Investing in property is a big commitment. Learn the red flags that indicate when you need to look twice before you leap. 

Is there any investment option that is as heavily encouraged and prominent as real estate? Arguably not, and rightly so.

The property game has been played by some of the wealthiest and wisest investors throughout history. Owners of property assets can enjoy the potential upside of financial security, portfolio strength and outstanding stability – especially in times of trouble.

Since the first MCO went into force on March 18, 2020, the government has sprung into motion with a slew of initiatives aimed at boosting financing in Malaysia. To begin with, Bank Negara Malaysia (BNM) lowered the Statutory Reserve Requirement (SRR) Ratio to 1.75%. The SRR is a liquidity management tool (read: cold hard cash! ), and this transfer will release around RM30 billion of liquidity into the banking system. While it seems that there is a lot of surplus money in the economy right now, it remains to be seen whether you should take the risk or not.

Here are a few possible reasons why it may NOT be a wise idea to begin investing in property yet.

Reason #1. You haven’t thought things through enough

One of the more obvious reasons for putting the brakes on your real estate investment plans is that you’re too new to the whole thing.

The Malaysian Real Estate market has long been a choice of investment in the country, and it has had ample time to mature into a stronghold for many experienced investors. On top of that, the sheer amount of property investors has increased dramatically over the past two decades or so, seeing that more people are looking to pursue a better financial future for themselves.

However, aside from the growing saturation of the market, a barrage of fluctuating factors may have to be considered – from the type of land and developer reputation, accessibility of the property and public amenities to pricing and a good understanding of the chosen location.

There are questions to ask yourself too; are you interested in yields or cash flow? Are you searching for long-term capital growth opportunities or a quick flip in the market?

If you haven’t delved deep enough into these variables, then you should take a back seat for now and beef up on your knowledge. You could be ready sooner than later if you do your due diligence.

Reason #2. The rental to salary ratio is too steep

If you’re a salaryman (or woman), then this can prove a pretty pertinent point. You may want to put a down payment on a property that appeals to you, but the monthly mortgage and overall costs to acquire the spot is a little overwhelming, especially at the current pay you’re reeling in.

If you’re currently renting a spot in a prime location in the city, there’s a good possibility that you’re paying monthly for a pretty comfortable place, and you might find it hard to downgrade your lifestyle to afford a property purchase.

Downgrading could mean that you can afford to buy a property of your own, but also mean putting a strain on your finances. As an example, a RM600,000 property can require a monthly mortgage of RM2,700 (excluding hidden costs like renovation and furnishings).

Can you afford it? If not, consider working on your primary mode of income before investing in real estate.

Reason #3. You’re making an emotional investment decision

Fear Of Missing Out (known widely as FOMO) is such a notorious concept that a term was coined for it. Humans are emotional creatures, and bad decisions are often made when we don’t control our emotions.

Some people want to buy property because they were disappointed that they missed out on a previous price spike. Some are enticed to invest due to unrealistic hype, and some are basing their decisions on peer pressure because of friends and family coaxing individuals into investing without proper planning.

Emotion can open you up to all kinds of problems, including an army of shady property marketers or self-proclaimed gurus who want to offer you a get-rich-quick scheme related to property purchases.

Before you settle on that house, you might want to make sure you aren’t being swayed by emotions.

Reason #4. A lack of rental income and unreliable tenants

Landing long-term, stable tenants may be more complicated than you imagine. Buying a property is one part of the equation but tenants are a whole other story. Even non-owners can understand the arduous journey of landlords looking for reliable tenants who pay on time and don’t damage their property.

If you get into renting out your asset, expect there to be a period when you earn no rental income. Even if you do get a renter, the bulk of your rental income may go towards paying off your mortgage. If you can’t afford to pay your mortgage every month without rental income, you may want to consider other options.

And if you can’t pay your mortgage without rental income, your property might become a financial burden and a source of stress, rather than a profitable investment opportunity. Before taking out a loan to invest in real estate, consider the possibility that you might have to personally deal with the constant payment obligation.

Mortgage anxiety is a serious problem. Fortunately, there are plenty of regulatory measures and resources that can protect both landlord and tenant, so it isn’t necessarily all gloom and doom.

Reason #5. Putting all of your eggs in one basket

To get into the real estate business, you probably need to put down tens of thousands, if not hundreds of thousands of dollars upfront. Renovations, repairs, and insurance can all add to the cost of a single investment.

If you don’t already have a well-diversified portfolio, going into property means you’re likely putting all your eggs in one basket. Meaning, the bulk of your funds are invested in a single property. It’s incredibly risky to put so much into one single thing, as you are leaving no room for error. One blunder or omission could really mess up your finances.

All of the money invested in a single property may have been better spent on a well-diversified investment portfolio that included stocks, bonds, ETFs, and other asset classes. A well-diversified investment portfolio protects you from ruining your entire financial situation if you make a mistake.

So, before you invest in a property, it is best to review your current investment portfolio to review your diversification allocation first.

Reason #6. Illiquidity can be challenging

Property and real estate, unlike stocks, are illiquid properties. You won’t be able to sell it for cash in a short period, no matter how desperately you need the funds. From recruiting an agent to seeking potential buyers to negotiating, the process of selling a home can take months (or even a year). Banks and attorneys (and a lot of fees) will likely be involved.

When inflation is factored in, the amount of benefit from the investment may not seem significant if you need to sell it immediately for cash. As a result, investing in real estate might not be a smart idea if you anticipate a requirement for cash in the future.

It’s better to have an appropriate emergency fund than to be forced to sell your property investment quickly for cash. However, if you have a good amount stashed away for a rainy day, then real estate might just be the next step for you.

Reason #7. Difficulty with loan applications

This is one of the more common problems faced by many Malaysians nationwide. When it comes to property investing, there’s usually no way around getting involved with the banks and when banks are involved, there’s often a great amount of due diligence on their part to try and make sure lenders are trustworthy. Meticulously examining submitted documents, credit history and other details for any discrepancies is part and parcel of the bank’s many duties.

Before investing in property, understand the bank’s role in the entire process and prepare yourself well so that you can get approved for a loan seamlessly. Try to ensure that all your documents and details are in order, and learn about what banks look for when qualifying a lender. Until then, you should hold off on that purchase.

Reason #8. The outlook changes every year

Historical housing price data can be a reasonable indicator of future returns in a given market. However, it may be important to not assume that trends will continue.

This year’s property investment could look very different than it did in 2011 when Malaysia’s property sector went through significant growth. Property rates shift in cycles, and Malaysia is not immune to experiencing a mild downturn.

Residential landscapes can be affected by a large “property overhang,” which is described as houses that have been built but have remained unsold for more than nine months. These factors, including many other fluctuating elements that are beyond your control, should be considered when evaluating market exposure.

Conclusion

Investing in property is a big commitment that requires thorough understanding before you jump in. Consider all the 8 reasons and decide for yourself whether you are ready for property investment.

If you are truly keen on growing your portfolio to include property but are not ready for physical ownership of a unit, have you considered REITs?

 

Will you be buying property soon? Do share your thoughts with us in the comments. 

 

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