Last Updated on Tuesday, 18 May 2021 by Zhen Thing
The first thing that comes into mind when we think about real estate investing is most probably about buying a home. Most people would only think about real estate investing in the form of a tangible investment. There are a few investment options and are not all physical properties.
Let’s dive into the topic of real estate investment options in Malaysia and the reasons for real estate investing.
|Table of contents :|
🏡 Rental Properties
🏡 Flipping Houses
🏡 Good Reasons to Invest in Real Estate
|🏡 Asset Appreciation|
🏡 High Tangible Asset Value
🏡 Cash Flow – Passive Income
🏡 Real Estate Leverage
Ways to invest in real estate.
The most common way an investor can make money in real estate is to rent out his/her property and become a landlord.
If you own or invest in a rental property, you can rent out the property and collect rent. Doing so, the rental you receive every month (deducting the mortgage instalment and other expenses) will be your return from this property investment.
As a landlord, you are responsible for these expenses, such as the mortgage instalment, property taxes, home insurance, property maintenance, finding tenants, and other problems regarding your property.
Traditionally, you would need to hire a property manager to manage your property listings, and they will list your property on property sites. They will help you find tenants and deal with the paperwork. Otherwise, being a landlord is a hand-on experience.
The rental you charge is based mainly on the current rental market price and the property location. Don’t forget to take your mortgage instalment and other property expenses into account when you set your rental fee.
One way to earn money through rental properties is by collecting rent, and the other way is through appreciation of your property. If your property appreciates according to the market price, you can sell it at a profit (when the time is right).
Investors who “flip” houses as a form of investment are “flippers”. What does a “flipper” do? Flippers buy undervalued real estate, fix it up or renovate it, then sell for a profit. Some flippers always look out for investable properties that are below market price. Therefore, they can buy now and profit from the appreciation when they sell it in the future. Typically, flippers intend to hold their properties for a short period (often no more than three to four months) and quickly selling them for a profit.
There are two approaches to flipping a property :
- Repair and upgrade. This approach applies when you buy a property that you think will potentially appreciate after certain repairs and upgrades. Then, you sell the property at a higher price that exceeds your total investment (buying price + renovation).
- Hold and resell. It is a different flipping approach. Instead of buying a property and fixing it up, you buy low from the start when a market is rapidly rising, hold for a few months, and then sell at a profit.
A real estate investment trust (REIT) is created and owned by a corporation to use investors’ money to purchase, operate, and sell income-producing real estates. REITs can trade publicly on major exchanges, like stocks and exchange-traded funds (ETFs), which is why it has increased risks similar to stocks.
Modelled after mutual funds, REITs pool the investment of numerous investors. It makes it possible for individual investors to earn dividends from real estate investments without buying, managing, or financing any properties themselves.
Much like regular dividend-paying stocks, REITs are suitable for investors who want a steady income. They offer the opportunity for capital appreciation too. REITs invest in many types of properties such as shopping malls, healthcare facilities, and commercial real estate, ranging from apartments to office buildings. In comparison to other kinds of real estate investments, REITs have higher liquidity.
Good Reasons to Invest in Real Estate
Real estate is a steady investment for numerous reasons. The real estate market is one of the low volatility investment markets, especially compared to equities and stocks. Below are five agreeable reasons for you to consider real estate investing.
Real estate always increases value over time.
Real estate investors basically make money through rental and appreciation of the property. Rental and property values tend to increase over-time. With a good investment, you may even gain a profit when you sell it at the right time.
Apart from natural real estate appreciation, you can also force appreciation. Natural market real estate appreciation generally means inflation in the general market for real estates, while force appreciation is the things you add that adds value to your property. For example, renovated interior decors, new furnishings, etc. These will add value to your property. Thus, raise the selling price. Even if you don’t sell your property right away, these new furnishings and renovated interior will also increase your rents.
High Tangible Asset Value
Real estate is a tangible investment that has a high value.
There will always be value in your home and the properties that you possess. Some investments like stocks have little to no tangible asset value, which can also zero your capital if you make the wrong investment move. Another example would be buying a new car whose value will decrease over-time. Furthermore, this asset is easy to pass down to the next generation!
A real estate investment can diversify your investment portfolio.
Diversification is the key for any investor in investing. Diversifying your portfolio means spreading out the risk of your investment portfolio. In this case, real estate serves as a safe tangible asset to balance out the risk in your portfolio.
Most of the time, real estate is negatively related to major asset classes like stocks. It means whenever stocks are down; real estate is often up. By adding a real estate investment to your portfolio, you can lower the overall portfolio volatility and yield a higher return per unit of risk.
If you choose a more direct real estate investment, such as buying a property, you will get a lower risk and low volatility. On the contrary, a less direct investment such as REITs that reflects the stock market’s performance will yield a higher risk and high volatility.
Cash Flow – Passive Income
Real estate can be a passive income that generates cash flow.
By renting out your property, you get a steady cash flow for months or years. It is also a form of passive income, whereby your property manager does all the work, and you only collect rent. Usually, passive income is the goal of any real estate investor.
Do it right, and you could end up retiring early.
Real Estate Leverage
Leverage is the act of using borrowed money to buy an investment.
Leverage is using borrowed capital (e.g., debt) to increase an investment’s potential return. For example, you pay a 10% down payment on a mortgage, but you get 100% of the house you want to buy—that’s leverage. Real estate is a tangible asset that can also serve as collateral. Therefore, financing is readily available.
As long as you have a good credit score and a stable job, it is very likely that you can get a loan from the bank.
Real estate investing can be complicated for new investors in this market, but it gets smoother when you get the hang of the momentum and how things work. I hope this blog article can help you in your real estate investing journey. Any thoughts on the topic? Let me know in the comments below! Or you can contact me if you have any enquiries.
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