Category: Articles

There is little doubt that property investment is highly profitable. The benefits which include the usability, high leverage, tax breaks and of course, proven long term record as a solid investment far outweigh the negative points. And because of this, a lot of people make money from their property investment.

Yet at the same time, sadly, far too many investors lose their money here. Though the reasons are many, the following are the top five mistakes made by property investors and also tips on how you can avoid them.

1. Buying in a poor location

The first and perhaps the most common mistake made by property investors is buying properties in poor locations.

The main reason for this is because location is subjective. A good location to you may be a poor location to others.

This is compounded by the fact that we all have our own peculiar needs and wants. So, while a particular location may be perfect for us – near to our workplace, our children’s school and our parents’ house – it may be less desirable to others. Having stated that, what is termed a good location is a place that is highly desired by a lot of people. ‘A lot’ here means thousands, and not just ten couples! And the places that meet this description are big towns and cities. There are tens and perhaps hundreds of thousands of people working in the cities. All that humanity needs places to reside, which equals to a huge demand for properties in the cities.

In other words, if you want to make money in properties, you must buy the properties that are located in big towns.

2. Paying too high a price

The second mistake is paying too much for the property.

Some people, especially those who are buying for the first time, have little idea about the market value of a property. Oftentimes, in their eagerness, they pay what the seller asks for or something close to it.

One reason why this happens is that the buyer has fallen in love with the property. He adores the design so much that he has decided to own the property, regardless of the high price. He is concerned that if he does not buy it now, somebody else will grab the property.

Incredibly, some people buy properties today because they are worried that if they do not buy them now, prices will spiral out of their reach by tomorrow; And that they will never be able to buy a property at all.

How can you avoid this expensive mistake? First of all, get yourself educated in property investment. The more you know, the higher are your chances of making money from it.

Next, remember that there are literally tens of thousands of properties out there, and more are being built. This being the case, missing one, two or even ten good properties is not even an issue. I can assure you that there are plenty more out there!

And oh ya, prices do not rise to the sky. While it can go higher and perhaps even defy gravity for a short while, prices will have to come down to reality, eventually. Reality is what the average Malaysian can afford to buy.

3. Ignoring the legal requirements

In the excitement of buying a property, some investors overlook a critical requirement – the legal rights and obligations. They consider the physical elements (location, design, developer) and the financial bits (price, down payment, mortgage) but often miss the legal requirements.

The legal element covers the status of the land (freehold, leasehold or Malay Reserve), category of use (agriculture, building or industrial), special requirements (such as the need to get permission from the state authority before the investor can sell the property later on) and of course, the actual ownership of the property. The good thing is that, most of the time, all these will be in order.

However, all it takes is to overlook one important point, and the investor could be facing a lot of problems with the property. Often, it will take much time, energy and even money to solve the problem. And sometimes, they can actually lose the money that they have paid and also the property, which tragically has already happened in this country!

So, check and double check all the legal requirements to ensure that everything is in order before parting with your money.

4. Choosing a mortgage purely on the interest rate

The fourth mistake is choosing a mortgage purely on the interest rate. Borrowers often pick the mortgage that offers them the lowest interest rate at the point of purchase. Now, while choosing a mortgage with a low interest rate is certainly not wrong, it would be a mistake to ignore all the other terms and conditions of the mortgage.

Unlike other things, mortgages last for a long time. Twenty, twenty-five and now thirty years mortgages are normal. We don’t know what will happen in ten years’ time, let alone twenty. Just about the only thing that we can be sure of is that our lives at that time will be different from today. Different, and for most people, better.

This being the case, what we want most from a mortgage is flexibility (to cater for the changes in our lives), and not just a low interest rate.

