High Risk with Low Return Property

Investment is all talking about risk. In normal investment terms, high risk taker will be well rewarded with high return while low risk taker always goes another way round. And no risk means “no return”. It does apply in property investment also whereby high risk happens when you are purchasing property with no logic in terms of the capital appreciation and resale value. This is the types of asset that I always trying to avoid as the reward are not moving parallel together with the risks. In other words the risk that you take is virtually much more ahead of your own reality.  

Rental guarantee

The package of rental guarantee has been famous in town for the past few years. If I’m not mistaken, the first developers who introduce such scheme are Api-Api Apartment and Marina Court developer. It was a successful program with both buyer and developer well rewarded through steady rental and capital appreciation. At that time the selling prices for Api-Api apartment and Marina Court was at RM120 psf and RM240 psf respectively. Comparing to current launch, most of the development are asking for RM700psf and above. With rental yield of 7%psf over 300sf apartment suites, virtually you need to rent your unit for RM1225 per month excluding monthly management fees. Of course the argument is that the developer will act at guarantor and manage it as a hotel for you, but who going to guarantee the developer? It’s like putting your money into my pocket and every month I will credit back into your pocket end of every month for the next 5 years. Will I continue to transfer the agreed amount consistently for the next 5 years? I can’t assure that also… it reminds me that our world class Bank Lehman Brothers also can go bankruptcy. What more our local developers!!

Affordable

Most of the investor in town that I met lately going for affordable properties i.e. prices ranges from RM150K-RM300K per units regardless of the size. The logic behind is that it will be easily rented out. That why when I go for property auction lately, I found out that a lot of people start accumulating old properties like Beverly Hills, Country Height, Bambangan Apartment, University Apartment and Telipok Apartment due to low entry cost. Is this a good area and asset to invest in? YES… it’s definitely much better investment if you compare to current launch development which selling for RM180K-RM350K with average size of 300sf-600sf. How high more it appreciates if you bought a unit of apartment suite for RM210K@RM700psf? If the property is really good and it appreciated RM100psf after 2 years, you are only making RM30K extra?? Returns over your capital investment is too low and the risk is too high…I won’t even think of investing in it!!!   

Smaller size

Last 15 years when local developers started to launch 3 bedroom apartments with unit size of 900sf-1000sf, a lot of us start to doubt over the usability of the size. But today people start to get use to live within the 900sf 3 bedroom apartments. It’s just a nice home accommodating small family of 4. With the land cost sky rocketing and material cost keep rising, our local developer has come out with more innovative and creative design whereby 3 bedrooms now can be squeeze into 700sf!! Believe it or not, it’s a fact that some developer really making big money from such development. It’s not the end when you can see in the recent property market, our developer has introduce designer suites ie similar size of the “master bedroom” of landed properties but with 4 times higher selling prices ie RM700 psf. Is the price sustainable over the years? I doubt about it capital appreciation, rental yield and resale values…     

Fully furnish

If you got free lunch, be prepare for expensive dinner. It’s a never a free things in this world. Most of the designer suites and apartment suite has introduced a “fully furnished” concept suite to accommodate buyer financial needs. Rather than only making money from constructing the units, developer will earn and profit from everything supply into the units. In other words, you just need to bring in your personal belongings if you decide to purchase the unit for own use. At the end of the days, virtually it’s like everything in your apartment are lease from the bank!! That’s including your mattress or even sofa sets my dear friend. Just to let you know that to valuers, internal moveable items are carrying “ZERO or minimal” values!!    

Location

Normally location for apartment suites or designer suite will be fantastic and centrally located with close proximity to matured commercial properties like Shopping malls. No doubt the chances of success are high but if it’s not, then the buyer will be in big trouble. Even international hotel will not continue renting from you if they don’t make money from their hotel operations. Furthermore, over the years your units will be less attractive due to the heavy usage of the room with various guests.

Resale

The ultimate of property investment is when you have to sell above purchase price to cover your own investment cost. The cost will be like interest cost, legal fees, stamp duty, renovation cost, agent fees and etc. The resale values normally depend on the market demand of the property with highly interrelated to rental yield and potential growth of the properties. If you purchase it for RM700psf and sold it for RM850psf then you are making nett profit of says RM100psf which is good but too bad you only make RM30K if you only got one unit with the size of 300sf. The returns certainly not worth your effort since you are taking all the risk all the time from the point of construction.  

So bear in mind, not all properties are good asset and be aware that nothing is free in this world. The higher the risk, the rewards should be higher. But if you are taking unnecessary risk with unreasonable returns, my advices is to avoid such investment. This is only investment tools that create by some smart developers to leverage their risks against your future earnings. If they make it, then they will reward you their words, if not they will burn your entire life… Happy Investing

You cannot Grow Land…CK Wong & MY DAD  

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Tagged as: Affordable, Bambangan Apartment, Beverly Hills, capital appreciation, Country Height, High Risk, Low Risk, Rental Guarantee, Resale Values, Return, University Apartment, Zero Values