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Your guide to buying an investment property PROPERTY INVESTOR GUIDE Content Fin

Your guide to buying an investment property PROPERTY INVESTOR GUIDE Content Finding the right property to invest 3 Get an ideal loan for your property 5 Property financing packages offered by CIMB Bank 6 Managing properties and cash flows 7 Factoring in the element of investment risk 9 Managing your tenants 9 Jurisdiction and tax implications 10 Realising investment gains 10 If you are a foreigner 12 Face to face with our CIMB 14 Home Loan Consultant How to apply 14 3 Finding the right property to invest The hunt for an ideal investment property can take much time and effort. Then, when you finally find a great deal, you might want to leverage on other people’s money to increase your investment returns. At CIMB Bank we understand the power of leveraging to multiply your investment returns and we hope this booklet will be a useful guide for you to make successful investments and build long term wealth. How to calculate return on investment There are two components of returns - rental yield per annum and capital gain. Rental yield per annum is the percentage return based on rental income from the property less expenses incurred to maintain the property versus the total purchase price of the property. Here is a simple method to calculate the rental yield on property investment. Assuming you purchase a property for RM650,000 inclusive of legal and other related costs, receive rental income of RM3,800 per month, and in turn, incur total expenses of RM5,400 per year to maintain the property. The Gross Rental Yield would be calculated as follows: RM3,800 x 12 = RM45,600 per annum rental income (RM45,600/RM650,000) x 100 = 7.02% per annum The Net Rental Yield is computed as (RM45,600 - RM5,400)/RM650,000 x 100 = 6.18% per annum Assuming you take an interest-only loan of RM500,000 to finance the property purchase, and the financier levies an interest cost of 6% per annum fixed for the entire financing tenor. The loan will be repaid on maturity of the financing facility or when the property is sold if it’s earlier. The annual interest cost is RM30,000 Net Leveraged Rental Yield takes into account your property financing in calculating the rental yield. In this scenario, your capital cost is the difference of purchase price and your borrowing (ie, RM650,000 - RM500,000). (RM45,600 - RM5,400 - RM30,000)/RM150,000 x 100 = 6.80% per annum Capital gain, on the other hand, is a one-time gain (or loss) when you sell your property. It is calculated by subtracting your original purchase price from the selling price. Caution: Do note the example above does not take into consideration taxation. You should consult your tax accountant to determine any potential tax liability deriving from such property investment. What to look for in an investment property – location, type, rental returns A great investment property is one that meets your investment objectives such as your target rate of return, investment time horizon and any other criteria you might have. Main determinants of property value include: Location - this should be assessed with the target market in mind to determine whether there will be demand by the target market for this location. Also research the historical rate of property value appreciation in that particular location for similar properties. Property type and size dimension- residential and commercial properties each have their peculiarities, and dependent on the location, attracts different tenant profiles. Rental Returns - find out how much rent the property can fetch by researching the rental values of similar properties in the area, and ascertain the estimated costs to own and maintain such property. Cash flow - evaluate the property's potential to generate income as against cash outflows. Obvious preference is to have the investment property cash flow positive as soon as possible. 4 * Total Return comprises net rental income and capital gain over the five year investment horizon; computed using the internal rate of return formula Personal Fund(s) Leveraged Rental (Net) Yield per annum 6.18% 6.80% Total Return per annum* 11.11% 23.52% Following the same example above, if you were to sell the property 5 years later for RM850,000, the capital gain would be: RM850,000 - RM650,000 = RM200,000 one-time gain, or (RM850,000 - RM650,000)/RM650,000 x 100 = 30.77% over the original purchase price Taking in to account the leverage (borrowing) effect, the Leveraged Capital Gain would be (RM850,000 - RM650,000)/RM150,000 x 100 = 133.33% over the initial capital The total return yield from an investment property is the rental yield plus the capital gain over the investment tenor. Using the preceding example to illustrate, 5 Buying your investment property The buying process will involve the following activities and decisions Determine the type of property to invest - Commercial, residential, land, etc Assess financial and borrowing capacity, determine budget and price of property to invest in Find your investment property Negotiate on purchase price Sign Offer of Purchase & place earnest deposit / booking fee Complete and execute Sales and Purchase Agreement (S&P) Pay balance of deposit Apply for bank financing, if required Appoint valuer to conduct valuation of the property Sign financing facility agreement Pay balance of the purchase price Get keys to the property Renovate Source for tenant Receive rental income!! Get an ideal loan for your property How to finance your investment property – your current cash flow and debt position When assessing your financing application the Bank will need to see if you have the income to service the facility and if you were to default, how much of the financing amount can be recovered by force-selling the property. To maximise your financing amount and the number of investment properties for which you can obtain financing you should show that each of these properties are capable of generating rental income that is sufficient to cover the loan instalment amount and other related expense. It is useful to prepare a projected cash flow statement that reflects the timing of your cash outflows and inflows to be sure that you will always be in a position to service your loan on time. Also, potential increase in the market value of your property will reflect a more manageable debt position as your total asset value increases compared to your total liabilities. Types of loans to suit every need At CIMB Bank we look forward to help you achieve your investment goals by providing the finances you need. The loan you apply for will depend on the type of property you are investing in. For example, BizLoan is available for commercial properties only whilst residential properties can be financed by the various Home Loans available such as HomeFlexi, HomeLoan, and Variable Home Financing-i. If you plan to expand your property investment portfolio further then a flexible financing facility like HomeFlexi or an overdraft type facility will suit you as these facilities offer you the freedom to pay more into your account when you have excess funds and withdraw excess payments from your account when you need extra cash. Extra cash will be useful when you find the next great investment property! Property financing packages offered by CIMB Bank HomeLoan - a traditional term loan facility that offers the certainty of paying a fixed amount each month, enabling better control of your monthly expenses. In addition, part of the financing facility can be in the form of an overdraft to provide added flexibility. The Bank offers a high margin of financing and no processing fees. HomeFlexi - a home loan combined with a current account. Suitable for those who have variable incomes and can save more money at different times. With this loan package, you will be able to use your savings to reduce your loan outstanding balance. So the more you save in your account, the more you will be able to reduce your interest. It also allows you to withdraw excess payments which you could use for any purpose. Variable Home Financing-i - a home financing package which is developed based on Islamic principles. The home that you wish to acquire will first be purchased by the bank and subsequently sold to you at a mutually agreed price with a profit margin for the bank. You then pay this price to the Bank via fixed monthly instalments throughout the financing period. The Bank offers a high margin of financing and no processing fee. BizLoan - a traditional credit facility to finance the purchase of commercial properties and offers fixed monthly instalments. In addition, part of the financing facility can be in the form of an overdraft to provide added flexibility. The Bank offers a high margin of financing of up to 90% of the property value. BizFlexi – a business premises loan that offers flexibility in repayment. You can pay more to save interest and yet be able to redraw the excess payment in times of need. The Bank offers a high margin of financing and lower interest as compared to an overdraft facility. 6 7 Managing properties and uploads/Finance/ property-investment-guide 1 .pdf