5. Making decisions based on what happened in recent years

Perhaps the most dangerous mistake made by investors is making decisions based on what happened in recent years. Some people think: prices have increased in the last three years so the trend will continue for the next three. This is a dangerous type of thinking, especially in the rapidly changing environment in this new decade. What happened in the past three, five, ten or even twenty years may not be repeated in this decade. In fact, it is unlikely for the trend to continue based on what is happening around the world today. The relentless printing of the U.S. dollar by the Federal Reserve, the huge debts incurred by major countries and the uncertainty of the Euro – just three of the problems – ensure that this decade will be very different from the past.

So anyone basing their investment decisions on recent history may soon be licking their wounds. There is a very real threat of prices going down in the near future. Add the very real possibility of interest rates shooting up and perhaps even the collapse of the current financial system, you can see that it is a whole new ball game altogether. These latest challenges call for new and innovative answers.

So there you go, the top five common mistakes made by property investors and also how you can avoid them. As you can see, the mistakes are avoidable – if you know what you are doing. So, help yourself by reading as many books as you can in the subject matter. The more you know, the higher are your chances of making money from property investment.

While properties can make you a lot of money, they are often the source of much problems as well. Thousands of property investors have found this out the hard way. Instead of generating income, the property is generating them endless problems: tenants problems, vacancy problems, maintenance problems, broken promises by the developer and perhaps the worst problem of all, uncompleted and abandoned properties.

So yes, property investment is a tricky business. To be successful in it, there are numerous factors that one must consider. One obvious factor is the financial aspects: the price, down payment, financing, interest rate, etc. Next comes the physical factors: location, design, building materials, etc. The third factor involves the legal rights and obligations: titles, land status, caveats, etc. Now as if those are not enough, you must also take the non-financial aspects into consideration. This includes the neighbourhood, nearby facilities, the direction the property and even the Feng Shui of the property.

Now while some people may dismiss that last point as superstition or old wives tale, you should consider Feng Shui seriously if you want to make money from properties, particularly in Malaysia. Remember that while it may not be important to you but it is important to tens of thousands of other people – thanks to (or blame) Lilian Too and Joey Yap! And needless to say, you will be selling and renting the properties to other people.

So this month, I’d like to talk about Feng Shui and how it can help you make money from properties.

Feng Shui translates as Wind-Water in English. It is an ancient Chinese system of aesthetics that can be used to help improve life by receiving positive chi. Feng Shui uses the laws of heaven (astronomy) and earth (geography).

While it has existed for thousands of years and practiced by the Chinese in Malaysia, Feng Shui was generally unknown to the rest of the population. The few who heard about it dismissed it as a Chinese custom or even superstition. However, the situation changed some fifteen years ago when Lilian Too started publishing books on the subject. The veil was lifted and Feng Shui soon became a rage, even to non-Chinese. Other Feng Shui masters, including Joey Yap, also started writing books on the subject while numerous Feng Shui shops opened up to supply gadgets, trinkets and ornaments to a hungry public. So today, Feng Shui is mainstream.

How mainstream? Well for starters, I think every single developer in Malaysia today charges a premium for properties with good Feng Shui. These include those properties having the numbers 8 or 88 in their addresses.

Obviously I’m not an expert on Feng Shui (so please do not set an appointment to see me regarding the Feng Shui of your house!). However, I do know some of the basic things that people look for. Basically, you want to avoid properties that:

• Face a junction
• Face a hill
• Near a hospital
• Near rubbish dump (you don’t have to be a Feng Shui master to figure this one out)
• Near power lines

Now this is a very short list. If you want a more comprehensive list or accurate reading, hire a Feng Shui master. He should be able to advise you accordingly for a small (or large) fee. Alternatively, you can even do-it-yourself by referring to the many books on the subject.

Let me now share an interesting story that happened to me some years ago.

As my daughters were growing up, I needed a bigger place. So I went to view a few different housing projects around KL and Selangor. Finally, I found an interesting new place in Kota Damansara. The house design was good, the location was superb and the concept of it being a gated community made it better. I must admit that I was very interested in the project and actually chose a particular unit. The price of the house was RM750,000.

