By Joseph Wong
For many new small-time property investors, deciding to own their second home for investment purposes could well burn their fingers if they do not do their due diligence. Many listen to property investment myths and fall into a trap that is hard to free themselves from.
Unless new investors have deep pockets and good property acumen, it is hard to practice. It is not like fiddling with stocks, where investors can afford to make a few bad trades and still be able to recover from their losses. With property, it is a different ball game, the mistake made can be irrecoverable, especially given the current sluggish market that has taken an additional beating from the Covid-19 outbreak.
Myth 1: Low risk
Many people believe that they can’t go wrong with this form of investment as property price is perceived as always appreciating. Exacerbated by the current movement control order (MCO), the discounts given now could very well make the deal seemingly sweeter as the property price is reduced further.
While this is generally true, there are some properties which over time lose their value instead of the increase in value is only marginal and insufficient to offset the interest charged and the inflation rate. Such cases of negative sales are seldom published.
Then there are the buyers who used all their savings to buy a property but failed to see the additional expenditures that come with owning a home other than the mortgage repayments. There is this false sense of security that they can always sell off their property if they can no longer afford to pay their mortgage. However, in this period of time when property sales are moving sluggishly and buyers looking for a bargain, the chances of selling the said property may prove to be more difficult. This is a disaster usually in-waiting.
If small investors want to be prudent, don’t start investing in property until enough cash has been saved. They should at least have six months to a year’s worth of spare cash to handle the hiccups which could rapidly drain their resources.
Myth 2: High-end properties are safe
The problem is that there is a belief that high-end properties in highly sought areas like KLCC and Embassy Row will hold their values even during downturns.
This is because these areas are seen as strategic and central to many luxurious lifestyle amenities.
But as we have seen during the Financial Crisis of 1997-98, even high-end property fell by as much as 40% to 50%. Not to mention, the drop in rental yields during the 2015 oil price slump. When the expatriates moved out of the country, rent price fell drastically as landlords were unable to find tenants who were able to fill up this void.
Moreover, the introduction of the mass rail transit (MRT) also changed the perception of being in a centralised location. With more transit-oriented developments (TODs) popping up, each TOD began forming into its own hub, further breaking up the whole centralised prognosis.
Myth 3: Low rates, buy now
The interest rates has seen a drop, and while this means lower mortgage payments, the reality is that it doesn’t last. The MCO has also made it more difficult to get a loan hence this is another issue to consider.
Investors should be wary that the economy moves in cycles of troughs, growths, peaks and contractions. Sooner or later, rates will rise again so if investors can only afford a property at the lowest rates, they will be in trouble when the interest rates rise.
Myth 4: Older property has higher rental yields
This may be true for those who bought properties back when the value was still low. But investors buying into the secondary market now isn’t going to benefit from low prices as they are buying at today’s prices.
Abet they may get some discounts but will the rents be high enough to sustain the mortgage payments? Moreover, if they happen to chance upon bad tenants who either pay their rents late or cause damage to the property, more cost may ensue.
With the secondary market, enough capital has to be put aside for renovation works to entice tenants to sign on the dotted line.
Many of the positive traits to property investment like capital gains or rental income are generally true, especially when looking in the long term like 10 to 20 years. But to safeguard oneself, doing that extra bit of homework in getting the due diligence done will decrease the probability of a bad outcome.
The MCO has afforded more time to new investors in that it allows them a possible six-month window to prepare themselves.