Conventional wisdom is that property is a great investment. Property is finite. Nobody can make more land so it can only go up in value over the years. Many rich people have made money from property all over the world. Li Ka-Shing, Robert Kuok etc etc…
My father though had a different experience when it comes to investing money. He never believed much in investing in property. Instead he believed in the stock market. Just like it’s important to make the right picks in whichever property you buy, it’s even more important so for the stock market.
I asked my father why? Why the stock market and not property? There are clear advantages of investing in property. That it’s not as volatile, that you can actually live there and is useful for those who don’t have a home who are already paying rent… and of course the fact that you can leverage to buy property. Whereas borrowing money to invest in the stock market can be deemed really risky.
It’s only when I started investing in my own property that I began to see the reasons. There are downsides to investing in property, and some of them aren’t so obvious.
1) Transaction costs
The transaction costs involved in buying a property is significant. There is lawyer fees for the Sale and Purchase agreement AND then again for the loan agreement once you take a loan from the bank. Then there is stamp duties too… and other disbursements. The absolute amount of these costs can be significant.
2) It isn’t easy to find a tenant to rent out your property
This is true especially in Malaysia. In KL in particular while property prices have been going up in general, there is a weak rental market. Most property agents would concede that of all the apartments in Mont Kiara, only 50% of them are occupied. The rest are empty. Most properties take months before you can find a good tenant.
This however isn’t true for some other property markets. For example I have a property in London that was rented out within a couple of months from completion.
3) Finding a tenant is hard enough. Finding a good tenant even harder.
There are some tenants you don’t really want to rent to. They can mess up the place, they can avoid you and not pay rent, they can use your property for illegal things. I’ve never experienced this before (thankfully) but I have friends who have and they tell me it’s a nightmare.
4) Maintenance is a bitch.
Sometimes in the homes we live in, things get broken but we know about them because we’re living there. So we can fix them. When you have a property that isn’t lived in or rented out yet, things sometimes go wrong without you really knowing about it. When you do find out then it can be a mess to clean up… and expensive too. This can be really stressful.
5) Property gains tax
We now have property gains tax for Malaysia. So if you sell a property at a profit in which you bought it for, you have to pay tax for the profit you made. In the stock market if you sell a stock in which you made money from, there isn’t yet a tax on that profit.
6) You can’t convert your property into cash quickly.
Again this is probably not the case for all property markets in the world but in Malaysia it kinda is. It’s not easy to find a buyer for your property when you want to sell AND at the PRICE you want to sell. It depends on how desperate you are. The more desperate you are the lower you can drop your price and the quicker you will then sell. But then you will get your money quicker but at the expense of a lower price.
Plus when you do find a buyer the whole process takes at least 3 months before you see your money.
7) You don’t always make money from property.
There is this development at Damansara Heights called Twins. It’s a really high end condo from a credible developer and it’s in a great location. Not just that, there is a huge development developing around that area that will form a mall and there’s even an MRT station being built there. It’s like it has the entire story.
Yet when you drive past at night you will see that only 30% of the windows at the Twins are lit up. Half of the remaining dark windows you’ll notice don’t even have curtains on them. So they aren’t even lived in.
When I talked to a property agent who handles that property he said when the project launched years ago lots of people bought it up but they’ve mostly been unable to rent it and have been trying to sell it but they can’t find a buyer at the price they want.
In the agent’s words he said “The owners already know they will lose money by selling… it’s just a matter of how much”. When I asked why lose money when the price of the condo today isn’t different from years ago when they first bought it (not lower for sure)… and he said when you incorporate holding costs, interest costs and transaction fees it was a bad investment. They are losing money.
Now of course who knows, if they hold for another 10 years the price of the property might go up. But would your money be better invested somewhere else? It’s about opportunity cost.
8) Property agents make money when you buy a property… regardless of whether you make money or not.
That’s something we all often forget. We think a property agent is on our side giving us the best recommendations to make the most money from property. Yes I think good property agents who care about you only want you to invest in properties they believe in… but have you ever met a property agent that told you “This is not a good time to buy a property… not now… wait for another year”. Why not ? Since property markets do go up and down too. They’re cyclical, so it can’t always be a good time to buy property.
But even when the property market is weak, agents normally say “Yes market is weak but this area is good”. Or something along those lines. Why? Because property agents need to make money too. It’s a full time job for all of them and they can’t only be making a living from years that the property market is good. They need to pay their bills so you can’t really blame them for pushing a sale. You just have to understand the mechanics of this and evaluate each purchase yourself.
I bought a house in KL that when the property agent sold to me he said it was a good price and easy to rent out. That I could fetch rentals as high as RM12K. That turned out to be not true. I waited 5 months and I had lots of viewings but the agent who promised to find me a tenant wasn’t able to.
In the end I blogged about it and found my own tenant from one of my readers. Not just that the agent couldn’t get me a tenant but the rental I ended up renting it out for was a lot less than what the agent told me I could fetch.
I don’t blame the agent really. I believe he tried his best. In cases like that we can only blame ourselves for our investments and the homework we do behind them.
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Note that I’m writing this mostly from a point of view of investing in property that you don’t live in. Heck if you live in a rented home then sure owning your own home could be a great investment to start with so your monthly payments go to paying your mortgage rather than someone else’s. But even then you really need to consider the points above and what you’re buying into.
The point of this article also isn’t to say everyone should invest in the stock market instead of property. Investing in the stock market is tricky too.. Personally I think I haven’t made much money from my stock investments in the past.
The point of this article is to share things I didn’t know about property investment until I bought my own property. That it’s a bit more complicated and stressful than I imagined it to be.
Timothy Tiah – Co-Founder of Colony, Kuala Lumpur Co-Working Space