Showing posts with label property investors. Show all posts
Showing posts with label property investors. Show all posts

Monday 5 August 2019

Property counters: How are shareholders rewarded? How exciting are property counters in terms of investment returns?

Property counters

1. Land held for development.

2. Land being developed and properties for sale.

3. Investment properties held for rental income.



How are shareholders rewarded?

After successful development and realisation of profits from the projects, the property counter may choose to reward the shareholders by paying half their earnings as dividends.

The investment income from properties held as investment can also be partially disbursed as dividends.

[How exciting are property counters in terms of investment returns?]

Thursday 6 September 2018

Buying a home? Be financially mindful.

Excellent podcast.
Click here:  https://www.bfm.my/rns-desmond-chong-akpk-buying-a-home-be-financially-mindful


Desmond Chong, Credit Counselling and Debt Management Agency (AKPK)

06-Sep-18 10:37


Desmond points out some financial and non-financial factors that have to be taken into consideration when purchasing property.



Presented by: Tan Chung Han

Tags: Mortgage, Debt, Home, House, Rent, Freehold, Leasehold, Property, Financial Services, Personal Finance

Friday 13 October 2017

Here's Why Malaysians Can't Afford a House


By Pooi Koon Chong
October 11, 2017,

Regulator sets up housing website to defend finance complaints

Central Bank Tells Malaysians Homes not Affordable

Malaysia’s central bank has a response to those saying it needs to do more to spur home loans: houses simply aren’t affordable.

Bank Negara Malaysia has created a website packed with data aimed at debunking the “myth” that access to financing was deterring home ownership, showing that loan approvals for key cities are near 70 percent or higher. The central bank has resisted calls to loosen mortgage lending, instead saying the property industry should boost efforts to cut costs and accelerate supply.

Rising home prices have added to the grievances of Malaysians grappling with the cost of living since a goods and services tax started two years ago, and as the government removes subsidies on daily items including petrol and sugar. That’s made affordable housing a key voter issue for Prime Minister Najib Razak ahead of a general election that must be held by mid-2018.

“It’s a tricky situation,” said Wan Saiful Wan Jan, chief executive officer of the Institute for Democracy and Economic Affairs in Kuala Lumpur. “I don’t think it’s right to say that there’s no problem with financing. But lending rules have to be both strict and balanced at the same time, otherwise we’ll have more non-performing loans and that is not good for anyone in the country.”


The median house price in Malaysia was 4.4 times the median annual household income in latest available data, making the housing market “seriously unaffordable” compared to global standards, according to a 2015 report by state-run Khazanah Research Institute. The report classed an affordable market as one with a median multiple of 3 times.

That still makes Malaysia cheaper than many other markets, with affordable housing in key cities something of a rarity in the 21st century. In the latest Demographia study, Kuala Lumpur had the eighth best housing affordability out of 18 metropolitan regions around the globe, with Hong Kong homes costing 19 times income and Beijing 14.5 times.

Take a closer look at the forces shaping Malaysia's economy, politics and markets

Malaysia’s central bank is seeking to strike a balance: its housing website aims to show transparency in the market while the lender also stands firm on stricter financing rules introduced since 2010 to curb speculation, as well as measures to promote responsible lending amid elevated consumer debt.


Household debt as a proportion of gross domestic product fell to 88.4 percent last year from 89.1 percent. It’s still one of the region’s highest and the nation needs to be careful of such levels, central bank Governor Muhammad Ibrahim said in July. The central bank has left borrowing costs unchanged at 3 percent since July last year.

Just 20 percent of new Malaysian housing launches in the first quarter were priced below 250,000 ringgit ($59,000), down from 33 percent between 2010 and 2014, according to the central bank’s “Housing Watch” website. The bulk of new homes cost between 250,000 ringgit and 500,000 ringgit. The median annual household income is estimated at around 63,000 ringgit.

“It is an issue of not having enough income and houses being too expensive,” Muhammad told a conference in August, reiterating that “the problem is not about access to credit” and the lender “must have the courage to say it loudly and clearly to the public.”

Only about half of people living in Kuala Lumpur own a home, while nationwide the number was 72.5 percent at the last census in 2010. Demand is set to rise: the median age of Malaysia’s 31.7 million people is 28 years and the nation’s urban population is growing at an average 4 percent a year, among the fastest pace in East Asia, according to the World Bank.

Najib has pledged to focus on boosting living standards when he tables next year’s spending plan in parliament this month. He may announce an increase in the number of affordable homes built by state-linked companies, tax relief for private developers and subsidies for affordable home buyers, RHB Research Institute Sdn. said last month.

Filling the Gap

Banks are being “prudent and responsible” in providing finance to buyers, an association of Malaysia commercial lenders said in a statement this week. It was seeking to refute claims by developers that house buyers are finding it harder to obtain a housing loan and that approval times are increasing.