However, for some reason or another (I cannot remember why), I did not buy it immediately. A few weeks went by before I decided to buy it. So I went back to see the developer to buy the house. Unfortunately, the unit that I was eyeing was already taken up. Fortunately though, there was another unit available. In fact, it was the last unit left. So I decided to buy it. Now the design, lay out and size was exactly the same as the unit that I was eyeing earlier. In fact, everything was the same, except that this new unit was facing south.

The salesman told me the price of this unit was RM800,000.

“Wow!” I was stunned. “That’s RM50,000 higher than the other unit. Why do I have to pay so much extra when everything else is the same? Don’t tell me it because I bought it a couple of weeks later.”

“No sir, the price different is not because of that.”

“Then why?”

“Sir, this unit is facing south.”

“So?”

“Ahh…this house is facing south. That means it is facing heaven – the source of warmth and all good things,” he smiled warmly. “That’s why it’s priced higher.”

I leaned back slowly – half stunned in amazement. What can I say? In the end, I did wound up buying the property though I must admit not being too happy about paying an extra RM50,000 for the same house. All because the house was facing south!

The story did end on a good note though. When the house was completed two years later, I received an offer for it. Though I bought it with the intention of staying there myself but as the offer was pretty good, I decided to accept it. So I sold the house for RM1.1 million and made a decent profit in the process.

So now I know the price of heaven – RM50,000!

Every now and then, I read about new ‘geniuses’ in the property market today. Apparently, their winning formula is simple: they locate a new property (usually condos), buy five units by paying the minimum down payment and borrowing the rest. And because the prices of the properties rose significantly in the last two years, they are certainly in the money, at least on paper. (Until they sell, all the profits are just paper profits.)

Now I must admit that I am happy for them. The higher the number of wealthy people in this country, the better it is for everyone.

At the same time, I do worry about these folks. There are two flaws in their ‘winning’ formula, and both are major. The formula is based on the property prices continuing its rise and the interest rate remaining at the current low levels.

Now they, and many others as well, may not want to believe me, but prices do not go to the sky and interest rate do not remain low forever! Prices can rise but it has to have some semblance to reality. The reality here is the balance between supply and demand. While price can and do get out of whack every now and then, economic sense if not common sense, will ensure it comes back to reality. This has happened before in the mid-1980s and again in 2007. Prices rose to very high levels only to come crashing down.

And I believe that current prices of properties in Malaysia are out of synch with reality.

Of course, that is one man’s opinion. I will add though that I came to that opinion after much thought, research, observation and experience of being a player in the market for over twenty years. It is certainly not a spur of the moment thing or one that is driven by emotions.

Let me share with you what the former Chairman of Land & General, Tan Sri Wan Azmi, commented on the over building of properties sometime in the late 1990s: “There will be the tentative recovery, the prolonged boom and then the prices and scale get driven to levels which will prove unsustainable. Like it did in 1997, and 1985. Yes, we live; but no, we never learn.”

The first two sentences rings a familiar bell while the last foretell of what may happen.

Let me also share another interesting story. The legendary financier Bernard Baruch sold all of his stocks just before the U.S. stock market crash in 1929 (and made millions in the process). What triggered his decision? Apparently, a shoeshine boy gave him some stock tips, which he correctly took as a sign of market excess.

Well, someone I met recently told me about the fantastic opportunity in properties!

When a person whose name I never even heard of tells me about properties, I took it as a sign that prices are indeed excessively high today. So, I sold a couple of my properties in recent months.

Now some people will be quick to point out the opposite; why prices in Malaysia are still ‘reasonable’. For example, one newspaper columnist wrote recently that prices can still rise because of the low interest rate, population growth, increasing income and the returns of expatriates. Further, he pointed out that prices in Malaysia are still low compared to Singapore and Hong Kong. Now, all these are valid points, and one cannot argue against them.

