Investing in property with a holistic perspective

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An opportunity management approach coupled with having a holistic financial planning can ensure better decision making in your investments.

“17 years ago, I missed the opportunity to invest in Desa Park City. 5 years ago, I missed Sunway Velocity. I regret it. I don’t want to miss the boat this time”.

“Too many new projects available now and developer offers good incentives and rewards, I don’t know which to choose.”

“I heard many unpleasant experiences from friends and family, I worry the property I invested would be abandoned or the quality is bad when I gain vacant possession.”

These are typical comments you might hear when Malaysians share their perspective on property investing. Like other developing countries, economic growth and continuous urbanisation in major cities have made real estate investing one of the more attractive investment vehicles for Malaysians to grow their wealth. There are loads of property investing books and “property gurus” on hand to offer pointers to those looking to embark on their property investment journey, imparting their strategies and experiences in this field. Some share their seemingly unbelievable profit- making experiences through property flipping (buy-to-sell) or property management (buy-to-rent).

The outbreak of Covid-19 in 2020 put a dampener on an already sluggish real estate market, resulting in property players having to transform their business model to weather the storm. Industry players responded with various digital innovations to allow most of the transaction process to be conducted without physical interaction. Supported by a low interest rate environment, these efforts seem to be paying off, as property demand at certain areas remained fairly stable despite the depressing health and economic backdrop.

Just like any other investment asset class, the real estate investment journey has its ups and downs. Some of us may make money from it, others should learn from the mistakes made so as not to repeat them to our own detriment. An opportunity often arises from a threat, so it is important to be able to separate the wheat from the chaff. In order to have a higher probability of success, we will need to apply a structured approach to address these potential opportunities.

Plan-Check-Monitor

A structured opportunity management approach for investing involves a simple three-step process: Plan-Check- Monitor.

Plan refers to having a clear purpose and objective for the investment – do you know what you want to achieve and when you want to achieve that? The answer will determine your direction in investing and know what information is required to build a solid investment portfolio.

Check involves activities to survey and collect information about the respective investment to ensure it is compatible with your plan.

Monitor is about keeping track of any changes on investment and being sensitive to the important indicators that your investment returns can potentially sustain and improve, or otherwise. This also requires one to be nimble and responsive according to changing market conditions. Adopting the PCM approach will enable investors to differentiate whether it is a real opportunity, and to know how to ensure the compatibility of the opportunity to one’s current situation.

As property investing is possibly the single largest financial commitment in one’s lifetime, it can have a different impact on various aspects of our personal and family life. As such, merely asking what property to buy or where to buy is not enough.

So how we can apply the PCM model in a property purchase scenario? You should start with questioning. What is your primary purpose for this property investment? What is your goal for this investment? The answer is crucial to determine the appropriate strategy to follow.

Say you are looking for an own stay property. You will need to identify a property that caters to your current and future family needs. Start by consolidating information about the targeted property (for example, understand the potential of the upcoming neighbourhood, the demographics, nearby amenities, etc.). Then identify and assess the saleable area of the property, number of rooms, potential renovation costs due to expansion or layout restructuring and suitability for future expansion to determine its compatibility to your needs. For newlyweds, do not forget to consider the extra rooms for your future children.

If you are looking for investing or a rental property, you need a clear approach with cost-effective solutions and a well-planned property rental management strategy to optimise your rental yield. If you want to save the cost of engaging agents or a property management company, you need to determine if you have the capability to do it on your own. Again, start with gathering information about the property types that are popular for rent, the targeted potential tenants, their preferred rental price range, etc. Then continue to identify and assess the property based on the needs of your targeted tenants.

In addition to this, you should continuously monitor the progress around the targeted property area. Are there any growth plans and projects to spur the development of that area, such as upcoming MRT lines, connection to highways and other developments that might affect your investment return direct and indirectly? You should also be prepared for vacant tenancy periods without rental income as this will represent an opportunity cost to you. Hence, your sensitivity towards the growth around the property area will assist you to seize the opportunity in pricing the rental accordingly.

Potential capital appreciation and positive rental income is a property investor’s ultimate goal. Nevertheless, few can accurately predict their actual investment return as this will depend on the overall development and progress of property location – actual versus expected.

Given this uncertainty, it is important for you to have a practical plan to secure the rental yield and a well-planned exit strategy prior to investing in any property. As such, one can apply the PCM model prior to the investment instead of blindly following what is recommended by people around you.

Impact on your financial health

The above examples should give you a fair idea on how you should approach a property purchase in the future. But is this sufficient for you to make the right property-related financial decisions? Will the purchase have a positive or negative impact on your overall financial well-being? To answer this, we will need to overlay the decision- making process with a holistic financial planning perspective.

Broadly speaking, holistic financial planning provides you a 360-degree view of your financial situation, taking your current and future financialexpectations into consideration to empower you to make more informed investment decisions. A holistic financial plan empowers you to constantly be on guard against possible investment risks and potential financial costs as you expand your property portfolio holdings.

Working on strategic asset allocation helps you manage your investment risk while stabilising your overall investment returns. For example, strategic asset allocation will remind you to invest less than 40-50% of your funds in properties.

Understanding key financial ratios provide valuable information to help you monitor your debt ratio to avoid over-gearing and keep track of your emergency funds in the event of a scenario without rental income. Cash flow management will help you ensure that you have sufficient cash for down payment without using up your emergency funds, and give you clarity on how you can continue to save and invest for other goals once the property loan repayment starts.

In conclusion, there is no doubt that property investing has a big role to play in growing one’s net worth. However, there are pitfalls in investing in this asset class so the practice of opportunity management approach utilising the PCM model, coupled with holistic financial planning, will help tominimise the potential impact.

First published in Smart Investor 09/10, 2021 Issue