I often heard people saying that they have just made 100k, 200k and even 500k in their properties investment. It may be true but what is their Return of Investment (ROI) and is it really a good return?
They may use 500k just to earn 100k in 5 years time or 100k to earn 500k in 2 years time. Often people will only care about their entry price, sold price and the cash they received end of the day.
There are 3 main stages in property investment:
1) Entry Stage (Initial Cost) – how we finance it. The initial cost will directly affect our return of investment. The return will be infinity if the entry cost is zero and better with cash back.
2) Holding period - The most important elements during holding period is positive cash flow and holding power.
The value of the property might be appreciated but the property is stealing money from your pocket each day. The ideal situation is putting money in your pocket and allow you to get another property soon. Repeat and repeat.
(-) Management fee
(-) Quit rent, assessment, insurance for home & mortgage
(-) Renovation & furniture
(-) Touch up/maintenance (major touch up every 5 years)
(-) Professional fee for agent
(-) Memorandum of Transfer (MOT) for new development (Often people will forgot it as individual title takes yearsssss to be issued in sabah)
(-) Unforeseen cost (10% of Rental)
Generally under construction property will generate negative cash flow. The interest during construction period is estimated in between 6% to 10% of property price. The void period - the period when the property is not generating income after OC (occupancy certificate) can be in between 3 to 6 months or even longer which the landlord need to pay full monthly repayment.
The landlords may engage real estate agent 3 months before taking the key. The ideal solution is to set a very competitive price and rent it out as soon as possible. Another important element is the renovation & furniture. Never over do or under do it! Please put yourself in the shoes of a tenant. Never put apartment furniture in a luxury condominium or worse the used furniture from home which yourself don't even want it.
The beauty of sub-sale property is it brings endless possibilities. it may come with renovation, furniture or good tenant. 1 way of lower down your initial cost is to get a ready tenant property which has 2 main benefits - the Rental & Utility Deposit of the tenant will be reassigned to new landlord and avoid void period of not renting out. It saved you at least 4-5 months of rental or 2-3% of property price. However, it may brings endless nightmare as well like bad tenant, unforeseen cost and defeats.
Cost for selling property involved Real Property Gain Tax (RPGT) or Income Tax, Valuation Fee (if needed), Advertisement(if any), Legal Fee (represent vendor, discharge mortgage & submitting LHDM form) & Professional Fee for Agent (if any)
People will often forget the 3 months period after SPA is signed and happily received the deposit from purchaser. Technically the property is still owned by the original vendor and still need to pay for the expenses like mortgage, management fee and so on. Vendor may rent it to the purchaser for half of the rental to maximize their return.
Part 2: Calculation of Return of Investment (coming soon)