But as I wrote earlier, prices must have some semblance to reality. When prices of a double-storey link house is half a million ringgit, the price is out sync with the real world. How many Malaysians can afford to buy at these prices? And mind you, these are starter houses!

If the market turns down (and it will do so one day), many investors will feel much pain.

And when the interest rate shoots up, that pain will become unbearable! Many will not be able to service their loans, which will leads to the banks repossessing the properties and the investors losing tens, if not hundreds of thousands. Those who look so smart today may not look so smart once that happens.

I need not remind you that not a single commentator will be there to ease the investors’ pain. They will have to carry the debt burden all by themselves.

Another sad thing is that bubbles are only recognized as bubbles after they have popped.

But unlike before, you now have a chance to be smart and wise before the event. If you think that prices are high, then why not sell some of your properties, realize actual profits, reduce your loan burden, consolidate your position and get ready to bite after the bubble pops?

I’m going to ask a question that you already know the answer to. Here’s the question: Will a guy who plays golf once a month become good at it after one year?

See, I told you that you already know the answer! I think you will agree with me when I say that it will be difficult for him to do so. How can he become good at it when he only does it only once a month?

Now let me share a second scenario: The guy plays golf five days a week, spending two to three hours a day each time he plays. That’s not all; he reads books and magazines on the subject. Next, he goes for coaching and watches videos on golf. And oh ya, he also spends time playing with better golfers than him.

Now while he may not become the Malaysian Open Golf Champion after one year, I think it’s quite safe to say that he will be good at it. In fact, he will be so good that he will be beating most of his opponents at that time.

So while that is golf, the same principle applies practically everywhere else: That the more focus, time and energy we dedicate to something, we tend to become good at it, be it at play, work, relationship and even religion.

I think most everyone can see the connection there and few will argue against it.

However, for some strange reason, not many people associate that relationship with money. See, some people want to have lots of money but then they do not spend time or energy at it. They do not read books about it, they do not plan their cashflow, they do not track their expenses, they do not know about the different investments nor insurance and perhaps most damaging of all, they do not spend any time educating themselves about it. To these folks, terms such as return on investments, capital gains tax, asset allocation, dividend yield and multiple sources of income are words from a different planet! Yet, despite all these shortcomings, they expect to be a master of money!

It does not even compute!

How can anyone be a master of money when they do not do money?

In other words, if you want to have lots of money, you must do money, i.e. educate yourself about it. This, among other things, means reading books and magazines on money (like this one). By the way, that’s books with an ‘s’, which means more than one book. Reading Rich Dad Poor Dad is good but it is not enough! You need to read a lot more than one; twenty would be good a start.

But that’s not all. You must also educate yourself by attending courses (formal and informal), seminars and talks on it. You can also learn by associating yourself with wealthy people and therefore learn from them. (I’ll tell you a secret – the rich are always happy to share their knowledge.)

Of course, all these will mean spending time, energy and yes, money. But if you are serious about wanting to become wealthy and a master of money, then this is the price that you have to pay. Actually, the price to buy the books is miniscule compared to the knowledge they offer. If you bought fifty books on money, it will cost you about RM2,000 (give or take a few ringgit). But there is no limit to the amount of money you can make from the knowledge culled from the books. What’s more, the knowledge sticks with you for life!

Of course again, there is no guarantee that you will be the next Malaysian millionaire by doing all these. There never is. (I’ll share another secret: Get the word ‘guarantee’ out from your system because the word does not exist in the rich man’s world.) But I think, and I’m sure you’ll agree with me again here, that it will be difficult for anyone NOT to become wealthier by taking all the steps that I shared here.

I now know for a fact, let me repeat that, know for a fact, that the more books on money you read, the wealthier you will be. I wish someone had told me about this when I was 20: I would have made a lot more money a lot faster! I would have avoided many mistakes, I would have chosen much better investments, the timings would be better and I would have enjoyed the journey more (when you are winning most of the time, the game becomes more enjoyable!).