Developers should instead be looking at their own industry, said Paul Selvaraj, secretary general of the Federation of Malaysian Consumers Associations.

“The focus should be on building houses which people can afford, not building expensive houses and then trying to push them, and then complaining that the banks are not giving loans,” he said. “The reason people are having problems getting loans is because the houses are not affordable. It’s beyond their repayment” ability, he said.

Some developers are slowly starting to fill the demand. Mah Sing Group Bhd., the nation’s third largest, is selling apartments within 5 kilometers from Kuala Lumpur’s center with prices starting from 328,000 ringgit for a 650 square foot unit. That’s within the maximum price a family on the city’s median income could afford.

The problem is set to become a bigger one over time. There is currently a shortage of 960,000 units of affordable housing in Malaysia, with the number projected to reach 1 million units by 2020, according to the central bank’s estimates.

“It’s a very important issue for Najib to address,” said Wan Saiful. “I’m just really wondering what more can Najib do other than provide heavy subsidies, at a level that maybe even the government cannot afford to do.”


https://www.bloomberg.com/news/articles/2017-10-10/here-s-why-you-can-t-afford-a-house-central-bank-tells-malaysia

Sunday 6 August 2017

Australia slams brake on property investors

Saturday, 5 August 2017


Bull run: A man jogs in front of newly-constructed residential and commercial projects in Sydney. Demand from property investors has contributed to a bull run that has catapulted the city into the ranks of the world’s priciest property markets. — AFP
Bull run: A man jogs in front of newly-constructed residential and commercial projects in Sydney. Demand from property investors has contributed to a bull run that has catapulted the city into the ranks of the world’s priciest property markets. — AFP

Curbs taking effect and home prices are starting to cool
ONE of the key engines of Australia’s five year housing boom is losing steam.
Property investors, who have helped stoke soaring home prices in Australia, are being squeezed as regulators impose restrictions to rein in lending.
The nation’s biggest banks have this year raised minimum deposits, tightened eligibility requirements and increased rates on interest only mortgages a form of financing favoured by people buying homes to rent out or hold as an investment.
Australia’s generous tax breaks for landlords, combined with record-low borrowing costs, have made the nation home to more than two million property investors. Demand from those buyers has contributed to a bull run that has catapulted Sydney and Melbourne into the ranks of the world’s priciest property markets. Now, signs are emerging that the curbs are starting to deter speculators and home prices are finally starting to cool.
Take the case of 29-year-old Taku Ekanayake, a former IT salesman who owns six investment properties in cities including Adelaide and Brisbane. He shelved plans to add a Melbourne apartment to his portfolio after rising rates increased his annual mortgage bill by A$14,400 (US$11,360). The biggest banks have hiked rates on interest-only mortgages by an average of 55 basis points this year, according to Citigroup Inc.
“With the rate hikes I don’t think it is a very viable option for me to invest there now,” he said.
In other signs the market is cooling, property auction clearance rates in Sydney have held below 70% in seven of the past eight weeks, compared to as high as 81% in March before the curbs were imposed. And investor loans accounted for 37% of new mortgages in May, down from this year’s peak of 41% in January.
That’s helping take the heat out of property prices, particularly in Sydney, the world’s second-most expensive housing market. Price growth in the city slowed to 2.2 percent in the three months through July, down from a peak of 5% earlier this year, CoreLogic Inc said on Tuesday. In Melbourne, rolling quarterly price growth has eased to 4.2%.
“There have been some signs that conditions in the Sydney and Melbourne markets have eased a little of late,” the Reserve Bank of Australia said on Friday.
While the regulatory curbs are aimed at ensuring the financial system could weather any downturn in the property cycle, they may also make it easier for first-time buyers to break into the market.
Housing has become a popular investment for Australians, who can claim the cost of an investment property including interest payments as a deduction against other income, such as salary, and get a capital gains tax discount if they hold the property for more than 12 months.
The favourable tax treatment for investors has become a hot political issue, with young first-time buyers protesting they are being priced out of the market. The opposition Labour party has pledged to wind back the concessions if elected to office, while the government announced a range of policies in its May budget aimed at addressing housing affordability.
Now, with costs increasing, and price growth slowing, property may lose some of its luster as an investment asset.
The changes “reduce investors’ ability to pay, and means they have to pay owneroccupier values rather than investor values,” said Angie Zigomanis, senior manager, residential property, at BIS Oxford Economics in Melbourne.
The restrictions will take “some of the bubble and froth” out of the market, he said, forecasting median Sydney house prices will decline 5% by the end of mid-2019 as investors retreat.
To be sure, investors aren’t exiting the market entirely. Ekanayake, who recently quit his job to start a mortgage broking company, is now focusing on cities such as Brisbane and Adelaide where houses are cheaper, but haven’t enjoyed the price growth of Sydney or Melbourne.
He says many of his clients are now looking for properties where they can still make a profit with a principal-and-interest loan.
Even so, banks may need to get even tougher on lending standards in order to to meet the regulator’s order to restrict interest-only loans to 30% of new residential loans by September.
Interest-only loans are seen as more risky because borrowers aren’t paying down any principal and may look to sell en masse if property prices decline. Moody’s Investor Services in June cut the credit ratings of Australia’s big four banks, citing interest-only and investment loans as an indicator of rising risk.
“We’ve already seen developers start to shift their efforts and focus more on owneroccupiers and less on investors,” said Sophie Chick, head of residential research at Savills Australia. “The restrictions have really made investors think twice.” — Bloomberg

