is, his rental yield is still not up to his expectation of at least 5% or higher rental yield.  Is there a way to increase the rental yield of his properties? Assuming that his 1st property tenant will be moving out soon, the current market rental remains unchanged and he has some excess cash in hand from his loan refinancing.

If you were in his shoes, what would you do to increase your rental yield?

There are few options an investor can do to his/her properties. He/she may choose to do nothing about it. This may be the worst choice because the property may be dirty due to ageing paintwork. By choosing this option, it may result in longer vacancy periods and worse still, it might even reduce the rental yield. The last thing any investor wants to see are numbers that don’t look good!

So don’t be overly anxious if you cannot immediately find a tenant for your vacant property, instead, you may consider doing some minor enhancements to improve the value and rental yield while looking for a new tenant. Yes, it will involve a certain amount of cost, but a proactive approach and a bit of initiative go a long way!

ways to improve your property yield

Here are 4 minor property improvements you may consider to significantly improve your rent rate; for properties such as flats, apartments and condominiums in the low to middle class.

 1. Walls– The very least the owner can do, is to touch up the dirty walls by repainting the whole house. Besides that, you should also check to ensure that all the electrical points are working fine.

2.Toilets– The owner may consider tiling up the walls, changing damaged and rusty taps. Installing a water heater if there was none before.

3. Floor- If your apartment/condominium has a yard floor with cement render only,  you may consider tiling up the floor of the yard and filling up any steps from the home area to the yard’s floor in order to have a flat ground between the yard floor and the flooring inside the condominium ; this will create a perception that the built-up area of the unit is larger than other similar units. 

4. Kitchen– Replacing the zinc counter in the kitchen with a custom made concrete countertop lay with polish tiles and stainless steel sink.

 You may also consider providing extra add ons such as the below:

·         Curtains for all windows and sliding doors.

·         Installing stainless steel clothes hanger at the balcony area.

·         Providing an extra stove in the yard area for heavy cooking.

Furnishing may not always be necessary. Whether or not to furnish the property should depend on the location of your property, if your property is within the city centre or near to education institutions, then furnishing the property would be beneficial. However, it is also wise to leave furnishing the property as the last consideration so that you can tailor to the tenants’ needs/requests. Some family tenants may actually prefer to furnish their own space.

All these property improvements, as minor as they may seem, can set your property apart from the other units within the same block, which will attract more prospective tenants to your property, and more importantly, will help to increase the rental demand of your unit.

Let’s now look at the potential return on investment (ROI). For example, if the above property improvement cost you RM10k and your new tenant now pays a rental of RM300 more, compared to the previous tenant. And if your new tenant commits to staying for 3 years, you would have received a return on investment of RM10, 800. On the other hand, If this RM10k was stored in the bank as a fixed deposit, the compound interest at the end of 3 years is ONLY RM1,248.

This all sounds great. However, there is also one point of caution to note; do not over-renovate every single property you have with the intention of increasing the rental yield. It greatly depends on the type of property you have. For example, a flat will still remain a flat no matter how much money you invest to make it great. The rental value will eventually hit a ceiling. It will not fetch the rental of a condo because it is a flat.

The reason why some enhancement of rental properties is necessary is that there may be several other similar vacant units available in the market at that point in time when your unit becomes vacant. Instead of positioning your property as a me-too property in the market, you can position your property as one of the best. Not only can you get your unit rented out faster, but your unit may also be able to fetch a higher premium compared to other units.

In addition to the above, since you have tastefully done up your unit compared to the rest, you would also likely have a higher chance of getting more than 1 offer for your property. This gives you the benefit of being able to select a better tenant, perhaps one that is able to sign a longer tenancy term.

What are some other techniques you have used to successfully increase your rental yield?

Action Real Estate copyrights reserved. Do not reproduce or copy the content of this post without first obtaining our consent. 

About the Author

KC LAW

Sr. KC Law is a Registered Valuer, Estate Agent and Property Manager with The Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVEAP) of Malaysia. KC Law is also an electronic engineer registered with the Board of Engineer Malaysia (BEM) and received his engineering training from Tunku Abdul Rahman College Malaysia and later at Hatfield Polytechnic United Kingdom. In the 1990’s he was involved with the digital transformation of Telecommunication infrastructure for Maxis and Telekom Malaysia. His passion for Real Estate in the 2000s led him to practice as a real estate negotiator in Ace Realty and later valuation and property management in Rahim & Co International. Several years later he founded Action Real Estate and Action Valuers & Property Consultants. His areas of expertise are in Real Estate Agency, Property Valuation, Property Management and Business Valuation. He is Member of The International Association of Certified Valuation Specialists of Canada, Member of Royal Institution of Surveyor Malaysia and Member of Malaysia Institute of Estate Agents.

Calculating Property Rental Yield

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Written by: Sr. KC Law, Principal & Valuer at Action Real Estate & Valuers

Property rental yield

 

 

 

 

 

 

 

One of the core determinant factor in choosing the right property to invest in for cash flow gains is by calculating the property rental yield. It is used to determine how much return on investment can be made from forking out the price of the property. Why is this important? Because calculating rental yield can tell an investor if the investment on a particular property is worth it, or how expensive that property is with respect to its potential returns. The gross rental yield is simply calculated by the total gross annual rental divided by the price of the property multiplied by 100%. Do bear in mind that the price of the property should also include all other expenses associated with the purchase of the property, i.e. stamp duty, sales and purchase agreement fees, valuation fees, and also renovation costs. 

Gross Rental Yield = Annual rent  /  Price of property  x  100 %

In addition to that, if you are making a calculation for a high rise condominium, there would also likely be maintenance fee which is borne by the landlord. Hence to accurately calculate the net rental yield, one should subtract any cost involved with the unit. (for eg. tax, insurance, sinking fund)

Net Rental Yield = Annual rent – costs (eg maintenance fees)  / Price of property x 100 %

In view of property prices that have increased over the last 2 years, it is getting harder and harder to find a property with a rental yield that can cover your monthly installment. (sucks, I know!). Most investors would generally set the cut of point of about 5% rental yield. These days, a rental yield of about > or = 3% is already pretty good! If you’d like to find out how to improve your rental yield, read here.

If you have not already noticed, the bottom line is, rental yield is greatly dependent on the price of the property! If you happen to chance upon a property that is below market value and in a fantastic location. What are you still waiting for?

Grab it by its tail before it is gone!!

Action Real Estate copyrights reserved. Do not reproduce or copy the content of this post without first obtaining our consent. 

About the Author

KC LAW

Sr. KC Law is a Registered Valuer, Estate Agent and Property Manager with The Board of Valuers, Appraisers, Estate Agents and Property Managers (BOVEAP) of Malaysia. KC Law is also an electronic engineer registered with the Board of Engineer Malaysia (BEM) and received his engineering training from Tunku Abdul Rahman College Malaysia and later at Hatfield Polytechnic United Kingdom. In the 1990’s he was involved with the digital transformation of Telecommunication infrastructure for Maxis and Telekom Malaysia. His passion for Real Estate in the 2000s led him to practice as a real estate negotiator in Ace Realty and later valuation and property management in Rahim & Co International. Several years later he founded Action Real Estate and Action Valuers & Property Consultants. His areas of expertise are in Real Estate Agency, Property Valuation, Property Management and Business Valuation. He is Member of The International Association of Certified Valuation Specialists of Canada, Member of Royal Institution of Surveyor Malaysia and Member of Malaysia Institute of Estate Agents.