Father Sez

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Archive for the ‘Real Estate’ Category

Great Opportunities for the creative and the enterprising

Friday, February 27th, 2009

This morning I read a post by Bigger Pockets that talked about the opportunities in turning distressed properties around with different businesses. 

This is a thought I have long harboured in my mind. Malaysia still has a fair number of buildings lying empty and abandoned from the days of the Asian Financial Crisis. That was more than 10 years ago! And quite a number of factories have since gone vacant when we lost our competitive edge in manufacturing to Vietnam, Cambodia and China.

And now, with the present miserable economic climate, many more buildings are going to go empty. Buildings can go vacant or abandoned for any number of reasons. They can be unsold, or the businesses they were meant for fail to take off, or the owners go bust due to other problems etc.  

There is a building not far from where we live, which was custom built as a wet market. It was empty for several years. One enterprising guy seems to have leased the building and it is now a thriving sea food restaurant.  Another nearby factory building has been converted to an indoor futsal and badminton court, and appears to be doing well. 

Like Bigger Pockets pointed out, even if the unemployment rate is 10% (Malaysia’s rate is much lower, apparently), we should focus on the 90% who are employed and see what kind of a business can be created to serve this market. And the chances are that we should get fairly good deal on the vacant building. I also believe the Council Authorities will also do their bit. After all which District Council wants these ugly empty buildings on their watch? 

abandoned2.jpg

Abandoned buildings near Lukut

Last week, I saw this row of shophouses about 10 kms from one of our seaside resorts. I last saw them about 3 or 4 years ago and they were empty then. And they are still empty now.  

abandoned-shophouses.jpg

A closer view. Quite a lot of real estate for the taking. The question is what should we take it for?

I wonder when someone will come up with some creative idea for some new business there. A private school or a trade school perhaps.  An eatery, maybe?  Something that when we all finally get to see, will make us all go, “why didn’t I think of that!!!”

Beware the law of immediate indefeasibility

Monday, February 23rd, 2009

One question that was often asked of me from my Ghanaian colleagues during the time I spent in Ghana was “How do we get rich?” We have to appreciate that the unemployment rate in Ghana then was very high, judging from the number of responses we got to our positions available ads. Apparently it was around 11%. And with a per capita GDP of USD1,500, wages and salaries were not high either.      

At that time my standard answer was “Buy land. Buy a piece of land that is cheap and outside city limits. Just leave it there. At least you would be trying to make sure that your children get a chance to get out of the vicious poverty cycle.” 

I was shocked at the reply that my colleagues gave me. Apparently the land title system in Ghana (then at least) was not very dependable. You could get 2 or even more people with seemingly valid titles in their respective names for the same piece of land. 

Secondly land encroachment was fairly rife. Land left idle for some time might see someone coming in and building a house on it. And the risks were higher the further out the lands were. 

I was shocked because Malaysia had an excellent land title system. Once you had a valid title in your name your proof of ownership was unshakeable. 

So I thought. Looks like I have to rethink my faith in the Malaysian land title system.  

There is a “Adorna Properties Sdn Bhd v Boonsom Boonyanit” case where it seems that someone forged a land transfer and got a title registered in their name. Then they sold the land. And the original owner found out and sued. It seems that the buyer of the land got to retain the land because of this law of immediate indefeasibility. 

I have to take note of this. Though I feel something is not right with the logic of this judgement, this is now the legal precedent in Malaysia, I think.  

At present only my wife and me know about the titles to the land that we own. None of our children, including the two elder girls know the details. If someone quietly forges my wife’s and my signature and somehow gets the land transferred, it looks like the land is gone for good. 

Maybe I should pledge the titles to some bank for some loans. With the pledges registered, the forgers and, I am sure, their accomplices in the land registration offices may not be so successful. 

What is the right value for a house? The Millionaire Mommy’s view

Wednesday, November 26th, 2008

In April 08, and in my view, before the sub prime issues really hit the fan, the Millionaire Mommy Next Door (one of my seriously favourite blogs, by the way) wrote a great post on this topic.  

The post was in response to one of her readers seeking MMND’s views on the indicators and trends to look out for in making a decision to buy a home. MMND listed three indicators: 

-         Price to Rent Ratio,

-         Would buying at that price make financial sense to a landlord and

-         An old rule of thumb of price against gross rent. 

She presented numbers and statistics and concluded that prices may be still elevated.

To those not familiar with MMND, perhaps the following extract from her about page might establish her credentials and also explain why I am such a big fan. 

Quote 

When we were 30, my husband and I decided we wanted to be parents. It was important to us that we didn’t repeat our parent’s mistakes. Since we had always wanted to parent through adoption, we didn’t have to be concerned about my ticking biological clock– we could wait for the right time.