Read more at http://www.thestar.com.my/business/business-news/2017/08/05/australia-slams-brake-on-property-investors/#tIFGMsUVdSiTMCr6.99

Friday 11 November 2016

Calculating Real Estate Returns: Cash on Cash Return on Property Investment and Total Return on Property Investment

1.   CASH ON CASH RETURN ON PROPERTY INVESTMENT


Cash on cash returns assess the return on investment on the basis of the amount of cash invested to purchase the property.

           FORMULA:   Cash on cash ROI = pretax cash flow/cash investment

Pretax cash flow in real estate can be based on Net Operating Income (NOI) minus the mortgage payment.

The cash invested is the amount of cash invested to purchase the property (not including the amount financed).




Price of Property  $1,000,000
Cash Investment     $200,000
Mortgage               $800,000


Annual Net Operating Income (NOI) = $135,000
[NOI = EBIT = Property's Income before Interest and Tax]

Annual Mortgage Payment (Principal and Interest)  $40,000
[# depending on duration, monthly payments and interest rates]

Pretax Cash Flow = $135,000 - $40,000 = $95,000

Cash on Cash Return on Investment (ROI) = $95,000/$200,000 = 47.5%.






2.   TOTAL RETURN ON PROPERTY INVESTMENT

FORMULA:  

Total Return on Investment 
= (Pretax cash flow + Sales Proceed - Initial Cash Investment)/Initial Cash Investment


3 years after the above property was bought:
It is sold for $1,200,000.
Mortgage balance $762,000
Selling expenses including taxes and broker fees = 8% of sales price or $96,000


Net Sales Proceeds
= Sales Price - Mortgage Balance - Selling Expenses
= $1,200,000 - $762,000 - $96,000
= $342,000

Pretax cash flow per year = $95,000
Total pretax cash flow for 3 years = $95,000 x 3 = $285,000

Total ROI  (over 3 years)
= (Pretax Cash Flow + Sales Proceeds - Initial Investment)/Initial Investment
= ($285,000 + $342,000 - $200,000) / $200,000
= $427,000 / $ 200,000
= 213.5%.


Comments:

Several aspects of this deal proved favourable.
1.  The appreciation over 3 years was substantial
2.  The NOI was relatively stable
3.  The cost of financing was low.

This proved to be a lucrative deal and the type that most real estate investors dream of.

The reality, however, is that any number of factors can hurt the Total ROI.



Mortgage Calculators:

http://www.money-zine.com/calculators/mortgage-calculators/simple-monthly-mortgage-calculator/

http://www.money-zine.com/calculators/mortgage-calculators/mortgage-apr-calculator/





Another example.

Price of Property $400,000
Cash Paid $100,000
Mortgage  $300,000

Rental received $2,000 per month.
Annual net operating income = 10 months of rental.
Annual net operating Income (Property Income before interest and Tax) = $20,000 per year.

Mortgage Paid  = $1,800 per month or $21,600 per year.

Pretax cash flow = $20,000 - $21,600 = - $1,600 per year

Cash on cash return per year = -$1,600/$100,000 = - 1.6%




Simple Monthly Mortgage Calculator
Total Home Loan Amount $300,000
Annual Interest Rate 6.00%
Term of the Loan (Years)  30

Calculator Results
Monthly Payment ($/Month)  $ 1,798.65
Total Payments $647,514.57
Total Interest Paid $347,514.57






Monday 5 September 2016

How to analyze real estate developers

How to analyze real estate developers

Real estate stocks make up a significant number of companies in Asian stock exchanges and many of them are among the the most volatile stocks. Whether the real estate developer is listed or not, they are influenced by a host of cyclical factors ranging from government policies, interest rates, unemployment rates, affordability, etc. Hence, it is important to understand how real estate companies can be analyzed.


Profit Model

Real estate industry can be separated into the following sub-industries or types of real estate developers:

  1. Residential real estate developers
  2. Commercial and mixed use real estate developers
  3. Industrial real estate developers

Profit model of residential real estate developers

Residential real estate developers are more dependent on economies of scale than ever because of increasing land prices and declining rate of increase in residential property prices. In many developing countries, developers used to be able to acquire land at cheap prices and hope for rapid increase in home prices to make huge profits. In developed countries, land prices are higher, and price increases are more muted. Hence, brands and good management are playing an increasingly important role.


