Contributed by Peter Yee

Property owners, regardless they are homeowners or investors, should have a proper exit plan in place before they buy any real estate.

Whether it is a residential or commercial property, having an exit strategy is an essential factor because it will have an impact on the owner’s financial standing.

The strategies for homeowners differ to those of investors due to their different needs. For most homeowners, their buy-stay-exit strategy tends to be long-term and fall into three distinct categories.

Upgraders

Looking past individuals buying their starter homes, this is the stage where a homeowner would upgrade from an apartment or smaller unit, taking advantage of its price appreciation, to buy a bigger and better home. A prime example of this is when the homeowner shifts from an apartment to a landed property.

Downsizers

This is a stage where homeowners may want a smaller place and at the same time, look at how they can generate an income from the selling of their property. A good example is when the homeowner buys a shophouse, using the ground and lower floors for business and the top floor as a home.

Empty nesters 

At this stage, homeowners tend to have a different mindset. In Malaysia where we practice multigenerational living, this group of homeowners is fewer than in Western counterparts. Those who do fall into this category would usually look to property investment to generate income to sustain them financially in their retirement.

On the other hand, property investors invest in all types of property from residential, commercial, industrial to land. The return on investment (ROI) is their prime objective with potential capital gain (PCG) in mind.

Two of the most common ROI calculations used are for capital investment and rental yield.

For returns of invested capital, it is what most real estate flipping investors look into since this is their main goal. The formula for this form of ROI is the net investment profit divided by the purchase price and multiplied by 100%.

For returns on rental yield, it is the second most common form of ROI used by investors as their properties are used to generate steady income. The formula for this form of ROI is the 12 months of rental income divided by the purchase price and multiplied by 100%.

A general guideline for property investors intending to enter the real estate industry is as follows:

• For high-rise residential property, the ROI is preferably at least 2.5 times the current fixed deposit rate.
• For landed residential property, the ROI is preferably at least two times the fixed deposit rate.
• For landed commercial property, the ROI is at least 1.5 times the fixed deposit rate

The PCG depends mainly on the location and type of property. For example, if the property is located within a growing township, it has a higher PCG rate. Similarly, landed residential property has a higher PCG rate than high-rise residential property.

Exit plan

In contrast to ‘flippers’ where they will buy and sell within a short period of time (usually when the property has increased to a targeted value for disposal), many are opting for the buy-hold-exit strategy.

The exit plan hinges on whether the ROI has fallen to less than the preferred level when compared to the current fixed deposit rate for the above property types.

Another exit plan is to sell during the property boom cycle. The ideas, after all, is to buy low and sell high. Ideally, it is better to buy during a bust cycle and sell during a boom cycle.

The only question is how deep is your wallet. Not everyone can ride out a lull period due to unforeseen circumstances. But if you need to cut loss, selling during a downturn does not necessarily mean a making an immediate loss because you have to sell at a lower price.

Practically, all property can be sold, even in a bust cycle. The trick is to find a buyer who wants your property. And at a price that is close to your original investment.

Peter Yee is the founding chairman of the KL and Selangor Property Investors Club.

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Disclaimer

This article is intended to convey general information only. It does not constitute advice for your specific needs. This article cannot disclose all of the risks and other factors necessary to evaluate a particular situation.

Any interested party should study each situation carefully. You should seek and obtain independent professional advice for your specific needs and situation