Over the course of a couple years, I learned about personal finance and created a lifetime financial plan that would allow my husband and I to be free of our money worries by age 40. It worked.

We are now proud and happy stay-at-home parents to our wonderful, young daughter. Financially free, our family hasn’t set an alarm clock in years. Whether it be work, parenting or play, we wake with the sun, eager to spend each new day doing whatever we choose.

We consider ourselves closet millionaires. Our family lives a typical middle-class lifestyle with one fantastic exception– we only work when we want to. Financial freedom affords us free time. Contrary to popular belief, most millionaire households do not live the extravagant lifestyles that many assume. In fact, a millionaire or two may be living inconspicuously next door to you.                                                                 Unquote 

Some of you may remember that my wife and I had written about us selling an investment property we had, a house. This house had been rented out prior to the sale. So more out of curiosity, I compared MMND’s figures against “our case”. The house was sold in April 08, so the timing was perfect. I wrote about the sale here and here.

Based on statistics, MMND took the view that the price to rent ratio should be around 11.6.  In our case, the price at which the house was sold against the annual rent we were getting was an astronomical 32.5.  

Either, my wife and I had seriously undercharged the rental (which I doubt, as we checked the newspapers on rentals charged by other houses available in the neighbourhood) or equally seriously overpriced the house. However I remember that the property agent telling me that the buyer’s father in law’s first statement after he saw the house and knew the price was that it was cheap! 

I also remember my friend AK, telling me many years ago that rental yields on landed property in the metro areas of Malaysia should be in the region of 4% or a P/R ratio of 25. He is a property valuer so he should know what he was talking about.  

So there seems to be some anomaly in comparing prices in Malaysia and the US Metro areas. I don’t know if the high ratio is a Malaysian “thing” or an Asian “thing” or if there is a real mighty tsunami coming for the property sector in Malaysia. 

Whatever the case, we are happy that we have sold the house and when my children get into property investing (notice that I did not say “if”), I shall advise them to use MMND’s principles and search until they get the right fit.  

What should I do with my Timeshare?

Wednesday, April 30th, 2008

During my younger and much more financially and life ignorant days, my wife and I purchased a Timeshare 

Then, the logic sounded good. For this one time payment + another yearly payment, my family had a choice of 7 or 8 properties in Malaysia where we could go for family holidays. As a large family we usually had to take 3 or even 4 hotel rooms. The Timeshare offered facilities like kitchen, a hall and 2 – 3 rooms. Perfect…it seemed.  

Alas! That was then! 

Now I think about the opportunity cost of the capital invested. This plus the yearly maintenance fee could pay for much more than what I was getting. 

Now I think about the resorts being booked solid during the times when my family would want to use it the most, i.e. school holidays, festive seasons and during other National holiday seasons.  

Now I think about how silly I was to have bought the Timeshare in the first place. 

Now I think about it being no wonder why there are so many ads for selling Timeshares at discounted and often deeply discounted prices. 

My wife has started renting out the Timeshare to her friends and other family members who may want to use it. The money received is used to defray the yearly maintenance charges.  Though the whole process is also quite cumbersome, at least part of the yearly outflow is being taken care off. 

We have often thought of selling off the Timeshare. Our local classifieds often have advertisements of these for sale. There are also some international web sites that claim to sell or rent Timeshares.

This situation of having to pay the yearly outflow whether we use the facilities or not is clearly an unnecessary financial pain. Something that is not in line with my present thinking of eliminating outflows that do not add any value. Something that should be taken care off immediately. 

I am going to advertise our Timeshare for sale. After all my investment is already sunk, if I can stop the continual bleeding, it should be enough. 

I have no back up plan.  However there seems to be an option to be able to donate the Timeshare.

My wife and I may donate this and hope that the recipients make more productive use of this Timeshare. 

PS:  

If any of my readers out there have any interest in a discounted and deeply at that,   Timeshare, please get in touch with me.   

Agricultural investment, is it for you?

Sunday, December 9th, 2007

Most townfolks don’t list agriculture very highly in their list of “investment must haves”.  

We have one such an investment, though it did not happen quite the way we had originally planned. This is our tale.  

My wife and I have been interested in starting a goat and cow farm for a long time.  In line with this goal, we had been looking for relatively cheap agricultural land. And along came this opportunity to buy a 11 acre piece for, let’s just say, RM 1,000.  

(RM is the acronym for Ringgit Malaysia, the official currency of my country, Malaysia. Approximate value now is about RM3.50 to the USD. I am using 1,000 to represent the cost so that other related expenses can be expressed as a % easily. I am also a little shy about disclosing actual figures about my finances). 