Profit model of commercial real estate developers

As prime real estate for commercial developments become more scare, commercial real estate developers tend to prefer to have rental incomes rather than selling units so that they can have consistent income and manage the properties. These developers are also more likely to sell their commercial properties to real estate investment trusts to free up capital and many are REITs that also develop properties.


Profit model of industrial real estate developers

Industrial real estate developers operate more like commercial real estate developers as they seek to have stable rental incomes and also sometimes selling their properties. Some industrial estate developers might even have a fund to invest in promising industrial companies so as to achieve higher profits.



Factors that Affect Value


1.  Land bank - the value of a real estate developer is directly influenced by its land bank. As the larger the land bank, usually means the developer can make more profits from developing the land banks later. Hence, the land bank that a real estate company has is always disclosed in detail in the listed companies' reports.

2.  Inventories - Real estate inventories can be separated into a few categories. Usually increasing values of construction-in-progress and land held for development will translate to higher future earnings for the company:
  • Completed developments - properties whose construction has been completed
  • Construction-in-progress - means the value of properties under construction.
  • Land held for development - value of land help for future developments.
  • Investment properties - properties held for rent or sale

3.  Customers deposits - for residential projects, it is often that developers will collect customers deposits or even prepayments of entire houses prior to completion of the units. As these properties are pre-sold and their profit and loss have yet to be recognized in the income statement, growing customer deposits could signal increasing revenue and most likely profits in the coming years ahead.

4.  Housing prices - the profits from real estate developers that primarily sell their developments come from selling the units at above costs. Hence, the moving of housing prices have direct impact on the profitability of residential real estate developers. Usually the stock price of real estate developers have high correlation with the anticipated housing price direction.

5.  Rental rates - Rental rates are especially important for commercial and industrial real estate developers as most of them do not sell all the units that they developed but they keep these units for rental returns. Rental rates have direct bearing on stock prices of such developers and REITs.

6.  Industry consolidation - as economic difficulties mount and economies of scale becomes more important, mergers and acquisition activities will also drive prices of real estate companies as the merged entities might be more efficient given a larger land bank.

7.  Macro economic factors - government policies play a huge role in controlling property prices as the following factors will determine the direction of property prices. We have listed

Factor                 Movement      Likely Effects
Interest rates         Up                Negative
Land supply          Down            Positive on short term price but will affect future
                                                  profitability if land bank dries up
Loan Quantum      Up                 Positive
Reserve ratio         Up                Negative
GDP                     Up                Positive
Unemployment      Up                       Negative




Valuing Real Estate Developers

A common method to value real estate developers is using the Revalued Net Asset Value ("RNAV") approach which basically determines the net asset value of a real estate developer by adding up

  • the change in value of the investment properties held by the company, 
  • the surplus value of properties held for development using Discounted Cash Flow method and 
  • the net asset value of the company with any other adjustments that are deemed necessary.


Usually a discount or premium percentage is multiplied with the RNAV base on the developers other qualities such as management capabiltiies, branding, track record, etc. A smaller developer with poor record of continuously generating consistent income is usually given a significant discount to its RNAV.

Using the RNAV approach only takes into account of what the developer can earn with the assets that it has in its books at the time of the valuation. If properly applied, it is usually more conservative than the market approach such as P/E multiples.

However, to use this method, it requires a lot of work in revaluing the properties held by the developer, making it difficult to implement by most people as information needed to determine RNAV needs some skill in obtaining.

The price earnings ratio method could also be useful to cross check the RNAV method.

Source: http://roccapitalholdings.com/content/how-analyze-real-estate-developers

Wednesday 13 January 2016

Buy-to-let investors under attack in the UK




A woman walks past an estate agent in Chelsea, London February 7, 2013.   REUTERS/Stefan Wermuth

They have pocketed some of the most lucrative returns available to investors in recent decades and been a staple of newspapers' personal finance pages, but tougher times now lie ahead for Britain's army of small-time landlords. So-called buy-to-let investors -- who usually own at most a handful of properties -- have enjoyed 20 years of surging house price growth and rents, and annual returns of nearly 10 percent.

They accounted for almost one in four house purchases funded by a mortgage last year, a chunk of the market unseen in other big economies. Overall, there are nearly 2 million private landlords in Britain, owning almost 20 percent of homes.

Their power is politically sensitive in a country where house prices border on a national obsession, reflecting the fact most people have the vast bulk of their assets tied up in their home. Critics argue buy-to-let distorts the market and makes it even harder for ordinary people to get on the housing ladder.

Now the landlords face a double threat. Finance minister George Osborne is squeezing more tax from buy-to-let (BTL) investments, partly to help fund incentives for new homeowners, while the Bank of England is seeking powers to limit the size of BTL mortgages in order to reduce risky lending.