In summary, if you want to build wealth, study wealth.

I have learnt much about investments in the past twenty years. While much information were culled from books and magazines (like this one), there were also lessons learnt on a first hand basis. And while making money is a big part of the lessons, it’s not all about returns. There are more.

Thought I’d share some of the lessons I’ve learnt on property investment. Read and prosper!

Move to a better neighbourhood as you grow wealthier

A colleague of mine bought a low cost house in Taman Sri Muda in Shah Alam some twenty years ago. It was the only property he could afford at that time because he just started his career.

Being a pilot, he earned a little bit more money than his neighbours. And he did the natural thing what all Malaysians do with their money – he renovated his house. In no time at all, his house was clearly the grandest house in the street and in fact, the whole area. While all the other houses remained looking like low cost properties, his house looked like a mansion and you could almost see it glowing like a beacon.

It was good for his ego.

But bad for his health.

The first couple of times the robbers came, they were away so they just lost a few possessions. However, the third time the robbers broke in, they were inside the house. Caught by surprise, he was quickly overpowered by the three robbers and was beaten senseless. Fortunately they did not harm the family. They took the TV, VCR and a couple of items before splitting.

I took him to the hospital and later to the police station.

I learn two lessons that day: the first one is that grills are practically useless – the robbers broke it down in less than a minute.

The more important lesson was not to make your house the grandest house on the street. While it may be good for your ego, it is bad for the health. The grandest house on the street is always the first house to be targeted by thieves and robbers. It is a calling card for thieves and robbers.

So while you may want to renovate your house to make it bigger, nicer and more comfortable, do it in moderation. Don’t spend an extra RM50,000 to make it the grandest house on the street.

What if you are promoted or even better, blessed with a fortune? In short, what do you do when you grow wealthier? The answer is to move to a better neighbourhood. As your wealth increases, move to a nicer and better neighbourhood. By then, your house might be a practical palace but it will be just one of the many palaces in the area. The chances of thieves and robbers targeting your house, er, palace, are considerably lower.

A side benefit of doing this is that you get a better quality neighbours!

Lawyers are not created equal

Some years back, I sold one of my houses in Kota Damansara. As doing the S & P is pretty much a standard affair, I hired the lawyer who acted as the developer’s lawyer when I bought the property. My thinking was that she would be of a certain quality, otherwise the developer would have not hired her. Further, as she is already familiar with the property, it would save everyone a little bit of time and energy.

Boy, that was a mistake!

Every time I called her to inquire about the status of the sale, she said the land office kept rejecting the documents. I left it at that because I was sure that she and the land office knew what they were doing. The thought that the documents were being rejected because my lawyer did not do her job properly did not even cross my mind.

It was only after the buyer’s lawyer hinted that the problem could be my lawyer that it dawned on me that she could be the problem. I did some investigation and soon discovered that yes, horror of horrors, the culprit was my own lawyer.

To cut the story short, I changed lawyers and the deal started to move after that. In the end, the deal was finally completed after over a year.

As a side-note, I complained about the lawyer to the Bar Council and finally got some justice a year later when she wrote an apology letter and paid me some compensation.

The lesson? Lawyers are not created equal. Once you’ve found a good one, stick with him or her – even though for ‘standard’ transactions. It will save you much headache and heartaches.

Take what the salesmen told you with a pinch of salt

Some years ago I visited a new housing project close to Shah Alam. At that particular time, the houses were only about 20 percent done. As I strolled along the streets, I noticed a river adjacent to the houses. “Wow! The river looks particularly close to the houses. Won’t it get flooded?” I asked the salesman who was taking me for the tour.

“Oh, you don’t have to worry, sir,” he smiled warmly. “Our engineers had taken that into account. Even at its highest level, the water will not spill out from the river. So you don’t have to concern yourself with floods at all. It is a non-event.”

I nodded my head slowly and continued on with the tour.

