I am often asked how Employees should buy Landed properties, especially since they may be chunky in price and normally produce negative cash flow.
My own Portfolio is peppered with Landed Properties, and I’d like to share some quick insights on this. In all humility, it is important to diversify one’s portfolio to have a mix of both Landed units and Condo’s. The condo’s that provide positive cash flows are your “fighter planes”. Smaller, nimbler and provides good cash flow. But your landed units are your “aircraft carriers” – mostly negative cash flow in nature, but can substantially appreciate in price over time. Your landed units are normally your Net Worth boosters.
WARNING – THIS IS A FREAKING LONG POST. PLEASE SKIP IT IF U DON'T LIKE DETAILS. Special thanks to Keneeth Tan Azrul Azrin and Mohd Ramzdhan for the inspiration behind this post. Don’t flame me guys – this is just my 2 cents worth.
THE GAME PLAY – BUY AT A MARGIN OF SAFETY
1. We’re employees with finite salaries. Most of us don’t have huge cash flow. As such, we got to avoid the fatal errors.
2. As such, I only buy landed with a “Margin of Safety” as coined by Warren Buffet. Let me explain.
3. Areas like DesaParkCity (DPC) set the pace with its Gated & Guarded (G&G) security, manicured lawns and great facilities. However, less than 5 kilometres away, there are matured, affluent and “boring” areas like Damansara Utama (DU), Damansara Jaya (DJ), TTDI, or SS23 to 26. (Let’s just generalise these areas as Dsara)
4. Most of my landed purchases (double-storey link houses) around the D’sara area were purchased from around RM 450K to 900K, let’s say RM600K on average. Meanwhile, DPC was selling at a premium of about RM 1.3 mil for its link counterpart, or more than 2X what Dsara was going for, during that time.
5. The pricing disparity of more than 2X did not make sense to me. Don’t get me wrong - I’m a great admirer of DPC. And I certainly do not mean any disrespect to dpc owners. Early buyers would have enjoyed tremendous gains as well. However, I believe that the euphoria of G&G developments pushed the pricing premium disproportionately over the old, boring and non G&G Dsara areas.
6. Bear in mind, areas like Dsara doesn’t really constitute as low cost housing. The affluent stay there, they have very strong Resident associations (RA’s), which forms good & proper security schemes. The upkeep of the properties there is also good with frequent renovations & upgrades.
7. As such, the margin of safety between Dsara and its benchmarked area (DPC) was very apparent to me, as DPC was priced 2X more than Dsara. My theory is that Dsara still had an “upside” due to the ceiling price established by DPC. If DPC appreciates even further, Dsara should logically follow suit, due to the margin of safety.
8. Granted – there will be naysayers or skeptics. Some will say that security breaches still occur in Dsara. Well, it happens rarely, but it still happens. Some will say old areas lack “beauty” or facilities. So be it then. As an Investor, I’m willing to take that calculated risk as the Margin of Safety is 2X.
9. Fast forward till today – a Double Storey Link House in DJ is selling for about 1.3 mil vs its DPC counterpart of about 2.1 mil. The disparity has reduced to about 1.7X, but the margin of safety is still apparent.
10. Using the steps above, my landed properties then appreciated accordingly. It did not happen overnight, but it crept up steadily from that 600K point to about 1.3 mil over the 5 years or so.
HOW DO I DEAL WITH THE NEGATIVE CASH FLOW?
1. Let’s say you find a house worth 800K, and you think it has a “Margin of Safety”. How can an employee deal with the negative cash flow that normally comes with it? (In general, rentals won't be able to cover the loan installments for landed units)
2. Using a Numerical example of the 800K house above, - You’ll be paying 3,700 per month to the bank (assuming 90% margin of financing), and collecting rent of RM 2,200 (let’s take a conservative yield of 3%). This will result in negative cash flow of – 1,500
Note: Some folks may criticize that my rental assumptions of 3% are too low. In all humility, I am just being pragmatic, and I'm taking a conservative yield based on rentals in Dsara TODAY. It is possible to be creative in your rental approach and maximize your yield. e.g. room to room rentals and the like. However, that involves a precious resource called time. If you aim to have a sizeable landed portfolio, I had no choice but to automate my approach. My tenant market comprises of young families who have high income, but poor net worth. Collection is prompt, and the rental system is automated, and I sleep well at night (Please bear with me, i'll elaborate more in later posts)
3. Even if you find a house with a Margin of Safety, you can’t afford a -1,500 downward drag on your salary. Remember, we’re employees trying to be free.
4. As such, my 2 cents – a Good Offense Starts with a Good Defense. If you recall Post # 5 listed in the links below, I started out with Positive Cash Flow Condos.
5. Let’s say I have 2 condo’s that generate a + Cash Flow of RM 750 each, or a Total + Cash Flow of RM 1,500. I will use these 2 condos to offset the – 1,500 from the landed property.
6. I call this the “Concept of Pairing”. On a Net basis, I must be Cash Flow NUETRAL at a worst case scenario. I used this concept consistently to build my landed property portfolio, while being an employee and progressing my earned income. But bear mind – I only paired this with Landed properties which I believed had a Margin of Safety. I do not buy landed housing just SOLELY on the HOPE that it will appreciate. This enabled me to have holding power over my landed assets. Eventually, the equity & appreciation in my landed units was enough to set me free.
7. Over time, as my bonuses and salary grew, I also allocated a portion of my yearly bonuses to progressively pay down the loans in my Landed houses. This enabled my equity to grow faster as well. As such, an advancing career and salary also plays a critical role towards your investments.
Moral of the Story – Buy at a Margin of Safety, and your Landed units have more “upside”. Secondly, you may want to consider the concept of “pairing” to mitigate any negative cash flow that may ensue from the landed purchase.
Hope this gives some perspective on how I built my landed portfolio. I’d like to reiterate again that whatever worked for me, may not apply for everyone. I’m just sharing my simple journey as an employee. Cheers & God bless.
MC
1. MY KEY MESSAGE - Boosting your Earned Income, Career and Property Investment Portfolio https://www.facebook.com/permalink.php?story_fbid=1491587207805601&id=100008630071945&pnref=story
2. FINDING MENTORS: Career & Salary Building Tip # 1 https://www.facebook.com/permalink.php?story_fbid=1492336594397329&id=100008630071945
3. GOING THE EXTRA MILE: Career & Salary Building
Tip # 2
https://www.facebook.com/permalink.php?story_fbid=1494156960881959&id=100008630071945&substory_index=0
4. WOLVES DO NOT LOSE SLEEP OVER THE OPINION OF SHEEP: Career & Investment Building Tip # 3 https://www.facebook.com/permalink.php?story_fbid=1497566427207679&id=100008630071945
5. BUYING POSITIVE CASH FLOW PROPERTIES: Property Investment Principles that any Employee can Use # 1 https://www.facebook.com/permalink.php?story_fbid=1493302007634121&id=100008630071945
6. FOCUS ON YOUR TARGET AREAS: Property Investment Principles that any Employee can Use # 2 https://www.facebook.com/permalink.php?story_fbid=1494803320817323&id=100008630071945&pnref=story
7. THE ART OF NETWORKING: Property Investment Principles that any Employee can Use # 3 https://www.facebook.com/permalink.php?story_fbid=1498524307111891&id=100008630071945&pnref=storyuh
Oleh Mark Chua
Baca penuh Di Sini