A few economists say the changes could even push the overall housing market down later this year. One landlord who fears he will have to sell is Chris Cooper. The 54 year-old airline steward must retire at 60, and started acquiring buy-to-let properties over 14 years ago in order to boost his pension. "I'm fuming, to be perfectly honest," he said in his own one-bedroom flat in Windsor, a historic town near London which is dominated by Queen Elizabeth's 1,000-room castle. "I will either have to raise rents by a ridiculous amount which tenants won't be able to afford, or sell my properties."
Cooper owns 15 properties in northern England and around London worth 2.4 million pounds ($3.5 million), financed by loans totalling 1.6 million pounds. Tenants pay him over 100,000 pounds in rent a year and, after running costs, interest and tax, Cooper makes 12,400 pounds. But Osborne's cut to the amount of mortgage interest that can be offset against tax, which Cooper plans to challenge in court, will reduce that to 1,000 pounds. When interest rates rise, which could happen this year, profits will be even thinner.

HEIRS OF THATCHER

Helping new buyers to enter the housing market is a stated priority of Prime Minister David Cameron, whose Conservative Party enjoyed electoral success in the 1980s under Margaret Thatcher by making it easier for renters to buy their own homes. Home ownership rates in Britain are now the lowest in 30 years at 65 percent, below the EU average of 70 percent. Many Britons blame property investors for making it harder for young people to buy, even if experts say a chronic lack of new home-building is really the main factor.

In a new headache for landlords like Cooper, the Bank of England said last month that buy-to-let borrowers could be more vulnerable to higher interest rates than normal borrowers. It wants powers to cap the size of BTL mortgages relative to a property's price and rental income, similar to those it already has over residential mortgages. On the other hand, the squeeze on small landlords could help ventures like Property Partner, which launched in 2014 to offer alternatives to traditional buy-to-let.

"Buy-to-let as a cottage industry is dead," said chief executive Dan Gandesha. The start-up enables would-be landlords to buy, sell and trade fractions of BTL properties and take advantage of tax benefits available to big investors, as well as spreading their bets across a wider range of properties.

"I don't think the returns on that are quite as good, but those are the sort of options that would make my life easier," said Ramzi Hajaj, 26, a technology worker whose family gave him two London investment flats in 2013 which are now each worth about 500,000 pounds.

He may invest 700,000 pounds more, but is put off by a 3 percentage point increase in property sales tax on for buy-to-let purchases from April, in addition to other changes that will make it more onerous for landlords to get tax relief on the cost of maintenance and repairs.

LOWER RETURNS

Upfront returns on buy-to-let property have already fallen.
Property Partner estimates net rental yields in London are 2.5 percent now, compared with nearly 8 percent when buy-to-let got going in the late 1990s. But returns on other assets are lower too. Ten-year British government bonds yield around 1.8 percent now, down from 7 percent in 1997. Small investors are betting instead on more of the house price rises which allowed buy-to-let in England to show average annual returns of over 9 percent for the past 20 years.

However, low rental yields are putting off major investors such as Grainger, Britain's largest specialist residential landlord. Speaking at an industry conference last month, one of its managing directors, Derek Gorman, said new investment in London was hard. "It is very difficult to get into the London market at prices that are reasonable. So we are looking at the regions," he said. Shortages of construction workers and rising costs, the slow speed of planning approval and the difficulty of building higher-density housing in London also delayed construction. Lack of supply means most economists predict house prices will keep rising -- by 5 percent this year and 4 percent in 2017, according to a Reuters poll -- even if some such as Morgan Stanley see buy-to-let triggering a brief dip.

"My hunch is that demand will rise first before supply catches up," said Simon Rubinsohn, chief UK economist at the Royal Institution of Chartered Surveyors. "Living costs are going to get dearer."


http://www.theedgeproperty.com.my/content/buy-let-investors-under-attack-uk

Sunday 17 May 2015

Warren Buffett’s Best Advice for 2015. Essentially a good review of and reliving the post 2008 GFC.






Published on 26 Dec 2014
Warren Buffett’s Best Advice for 2015

Warren Buffett says:

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.”



Comment:

Listening to this video gives you a good review of financial crisis and stock market volatilities post-2008 GFC.  The video is a collection of live interviews of Buffett during this period and gives a good review of the unfolding crisis with Buffett's live responses to the crisis as it unfolded.

Were you frightened out of the market or you embraced the market during this period?

Warren Buffett shared his thinking of the stock market and other asset classes during this crisis period generously, and today, in 2015, his approach and philosophy are sound, safe and first class;  proven to be absolutely right and rewarding.

A lot of great lessons to learn in this video.


For those looking at buying first single family home, here was Buffett's advice in 2012.
This was the best time for you to buy.   Maybe different in 5 years from then.
Certain conditions need to be fulfilled:
- you should know where you are going to live.
- you must have a reasonable income.
- single family home can be bought with a 30 years mortgage at low interest rates of 4%.