I must admit that I seriously thought about buying a house there. The design was good, the price reasonable and the location was acceptable. However, I could not get the thought of the river out of my head. It bothered me so much that in the end, I chose not to buy.

A couple of years later, there was some continuous heavy rain for a few days. And yes, you guessed it – the whole place was flooded! You can just imagine my relief at that time. And as if to press the point further, the place was flooded at least three or four more times. It took a few years to get the problem rectified, and I’m still not sure if the people living there are actually at ease whenever it rains.

That was a lesson that I hope I will never forget – take what the salesmen told you with a pinch of salt. In short, don’t believe everything they tell you as the gospel truth. While I’m not saying that they lie, they may not tell you the complete picture. So listen to their pitch, yes, but always check and verify all statements. It may save you much heartache and much money.

And oh ya, stay away from flood prone areas, no matter how cheap the property is. It will take years for the problem to be rectified – if it ever will.

Some of my best investments were the ones I did not make.

In an ideal world, we shouldn’t have to change anything. A success-formula should last forever, especially one that brings in great results. Learn the formula, repeat it over and over again, and live happily ever after. However, this earth is not that ideal world. It is constantly changing – new rules introduced, old rules withdrawn; new laws passed, old laws withdrawn; environment change, people change, we change. This means that we must constantly seek new answers to meet the new challenges. We have to learn, change, adapt and re-learn – if we want to remain relevant.

This is why I get stunned reading and hearing some of the advice that are dished out to property investors today – buy as many properties as you can by paying the minimum down payment (or even better and if you can, paying nothing at all) and borrowing to the maximum. That’s right; they say, “Take as much loan as you can. In fact, refinance your house and get your hand on the cash so you can buy even more properties. Then repeat the process so you can become the next property millionaire by next Tuesday!”

The problem with this advice is that it is perfect – if the situation remained as it was last year! The advice is great if the interest rate is low and prices keep rising by double-digit percentages every year. But as you already know, the interest rate has risen by 75 basis points this year alone. As if that is not enough of a change, the LTV (loan-to-value ratio) for the third and subsequent property purchase has been capped at 70 percent.

Change is constant

By the way, there will be more changes to come; some good, others not so good and some of which you and I have never seen or faced before! For example, there are proposals of reintroducing the full Real Property Gains Tax (tax of 30 percent in the first two years) to further slow down the price hikes. I’m sure that if this does not bring the desired result, BNM (Bank Negara Malaysia) will introduce even more draconian steps to stop the price from shooting skywards. In other words, dear readers, the investment landscape has changed.

So if the situation has changed, it is obvious that the answers must also change if we want to continue to stay relevant. For starters, we should re-look at the strategy of borrowing to the maximum in a rising interest rate environment. You may borrow, but make sure that you can make the payments even when the interest rate rises. Otherwise, the monster mortgage will create serious damage to your finances.

Know what you are doing

Of course, this does not mean that you should avoid buying properties. Good deals are plentiful, they are out there and you should grab some. Just make sure you know what you are doing before signing on the dotted line! If you evaluate mortgages purely based on interest rate, then I’m afraid you don’t know what you are doing!

On the other hand, the best time to sell is when prices are high. Ideally, we want to sell at the highest possible price. But as no living person can do that on a consistent basis, we do the next best thing – sell when prices are high and out of whack with reality.

Looking at the property prices today, I think all of us will agree that prices are indeed high. Maybe not the highest, but high all the same. That being the case, now appears to be a good time as any to sell!

Let me share a little about the recent property crash in the US with you. The  reasons may be obvious as you read the article. The inflation-adjusted property prices in the US have gone up and down from years 1890 to 2000. Prices dropped well below the 1890 values during the Great Depression, rose after World War II and rose further during the 1970s boom. However, prices simply shot up and rose by almost 100 percent in the six years from 2000 to 2006. In fact, in some places (namely Boston, Los Angeles and Manhattan), prices rose by more than 100 percent.

