Asset under property can be divided into few levels. All of them build for different purpose, generating different rate of return, commanding different rental, rented to different tenant and the most important bank charging different interest rates. Which asset class gives you the best return? Which one is most easy to manage? Which commands the best rental yield and fastest capital appreciation? Let’s find out more through my sharing below.
The first asset class that is most affordable to majority of people is residential property. Under this asset it’s divided into 2 parts that is landed property and non-landed property. Bank not only preferred this asset but also giving lowest interest among all borrowing security. Bank always believe that no matter what happen to the economy, borrower will never default their home loan repayment. Thus the risk is lower to them. Among residential property bank would also preferred landed property over non-landed due to subdivision land title risk and time frame for subdivision. It would be more risky to bank if they keep borrowed using assignment document as a security. Imaging if suddenly the developer missing, who going to endorse your document? That is what happen to famous and matured residential known as Austral Park at KK.
Residential property for landed can be divided into 3 parts that is terrace house, semi-detached and detached house. While non-landed property is apartment and condominium. Which one command better rental yield and command highest capital appreciation? Based on my experience, non-landed commanding better rental yield compare to landed due to the facility given. Example condominium provide facilities like 24 hours security, swimming pools, cleaning, play ground, sports facility and sauna. While landed property normally don’t have such facilities. That why the rental yield for apartment and condominium can reach even double digit over your purchase price. In terms of capital appreciation, of course landed property will lead the way. But due to low rental yield you might need to subsidies additional fund to cover your monthly loan repayment. Thus over the long run this negative cash flow will filter your appreciation and this is absolutely unhealthy for beginner who just joining the property games. I personally still prefer non-landed as the monthly rental is enough to cover my loan and very likely going to be positive. This fulfilled my objective of having less negative cash flow portfolio which a lot of people say don’t feed ‘alligator” at your own backyard.
Second types of the asset class is commercial property which includes shop lot and shopping mall units. Commercial loans normally will be charge higher interest rates as bank say since you make money out of your property then you should pay more!! Shop lot is good especially if it is surrounded by massive matured residential property just like Damai commercial centre at KK. All the shop is fully occupied and now commanding rental income of not less than RM3500 per month for ground floor. This area is surrounded by matured Chinese resident which have the most purchasing power. Those who own property at this location can laugh all the way as tenant waiting list is there all the time. Both types of property are capital intensive and of course rewarded with higher rental yield. Initial capital for shop lot for 3 or 4 storeys easily cost you more than RM1 Million with expected 70% of the whole block rental derive from the ground floor alone. These upper floors is having high risk of vacant and generating low rental income. Given choice I would only accumulate ground floor or the most 1st floor under my rental portfolio.
Whereas for shopping mall investment can be totally different compare to shop lot. Developer sell shopping units by square feet you own. Just like Suria Sabah, upcoming high end shopping mall at Kota Kinabalu selling for about RM2800 per square feet for ground floor. So if you purchase 1000sf that equivalence to RM2.8M. The rental expected is about RM20 per sf or RM20K per month!! It’s not my cup of tea yet. One of my customer who own a unit ground floor at Wisma Merdeka many years back now he is well reward for his decision as he is collecting RM36K per month!! So owning both shop lot and shopping units is much better compare to residential as the premises is use for profitability activities. And so long their business makes money its make more sense they pay rental more promptly and on time.
Another asset class that a lot of investor ignores is industry land which mainly use for light industry and warehouse purposes. Under this portfolio your tenant is totally different as they might include tenant like consumer distributor Harrisons, pharmaceutical company, hardware suppliers, car dealer, car workshop, shipping company and furniture retailer. The most popular industry land at KK is along Jalan Lintas which is known as Kelombong and Inanam. If you notice most of the business operator here need bigger land size due to their natured of business and spaces required to store their products. The demand for this types of property is very high recently in view of low rental per square feet. Not only that, if you are running same car workshop business at shop lot, it might cause a heavy traffic, car park problem and worst complain from nearby shop. Currently warehouse or showroom with land size of 5000sf – 7000sf at Kelombong is selling not less than RM1M with rental expected around RM6K-RM8K depending on the buildup area. This is definitely a very good area to explore even though initial capital is big and higher risk but it’s still worth considering. I’m searching and wanted to add some of this property into my portfolio in the near future.
The last level of property class is vacant land. Bankers don’t like vacant land. I repeat “bankers don’t like vacant land”. Not only providing lower margin (around 60%), they also charge borrower higher interest rate (around 7%-9% per annum). Some banks even give less loan tenure of not more than 15 years. So to invest in vacant land you need to have a lot of capital and bear in mind, your vacant land might not generating cash flow for you in the near term. Therefore you have to subsidies 100% on your monthly repayment. Unless your cash flow is huge or immediate development on the land or high potential of rental otherwise it is not worth to get bank financing to purchase a land. As your land appreciation might not enough to cover bank loan interest. The best land deal I ever heard in town is land near to Likas recently sold for almost RM40M cash and the owner is planning to develop the whole pieces into high end condominium within the next 2 years. It’s going to be at least RM500M project. So with vacant land, there is plenty of choice you can use to utilize the land. The best part is you can build multilevel building with one time land costing. The higher the building the lower your land cost. That is the beauty of vacant land.
In summary, bank love’s residential property and they willing to scarifies their profit by giving lowest interest for housing loan. Whereas for investor, highest returns will be vacant land which gives you unlimited potential of earning and of course those who love simple life, accumulating rental portfolio under non-landed and commercial is a good choice either. The best portfolio character will be combination of all the above asset class which will give you highest returns, recession proof and the most important inflation proof portfolio. Happy Investing.