Don't buy:
- if you are going to move in 6 months time.
- if you are uncertain about your job situation.

These are simple and common sense first class advice from Buffett.

Buffett is optimistic that single family homes will double in value over a very short period during his interview.
He is tempted to do this business but it would be extremely difficult to manage so many single units of homes and also dealing with so many people with difficult behaviours.

(@1.40 of video)



Additional note:

For those who are in their 50s or more, you may ponder over this particular fact.  Buffett first invested in shares at the age of 11 years old.  His present networth is about $70 billion.   1% of his wealth were acquired in the first 50 years of his life; the other 99% after his 50th birthday.

Once you have your initial capital and is on the growth path, the power and magic of compounding over many years can do wonders.

Always buy income generating assets as they will definitely beat any non-income generating assets over the long term and less subjective to prices offered and set by another based on sentiment (speculating).



Buffett:  When the market is down, I'm happier buying


Buffett:  Stock market, generally, is best place to have money





Warren Buffett started investing at 11yo and he regrets not starting earlier!!! What is also not widely known is that he made 95% of his money after the age of 65 years old!!! There is hope for us, old folks. Hahaha. But then again, we can't all be Warren Buffett.

Sunday 9 February 2014

Property Investments

Understanding the figures behind property investments.

Here are the important calculations

Income Statement
Gross Rental Income
Vacancy Allowance (%)
Gross Operating Income = Gross Rental Income - Vacancy Allowance

Annual Operating Expenses 
Total Expenses include assessment tax, quit/annual rent, management service charge, fire insurance, householder's insurance, MRTA, and others.

MRTA = mortgage-reducing term assurance
MLTA = mortgage-level term assurance (MLTA)


Net Operating Income 
Net Operating Income = Gross Operating Income - Total Expenses


Cash Flow (before tax) from your property investment
Having calculated the net operating income, subtract the annual mortgage payments to obtain the cash flow (before tax) from the property investment.

Cash flow (before tax) = Net Operating Income - Annual Mortgage Payments



How much do you value or pay for the property?
Purchase price
Down payment / Equity
Balance financed by mortgage

Mortgage Summary
Bank
Term (Years)
Interest (% )
Total Monthly Payment
Total Yearly Payment
Total Debt Payment

Reference:  Mortgage Calculators




Initial Yield Computation
Initial Yield = Gross Annual Rental / Purchase Price 

Those more enterprising aim for initial yield of : 
House  4 to 6%
Condo  8 to 12%

Return on Equity (ROE)
Your returns come from these 3 sources:
1.  Cash Flow (before tax) provided by the property
2.  Gains from your equity growth in the property
3.  Appreciation of your property price over the period.

Your TOTAL RETURNS at the end of the mortgage period = 1 + 2 + 3
TOTAL ROE = (1+2+3) /  Initial Down-payment  for the Property


My general rules:

1.  Properties prices appreciate by 100% every 10 years, higher for those in good locations..
2.  Rental yields are around 3%/year based on present market price.
3.  Rentals increase generally by 10% every 3 years, but only for selected properties in good locations.


When you own a good or great property in a great location at a good price, you will enjoy great ROE on your property investment, using the generous leverage provided by your bank mortgage (using other people's money).  You paid an initial down-payment, and your tenants pay for the mortgages and the expenses.  On top of this, you may even enjoy a positive cash flow from the property giving you regular income.  During the tenure, you continue to enjoy increasing rental, after-all, you have no problem getting the best tenants and the existing tenants will likely pay up since they are making good earnings from the use of the property.  At the end of the mortgage period, you would have owned 100% equity of the property, the property would have appreciated over the long period, and you have also pocketed incomes from the positive cash flow generated by the property.  Totaling all these gains and then working back to your initial down-payment (your equity), you would have realised a great ROE.  

Those less knowledgeable in share investing may wish to go the property route.



Summary:
1.  Location, location, location = good or great properties
2.  Net Operating Income = Gross Operating Income - Total Expenses
3.  Cash flow (before tax) =  Net Operating Income - Mortgage Payments
4.  Mortgage - go for the largest available mortgage, with the longest term and the lowest interest
5.  Ensure that 2 & 3 are always positive.



(Types of properties:  squatter homes, low cost houses and apartments, houses, apartments and condominiums, townhouses/duplexes, commercial, service apartments, luxury homes, mobile homes, raw land, recreational, ranches, agriculture, industrial, specialty buildings such as stadiums and theaters.)(

Tuesday 19 November 2013

Only rich at risk from London’s bubble

Only rich at risk from London’s bubble

Oct 7, 2013 : UK housing bubble fears have been exacerbated by Help to Buy. But Ed Hammond, property correspondent, tells John Authers the bubble is built on equity, not debt, and that the average home price remains below pre-crisis levels


Be cautious, first-timers urged
November 17, 2013

With a threat of mortgage interest rate rises in the near future, home buyers are asked to tread carefully.