We went to see the land (about an hour easy drive away), and it was fully covered with thick secondary undergrowth. The advantage was that it was roadside land. Though it appeared hilly, we decided to go ahead and buy anyway.  

Well, it turned out hilly alright. No way could the land be used as an animal farm.  So we decided to plant it with rubber.

See here and here for some background facts on rubber trees. 

The trees take about 5 – 6 years to mature and should start yielding rubber latex from the 5th year onwards. We got a contractor to clear the land, cut terraces and plant the seedlings. We appointed another contractor, to take care of upkeep and maintenance.  

The final costs from purchase of land to planting came to RM 1,285. Additional costs for maintenance and upkeep for the 5 years, till the trees start yielding would be RM240, bringing the total cost to RM1,525. 

We have estimated our earnings to be approximately RM105 – 220 per annum, net of all expenses, starting from year 6 onwards. (We have assumed that, when the time comes, we’ll appoint a contractor to tap the rubber. The present norm is to share the yield 50:50. The amounts represent our 50%). 

Is this a good investment? Let’s see.

Rate of Return Using the rule of 72.

This investment gives us a compounded annual return of 3.60% - 5.76%, depending on market prices for rubber. (I am taking current prices as the maximum).  

The inflation factor should be taken care off in the appreciation of the land.  

Liquidity – Nope. Land is usually considered as non liquid.  

Do I have any regrets? I have to answer an emphatic no. I would not normally participate in illiquid investments with this rate of returns. 

However, our entry cost was relatively low, and it has been an enjoyable experience overall. I love the countryside, anyway. 

There have been some good lessons learnt. 

i) The principal lesson would have been to make sure the land “was what we had in mind”.  (I need to learn this. Now you know the reason for my dismal investment skills.)

ii) During the course of this exercise of clearing and planting, etc., we found out, (too late for us,though) that there were people who would have done all the work for free, provided we allowed them to grow cash crops such as bananas for a period of 2 -3 years. As this does not bother the rubber trees at all, it is a great win-win situation.  

Now that we have the land planted, we do not intend to just wait. We are looking into inter planting with cash crops. Perhaps we can increase the rate of returns, after all.  

My daughter is attending a property investment course

Wednesday, December 5th, 2007

As many other aspiring billionaires, I have read and been fascinated by the many books that espouse theories on making money on properties. 

However my wife and I have never really tried “property investing”.  

A good family friend, Kalai, has tried and made money. He has been a “fixer upper” and made decent money on 2 properties. He has bought and sold properties. He has been a property agent and sold a number of properties. He has also a dud on his hands now. His stories have always fascinated me.  

I accept that property is a major asset class and learning about investing in them can only be a plus in our journey to financial freedom. 

So when a local financial and property “guru”, Milan Doshi, announced his upcoming class, I was interested got up my daughter and nephew to sign up. 

The course promises a number of things, related to improving our financial IQ and learning about RE investment. 

Of course, neither my wife nor I expect our daughter (the second, the first is studying in Wales) to return from the course with Donald Trump’s skills.

What then do we expect? 

a)    My nephew and daughter will get to understand at least some of the nitty gritty and be given an introduction to the world of RE investing and the related matters, like tenant issues, types of property, pitfalls to look out for, financing, calculating returns etc. 

b)    My nephew and daughter will get to meet other course participants who should have the same interests and maybe, form a peer group with some of them. (See this great article on the advantages of peer groups). 

Besides, my daughters forming a peer group is one of my goals for 2008.  

c)     My daughter is close to my nephew and there is no reason why they should not form a 2 member peer group to start off with. 

d)    My nephew is a very sensible young man and I am sure his presence at the course and as my daughter’s peer group member will be of great help to her. 

e)    My daughter is not out of University yet, but my nephew has been working for a few years now. He works with our country’s Central Bank, and thus has his fair share of friends in the banking industry. This should be a plus for them.

f)      I have read Milan’s books and I think he gives a fair representation of the industry. It is not “just buy property and become rich”. It is also about gain knowledge, study your property carefully and buy. And that making mistakes in RE investment can be a long painful affair to unravel.

I believe that my nephew and daughter will get a balanced view of the positives and negatives of RE investing. 

Ultimately, we hope that my nephew and daughter will learn from this course and be more enlightened about the specifics of RE investment.

We hope that they will look up and study a lot more on RE. And we hope they’ll consider RE investment as one of their vehicles in their journey for financial independence. 

Kalai has also talked to my daughter about his experiences, relating both his good and bad ones. He dwelled upon the need to carefully study the property and suggested that she should start with something “small and manageable.” 

I am bristling with so called ideas on what my nephew and daughter should do. I have to and must restrain myself. This is their journey.  

Maybe I should just ask for their idea of a 5 year plan on their RE investments.  

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