Realities of Investing in Multiple Properties

In today’s world of social media, where information is abundant and influencers are everywhere, a concerning trend has surfaced: the encouragement to build a real estate empire. Imagine this scenario: a new property investor is scrolling through their feed and comes across an enticing post. The headline makes big promises: “How to profit from investing in 10 properties!” The appeal is compelling. Owning multiple houses provides passive income. It elevates one to the status of a “real” property investor, often poking fun at those who own only a few properties.

However, beneath the attractive facade lies a harsh truth: demand may not match supply. As unsuspecting individuals follow this enticing advice, they unknowingly tread onto a financial tightrope, balancing between dreams of wealth and the risk of financial ruin. When bank loans conflict with market dynamics, the consequences can be severe.

Investors need substantial funds, as banks do not simply lend on multiple properties. This type of advertisement aims to excite the general public to make purchases.

Advantages and disadvantages of owning multiple properties

Investing in multiple properties with high bank loans can be beneficial, but it comes with risks.

Benefits of Owning Multiple Rental Properties

Owning multiple properties allows for diversified income sources. If one property experiences short-term negative cash flow (e.g. due to vacancies or unexpected repairs), positive cash flows from other properties can offset it.

Owning properties in different geographic locations is generally recommended to spread risk. Trends change, and investing solely in one city may not be the best strategy. However, if your property is far from your home, you will depend on someone or an agent to manage it.

Rental income tax is based on chargeable gain after deducting the following: assessment tax, quit rent, mortgage interest, fire insurance premium, rent collection expenses, rent renewal expenses, repairs and property maintenance. Please seek advice from a tax professional regarding how to offset losses from one rental property against the chargeable gains of another.

Risks of High Margin Bank Loans for Multiple Properties

Some investors cross-collateralize their loans using their primary residence as collateral for investment properties. This is not recommended. Market downturns can jeopardize your home when the rental properties sit empty for months or you cannot secure good-quality tenants. Owning more properties also means more repairs and maintenance costs.

Overleveraging, owning too many properties with significant mortgages, poses bankruptcy risks due to potential declines in property values or rental income, making it challenging to service multiple loans. Maintaining cash reserves to cover unexpected expenses and loan payments is essential.

Owning multiple properties can be profitable in a strong market where demand exceeds supply. However, it’s crucial to assess financing options carefully and spread out risk, as the market can shift to a downturn.

Determining the right time to sell

This is the tricky part. People often hold on to properties, thinking their value will increase steadily. However, this is not always the case, especially for strata properties with poorly managed common areas and older condos in KLCC. In such cases, property prices can stagnate or even depreciate.

A high-quality property investment must meet two critical criteria: substantial capital appreciation and rental income that covers the mortgage, repairs, maintenance charges and other expenses. Even if capital appreciation slows down, it’s still worthwhile to continue if the rental income is sufficient, as the interest portion of the monthly loan repayment will decrease over the years. This assumes that the property is well-maintained and the property market is stable.

If the property’s value has stagnated and the rental income isn’t sufficient, after accounting for vacant periods, it might be a good idea to sell. This is especially true if the common areas (for strata properties) are poorly maintained or you don’t have enough funds to maintain the property. In this scenario, a cash purchaser not using a bank loan to leverage may be better off putting the money in a high fixed-income fund.

Monitor the market situation closely for new competing projects. If your property is in an excellent location and there is no room for another project, nearby projects may not significantly impact its price and rental. Stay informed about bank interest rates, capital gains tax, stamp duty rates for property transfers, recent short-term rental court decisions and government policies.

Lessons from the performance of KLCC condos

The article, “Luxury condos in KLCC going ‘cheap’ on the secondary market”, published on TheEdge in 2017, demonstrates that property values can depreciate.

The key takeaways from this article are as follows:

1. Transaction volume dropped 20% for large-size units above Rm1 million in the first half of 2016.
2. Transaction volume dropped an average of 33.5% per annum from its peak in 2013 to 2016.
3. Non-landed residences tagged over Rm1 million had slowed down since 2014.
4. Lack of foreign buyers and weak demand from local buyers.
5. The fall of oil and gas prices impacted the number of expatriates employed in this sector and weakened demand for the high-end, high-rise residential rental market.
6. Oil prices must recover before more companies send staff to KL.

Another article, “Is the residential property market really recovering?” aimed to determine whether The Star’s Top 10 KLCC condos outperform inflation.

When the transacted prices of the ten listed KLCC condos were compared in 2010 and 2022, most properties showed a decline.

The links to the two articles have been included at the end under References.

Managing the property and mitigating risk

Managing your property can be rewarding, but it also comes with its fair share of challenges. Focus on tenant relations, maintenance and repairs, and financial management. For tenant relations, prioritise finding reliable tenants, addressing complaints and disputes, and managing lease renewals and turnover. For maintenance and repairs, emphasise regular maintenance, handling emergency repairs, and effectively managing repair costs. Regarding financial management, stay on top of rent collection, budget for expenses, and maintain accurate accounting and record-keeping.

Several key strategies for mitigating risks in real estate investment exist. One is to maintain moderate leverage by balancing debt with equity. Another is to have cash reserves for unexpected expenses. Conducting stress tests to assess how changes such as interest rates and vacancies could impact cash flow is crucial for being prepared for potential challenges.

Each investor’s situation is unique, so tailor your financing approach to your specific goals and circumstances. Prudent risk management is essential, so consider seeking professional advice tailored to your circumstances. Regularly assess your financial situation and adjust your strategy as needed.

Remember, not all that glitters on social media is gold. Tread carefully and seek counsel from professional sources grounded in reality.

References:

1. Luxury condos in KLCC going ‘cheap’ on secondary market (theedgemalaysia.com)
2. “Is The Residential Property Market Really Recovering?” Part 2/3 — 360 Kirana Residence
3. Prime residential, KL city submarket expected to stay dynamic: JLL Malaysia (nst.com.my)
4. The Edge Malaysia | Savills Klang Valley Residential Property Monitor 4Q2023: More residential properties completed during the quarter