These are some of the reasons for the boom (I’m giving the abbreviated version due to space constraints):

1. Low interest rate

At that time, the interest rate went as low as one percent. This further  encouraged the already high spending Americans not to save money. This also meant that the interest rate charged for mortgages were low – about four or five percent. This is a dream situation for property investors.

2. High loans margins

The loan margins were as high as 100 percent, which meant that the borrower does not need to fork out any money to buy a property. This in turn meant that they could buy a string of properties.

3. Flexible mortgages

While mortgages used to be simple – fixed interest rate and fixed term – they were not user-friendly. So the banks came up with more user-friendly mortgages. These included interest only mortgages, ARMs (Adjustable-Rate-Mortgages), honeymoon mortgages (those with low initial interest rate) and even assumable mortgages.

4. Questionable borrowers

As the party went on and the lending standards loosened, banks and mortgage brokers were giving out mortgages to just about anyone – even people with bad credit history and college students. Yes, you read that right – mortgages to college students, those who are still studying and therefore have no income yet! These are termed NINJA loans – No Income, No job or Assets. One American writer made an interesting comment on this, “Try giving out free booze and see if you don’t attract some winos to your party!”

5. Current owners treating their houses as ATMs (automated teller machines)

Even current property owners got sucked into the euphoria as well. They saw their property rise in value. So they refinanced their property to get access to the cash. So while, the original mortgage was almost paid off, they are now bearing the burden of new mortgages costing hundreds of thousands. Of course, as long prices kept on rising, this is not a problem. Needless to say, the owners also went to town with the money from the refinancing – taking expensive vacations (hopefully to sunny Malaysia), buying new cars, renovating the house and of course, buying other properties.

As a result, prices shot up by double-digit percentages every year after 2000. But of course, such increases cannot be sustained especially when income only rose by two percent per annum in the same six-year period. Once the sub-prime problem surfaced, the property bubble burst. Prices have dropped by 30 or 40 percent, and is still trending downwards today.

As you read the above points, don’t they look familiar? Don’t they look very familiar?

Now I’m not saying that what happened in the US will happen here. Different country, different time. Still, when the warning signs are up in the air, coupled with the uncertainties in the air (possibility of further interest rate hikes and lower LVR (loan-to-value ratio) and the massive challenges (possible collapse of the dollar and insolvencies of major European countries) in this new decade, I’m not waiting to find out. Following my footsteps, many of my clients have sold some of their properties in recent months. By doing so, they enjoy actual profits and reduce their loans’ burden and exposure to the overheated market. And yes, the profits made from the sale also meant that they have more money to capitalise on the exciting opportunities in the near future.

Perhaps you may want to consider doing the same.

Two of my former students came to my office the other day. Both of them are doing extremely well. They own properties worth more than RM10 million and have been full-time property investors for the last nine years. Naturally, our discussion soon treaded into the current property scene in Malaysia.

They agreed with me that prices have gone up over the roof in recent times, so much so that even they had problems buying properties! However, the main surprise was the participation of young people at launches and even auctions. They were surprised at the aggressiveness of these young investors. On more than one occasion, they witnessed young investors buying four and even five properties at one go! The main reason these young investors can buy properties like they are buying groceries at the supermarket is because they can take monster loans, i.e. minimum down payment and maximum loans which can be almost 100 percent the cost of the properties.

I have noticed this trend as well. The participants at my recent property seminars include a lot of young men and women. These young investors are smart, knowledgeable, hungry and more importantly, eager to learn so they can become even better. They are not willing to wait for 20 years to make their money. They want it all and they want it now!

In some ways, they may not be acting recklessly. Actually, they may be doing a sensible thing – repeating a formula that brought them success. See, they have known nothing but success in property investment. Banks handed out mortgages freely, interest rates low, LVR high and best of all, prices shot upwards by thirty or forty percent in two years.