The cost of getting behind with loan repayments is about to become potentially much higher.

Read more: http://www.smh.com.au/money/borrowing/be-cautious-firsttimers-urged-20131116-2xnn8.html#ixzz2l4qnver1

Thursday 29 August 2013

What factors drive the housing prices?

What factors drive the housing prices?

Among the factors are:
1.  A dropping interest rate
2.  Increasing liquidity in the banking system
3.  A growing economy

All the above factors drive the demand for residential and other real estate.  This causes the prices of these real estate properties to rise.

Property prices in Malaysia have been rising since 2005. At present, the real estate prices have not softened in the Klang Valley, though property transactions have dropped compared to the previous years.

Will property prices in the Klang Valley soften?  Will interest rates rise and adversely affect the demand from the end-users or end-buyers?   Is there a rise in the inventory of unsold property in the real estate sector?  Are builders able to meet their loan repayment liability as well as complete their already started projects?  Are builders turning prudent through cutting prices to sell their units and to generate cash?


Saturday 24 August 2013

Real Estate and Value Investing

1.  Most people purchasing real estate seem to believe it is possible to get a "good deal."

2.  By this they embrace the possibility that price and value are different things, suggesting that when it comes to home ownership, people intuit the core quality of value investors.

3.  By staking a modest down payment (often 10 to 20 percent), much of the population exploits the leverage afforded by putting more assets to work for them.

4.  Except for speculative fever in select times and places, real property values rise reliably, making such an investment a reasonable vehicle to increase net worth.

5.  Owners have been able to tap the increased equity value in primary residences in recent decades by using home equity vehicles dotting the market.

6.  Low-interest-rate-environments spur refinancing transactions that, by lowering debt service obligations, free up cash flow as well.

7.  Buying secondary homes for use as vacation getaways or rental properties has also become more attractive to many families, no longer the preserve of the upper echelons.

8.  Particularly in periods of low interest rates and sagging stock market returns, these markets offer attractive value investments.

9. Apart from the additional concerns of family needs and psychic rewards, the basic principles of valuation apply to these vehicles.

10.  Paying a price reasonably below estimated value remains important.

11.  Avoiding excessive leverage is akin to avoiding margin trading on equities.

12.  Patience is likewise valuable.

13.  Another advantage to home ownership is that the owner is the manager - he runs the home, maintains it, determines required reinvestment to maintain and improve its value, and so on.

14.  Value-minded investors are sure they can do these tasks, or else turn the reigns over to someone who can.

15.  These points go doubly for vacation or rental properties that might present logistical problems.

Friday 1 March 2013

Singapore to raise property tax rates for luxury homeowners



WRITTEN BY BLOOMBERG   
TUESDAY, 26 FEBRUARY 2013 17:54

Singapore plans to raise taxes for luxury homeowners and investment properties, widening a four- year campaign to curb speculation after prices in Asia’s second- most expensive housing market rose to a record.

The higher tax will apply to the top 1% of homeowners who live in their own residences, or 12,000 properties, Singapore Finance Minister Tharman Shanmugaratnam said in his budget speech yesterday, without giving a definition of what constitutes a high-end home. The government will also raise tax rates for vacant investment properties or those that are rented out, he said.
Singapore joins Hong Kong in extending anti-speculation measures as low interest rates and capital inflows drive up demand and make housing unaffordable. Residential prices in Singapore climbed to a record in the fourth quarter as an increase in the number of millionaires drove up demand.

“The graduated property tax on luxury properties may impact investors, particularly corporates and high-net-worth investors,” Petra Blazkova, head of CBRE Research for Singapore and Southeast Asia said in a statement. “It may put pressure on the holding cost of investment properties held by developers and investors.”

The property index tracking 39 developers fell 1.2% to a one-month low at the close in Singapore. CapitaLand, Singapore’s biggest developer by assets, declined 1.5% to $3.86. City Developments, the second largest, slid 1.8% to $11.15.

HONG KONG
Singapore’s latest efforts were announced three days after Hong Kong increased property taxes. The Hong Kong government last week doubled sales taxes on property costing more than HK$2 million ($319,900) and targeted commercial real estate for the first time as bubble risks spread in the world’s most expensive place to buy an apartment.

“The property tax is a wealth tax and is applied irrespective of whether lived in, vacant or rented out,” Shanmugaratnam said. “Those who live in the most expensive homes should pay more property tax than others.”

For a condominium occupied by the owner in Singapore’s central region with an assessed annual rental value of $70,000, the tax will rise 5% to $2,780, according to the budget statement. If that home is rented out, the tax will climb 21% to $8,500, according to an example highlighted in the statement.

Based on a 3% rental yield, that property is worth $2.3 million. Gains in levies for properties assessed at higher rental values will also increase at a faster pace, it said. For a house with an assessed rental value of S$150,000, worth $5 million based on the same yield assumption, the tax will rise 60% to $24,000. The revised taxes will take full effect from January 2015, according to the statement.

