Buying your next property

YOU have secured your first home and are living comfortably there but you’re probably thinking about buying a second property for investment. After all, putting your money in real estate is considered one of the safest and best forms of investment.

“Property is one of the best investment options because it has many merits,” Malaysian Institute of Estate Agents vice-president Lim Boon Ping tells TheEdgeProperty.com. Not only is it a stable investment, investing in property can add to your source of income and act as a hedge against inflation.

Besides rental income, a property can also achieve 4% to 5% average capital appreciation over the long term and offset inflation in Malaysia, which is about 4%.

On the other hand, buying a property involves a large amount of cash so if you want to buy a second property, you may become tight on cash with limited liquidity, he cautions.

So how do we deal with the issue of financing? Similar to when you bought your first home, one could go the usual route of getting a mortgage.

“Having good payment behaviour for loans, additional sources of income, reserved substantial savings and paying tax duly are all crucial factors which will help investors get a higher LTV (loan-to value) ratio from banks,” CEO and co-founder of SkyBridge International Adrian Un shares.

He urges buyers to always maintain a good credit profile as it is crucial in the process of obtaining loans. “With banks’ tightening on lending policy, if your Central Credit Reference Information System report is good, and you’ve got all the documents ready, then your chance of getting a loan will be higher.”

Refinance your first property

Meanwhile, you could try to refinance your existing property or properties, he suggests. What could be saved from the refinancing, could be used to finance the second or third property.

“However, it is best to do the refinancing early as the process may not be easy and may take some time,” he advises.

If the bank takes longer than expected in the refinancing process, investors may not get their money in time, resulting in the deal for the new property purchase falling through.

Un also reminds investors of Bank Negara Malaysia’s (BNM) guidelines since 2013, whereby any cash-out from mortgage refinancing would be capped at a 10 years’ tenure.

“The borrower will have to pay higher monthly instalments as the loan repayment period is shortened to 10 years. So, they should assess their financial status before refinancing,” warns Un.

For those buying their third property and above, since 2010, BNM has implemented a maximum LTV ratio of 70% on the third mortgage.

Housing loans for the first and second units, on the other hand, are not affected, and the present prevailing LTV levels by individual banks apply, based on their internal credit policies.

The regulation has limited the purchasing power of third property homebuyers, but Un reveals that some banks have come up with other options.

“There is one bank that will approve the third mortgage with a higher LTV ratio under a guarantor scheme, Un explains, but declines to reveal the name of the bank.

“For example, a buyer can ask his or her spouse, who has a lower income and no mortgage to his or her name, to come in as a guarantor for the new mortgage. The bank may then approve the loan with a LTV ratio higher than 70%,” Un discloses.

Joint purchase

Another option is to do a joint purchase with family members or siblings who are not restricted by BNM’s rule. One could also refinance existing properties to the spouse’s name before applying for a new one or apply for the new mortgage under a company.

Meanwhile, VKA Wealth Planners head of financial planning Lawrence Seow reminds investors to assess their financial status and have a proper financial plan.

“When people buy their second and third properties for investment, they usually forget that they are getting more loans, which will increase their financial burden,” he says.

He does not recommend group purchasing as it is risky and could get complicated.

“I have my reservations on property group purchasing schemes. The members in the group have different financial standings and expectations on investment returns. Furthermore, if one of the group members passes away, it will affect the whole plan,” he explains.

 

Be prepared with a back-up plan

In the current slowdown, there could be many property investment opportunities, but people in the industry usually “will have the first bite”, Un points out.

“If someone from the ‘outside’ wants to have a taste, they should get connected with agents and ask them to look for great deals in the market, but they have to be very specific about the price and location,” he adds.

However, buyers who plan to buy their second and third properties for investment must prepare back-up plans in order to deal with unexpected events, he counsels.

“If the property can’t secure a tenant, you must have an alternative or a back-up plan. You should also have enough income that could sustain you for at least six to 12 months.”

Location

Meanwhile, Lim reminds buyers the main factors to consider when buying a property for investment.

“The first factor is location. Buyers should study the community, amenities and developments near the property.

“Second, assess the tenant demand in that area and estimate how long it will take to lease out the house.

“Then, look at the potential rental yield and pricing of the property. If you buy the property at a very high price but only manage to rent it out at a low rental, you might not be able to handle the monthly instalments and may fail to hold the property for at least a few years to enjoy capital appreciation.

“Finally, keep an eye on the property management if you’re buying a strata property because a bad management will cause the value of the property to decline, and vice versa.”

While buying properties within a well-planned development sounds like the right choice, investors need to be aware of the costs involved, Seow warns.

“Investors may have to fork out some money for renovation and furnishing before gaining rental returns. These are expenses that should not be ignored.”

One also has to think about how long it will take before the investment will reap returns. “There are many things that need to be considered, including monthly instalments, mortgage reducing term assurance (MRTA) and the overnight policy rate,” says Seow.

Lim says investors must ensure they have enough holding power to deal with situations when there are no buyers or tenants for their property.

“Also, investors should invest judiciously and always buy MRTA or MLTA (mortgage level term assurance), especially when buying residential properties, to prevent them from becoming unnecessary liabilities to their next of kin in case of unforeseen circumstances.

This story first appeared in TheEdgeProperty.com pullout on Feb 3, 2017. Download TheEdgeProperty.com pullout here for free.