They made money, so it is certainly sensible for them to continue doing it and in fact, take it to limit so they can multiply their wealth even faster. While I am happy for these young investors, I am starting to fear for them as well. I have seen this type of euphoria twice before (mid-1980s and mid-1990s) but I cannot help but to see similarities between what happened in the US and our country now. In the mid-2000s, banks in the US were dishing out mortgages to just about everyone, including college students. You know, giving loans to people who are still studying and have no income yet. These were termed as NINJA loans – No Income, No Job or Assets. As incredible as it may look now, it made sense at that time because prices were rising by double digit percentages every year after year 2000. So by the time the students completed their studies, the prices of the property would have doubled! They sold it, paid off their student loans, obtained a degree and perhaps even pocketed from some of the proceeds as well.

In years 2000 to 2006, property prices rose by almost 100 percent while income only rose by 2 percent. Of course, such increase could not be sustained. Once the sub-prime problem surfaced, the property bubble burst in year 2007. Prices have dropped by 30 or 40 percent, and is still trending downwards today.

Of course, that is in the US, not here. It cannot happen here as our banks are not so reckless as to approve mortgages for everyone, interest rates are ‘normalising’, prices are ‘stabilising’ and most investors know what they are doing at all times.

Or do they?

The times have been good for property investors in the past couple of years. Prices in certain areas, particularly in selected areas of Kuala Lumpur and Petaling Jaya have risen significantly, some as high as 50 percent. And as a result of this rise, practically all property investors had made money. In fact, some people have seen their net worth jump up by 30 or 40 percent because of the price rise. For example, a young colleague who purchased their house two years ago saw the value of their house increase from RM950,000 to RM1.3 million today. Of course, the owner was all smiles when they told me the story.

I am happy for them. As an avid property investor, I have benefitted from the rise myself, so I am certainly not complaining. At the same time, I must admit that I have some reservation about the whole scenario. The price rise has distorted reality to many investors, including my colleague. Because the price climbed up as soon as he bought the property, and remained at a high level even today, his view on property investment is seriously distorted. He thinks that:

1. Prices will go up as soon you buy a property.
2. The gains will be in double digits per annum.
3. This is normal.
4. Prices always go up.
5. It is easy to make money in properties.
6. He is a super genius when it comes to property investment!

Long-term property investors will quickly point out that none of the above are true. That’s right – none! For starters, I can tell you the current situation is exceptional. It wasn’t like this five years ago, and certainly not ten years ago. I can also tell you that times are not going to remain this good forever. Prices do not rise to the sky, and interest rates do not stay low forever. In fact, interest rates has already climbed (or to use the toned down term of ‘normalised’) by 75 basis points already this year.

Why am I so sure of this? Simple; I have seen similar euphoria before (the first in the mid-1980s and then in year 1997 during the Asian Currency Crisis), and the story did not end well on both occasions. Like most bubbles, prices edged up slowly initially. The initial buyers made money and this attracted others to invest into properties as well. And as prices climbed higher and higher, the euphoria got to the levels that some people were rushing to buy because they were scared that the prices will spiral out of their reach if they do not act then. But when the market crashed, as all bubbles eventually do, a lot of people were seriously hit, a lot of money was lost, and that included seeing their properties being auctioned off by the banks.

I see the same story being repeated today. On top of the ever present dangers, there will be massive challenges in this new decade. There will be much turbulence in the coming days, and some of them will be unlike what you and I have seen or experienced before. This may include double-digit interest rates, multiple bank failures, currency crashes and explosion of the derivatives market.

As a result of the new challenges, the investors using the current success formula of buying five properties at one go (by paying the minimum down payment and borrowing to the hilt) will be seriously hammered. They will experience much pain, to put it mildly. Some people will lose their properties, some will lose more than money and yes, some will become ex-millionaires.

But of course, where there is danger, there are also opportunities. This will include a huge number of properties being auctioned and also getting huge discounts from distressed sellers.