Singapore is Asia’s most-expensive housing market after Hong Kong, according to a Knight Frank LLP and Citi Private Bank report released last year that compared 63 locations globally.

http://www.theedgesingapore.com/the-daily-edge/business/42916-singapore-to-raise-property-tax-rates-for-luxury-homeowners-updated.html

Sunday 2 September 2012

Real Property Gains Tax (RPGT) & The Property Owner


The 2012 Budget unveiled on 7 October 2011 included a revision of the Real Property Gains Tax (RPGT)Posted Date: Mar 15, 2012
By: Jennifer Chang
Real Property Gains Tax (RPGT) & The Property Owner
The 2012 Budget unveiled on 7 October 2011 included a revision of the Real Property Gains Tax (RPGT) rate from the 5% to 10% as part of the Government’s efforts to curb property speculation. The increase was recently gazetted and took effect from 1 January 2012 onwards. Jennifer Chang studies the impact of this move on property purchasers.
The rate of 10% applies to gains on properties held and disposed within two years while gains on properties held and disposed between two and five years will be levied a 5% RPGT rate and disposals after five years continue to be exempted from RPGT.
RPGT is a form of capital gains tax that is chargeable on gains arising from the disposal of real property, which is defined as:
• Any land situated in Malaysia and any interest, option or other right in or over such land; or
• Shares in a real property company. Anyone disposing of real property in Malaysia - whether a resident or non-resident - will be charged RPGT on the gains.
Evolution of RPGT
A tax on property was introduced in 1974 under the Land Speculation Tax Act. This was subsequently replaced with the Real Property Gains Tax Act in November 1975. Although in existence since the mid-70s, the Government pro-actively adjusted the rates of the RPGT through the years to cater to the property market conditions.
It’s natural for most people to react to the reintroduction of RPGT, having enjoyed full exemption for a few years previously, however, compared to the original rates of RPGT which range up to 30%, the recent hike of up to 10% is actually quite mild.

Impact on the Malaysian Property Owner
The disposal of a property takes place upon the signing and execution of a Sales & Purchase Agreement (SPA). The date of the SPA is significant, being the deadline to file RPGT returns and tax payments are based on SPA date. For example, the acquirer will need a 2% retention of the disposal price to be paid to the Inland Revenue Board of Malaysia (IRB) as part of a withholding mechanism on behalf of the seller of property and such withholding and filing of notification of disposal needs to be submitted to the IRB within 60 days from the date of SPA.
In conditional contracts which require Government consent, the date of disposal can shift to a later date than the SPA. Hence, the date of disposal shall be the date when Government consent has been obtained. Exemptions applicable to property disposals for a Malaysian individual include:
• An amount of RM10,000 or 10% of the chargeable gain (whichever is greater).
• Gain arising on disposal as a result of compulsory acquisition of property under law.
• Gain made by an individual who is a Malaysian citizen or permanent resident on one private residence.
• Gift made to the Government, State Government, local authority or approved charity.
• Gift between family members (e.g. parent and child or husband and wife).
Of importance is the fact that RPGT applies when property ownership is seen to be long-term capital. Where ownership is speculative, the IRB may view the disposal as revenue and seek to levy income tax instead. Income tax is levied at 25% for companies and up to 26% for Malaysian individuals. Of course, compared to income tax, the RPGT is preferable.
However, what is capital and what is revenue can be subjective and may depend on the property ownership and the taxpayer’s profile. For example, the sale of a residence after five years of ownership is more likely a capital transaction. On the other hand, the sale of an empty plot of land just subdivided for a project is likely to be treated as revenue.
What else do I need to know about RPGT?
Innovative property owners who have parcelled their properties in companies also need to be aware that the sale of shares in such companies may trigger RPGT. Remember, the definition of real property includes shares in a real property company, of which a substantial portion of their assets are properties.
The hike in RPGT rate from 5% to 10% is seen to be moderate and it is important to note that regionally, Malaysia is quite competitive. Countries such as the UK, Australia, New Zealand, Japan, Korea and India have some form of capital gains tax regime which could later extend to other types of assets as well. However, for some of our neighbours such as Singapore and Hong Kong, there is no capital gains tax regime on properties sold by resident individuals. We do hope that eventually, the RPGT rate in Malaysia will be relaxed, especially for Malaysian individuals.
Article contributed by Jennifer Chang, a Senior Executive Director with PricewaterhouseCoopers Taxation Services. She is a member of the Institute of Chartered Accountants in Australia, the Securities Institute of Australia and International Fiscal Association. Her extensive tax and financial services experience both in Australia and Malaysia enables her to regularly advise clients on various tax matters including income tax, real property gains tax, stamp duty, service tax, applicable tax incentives and double tax treaties. She can be contacted atjennifer.chang@my.pwc.com.