Saturday, July 18, 2009

Why Not Real Estate Investment

If you look at Hong Kees and Singaporeans today, they are very well aware and focus on investment, just because they want to bring the biggest value to the money they earned. Every investment has their defined risk, I believe you've already listened and seen how many Hong Kees make serious loss in real estate, Forex, stock market, Lehman Brothers and so many more. Of course, many of them also earn until their mother couldn't recognize them. Many of them willing to take risk (be it high or low) and go for big return. This is what we call 'daring'. If I ask you to contra $200,000 on one of the hot pick stock on next Monday morning, will you dare to? I think none of us willing to, because we are not confident on that hot pick at all.

Back to this post topic, many people invest in real estate because they think the risk of real estate is lower, or perhaps it is not as volatile as stock and Forex market. I believe it is very true, as everyone and family needs a shelter, so the demand is always there. So no matter how worst is the market, the demand will be there. That's why we dare to invest one, or perhaps as many as we can. And most of the time, real estate price is shooting like a rocket, people tend to get big return from this investment, and it is easy yet low risk.

Have you thought of build them, instead of buy them for rent/sale?

From my opinion, real estate invest wont be my cup of tea for now, perhaps I just need one for my family. My reason is pretty simple, as below:

1) Too Expensive The real estate price is overshoot in Malaysia for now, and with the paycheck I'm getting, I simply cannot afford it. I would like to buy a 'better' and 'bigger' terrace house at my home town but it simply costs me over RM400k, what's the point I need to downpayment my hard-earn money for RM40k and pay the difficult installment for every month? There must be some other investment which has lower risk and higher return than real estate? Or perhaps can I wait for the real estate price to go down? Or will it goes down?

2) Volatility
This is a common problem with real estate, where it is lack of volatility and it is time-consuming to settle your real estate transaction, either buy or sell. And to sell a real estate, you have to find buyers and provided they agree on the price you offer. Even though nowadays real estate agent will does all the jobs for you, but you need time to get your investment back. For those who require volatility from investment, real estate definitely not your cup of tea.

3) Interests Rates
I always think that real estate investment is design for rich people. For those middle-class down to poor people like me, I do not afford to buy a house or shoplot in cash, or perhaps finish the loan within 20 years. We mostly have to loan money from bank in order to invest in real estate. Okay let's do some simple calculation here ( I copied the configuration below from online loan calculator).

Loan amount: $
Loan term: years
Interest rate: % per year

Monthly Payments: $

Wow, to buy a 400K terrace house, I need to pay RM1,800 monthly installment, after RM40k down payment! Those are excluding insurance, lawyer fees etc. That's killing me. If I opt for this, let's see what I 'll need to pay for the rests of my working life for the following table.

Please look at how much you are paying for the principal and how much you are paying for the interests. After 3 years, you have paid about RM53,128 amount of interests to bank. So at that time, you better pray that your property is already shoot above RM454k in order to break-even your investment, that's about only 4.31% growth per annum. I believe you always heard people saying this guy or that guy bought this house for RM400k in 3 years back and now managed to sell it for RM450k. He managed to gain RM50k profits from this investment! But once I look at the table above, unless he paid cash, how do that guy gain any penny from this deal? Furthermore, I only take 5% as base loan interest, it might possible to shoot up to sky high in the future.

4) Growth rate
As you can see the statistic above, the annual growth rate above is only 4.31%, almost the same as Malaysia Fixed Deposit. I hope that would be the worst scenario, if Malaysia real estate doesn't collapse. If you are very lucky, you may get 10% return a year, it's all depends on the supply and demand.

Will it be wiser if we use other investment money to invest in real estate?

Human beings are always smart. To overcome such problem, we cannot rely solely on the growth rate and just let the property empty. We rent it out in order to bear the monthly installment, and we will gain net profit if we manage to rent more than what we paying to the bank! This is a brilliant and profitable idea from the beginning. I found out most of the properties do not give the net profit or perhaps less than 10% of annual return of the property total price nowadays. That's mean, we still have to pay some portion of the loan to bank, fork out some bucks to maintain & renovate the property, and bear the risk of the property price growth. We also need to pray the tenant does pay us every month.

In fact, there are many alternative investments that can give us affordable, interest-free, better volatility, and return growth rate than real estate, such as invest in a business, unit trusts, stock or Forex. If you think that because real estate lets you leverage your investment, the rate of return is much higher than a business or stock investment and is, therefore, a better place for beginning investors to put their money, think again. I believe Phil Town is with me.

Of course, there are many people managed to gain big and steady income from real estate investment. I believe the rule of thumb is, as long as you spent some times to look into the investment in details, understand the reward and risk, and work out a system and follow it, there you will be another successful investor.

Have a nice weekend, folks!


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