2020 – Lessons to be Learnt on Property Investment

2020 has been a particularly tough teacher in the Property 101 class. The Covid-19 pandemic absolutely wrecked everything in the short term rental space as tourists stopped visiting Kuala Lumpur and many business owners were affected by the movement control orders (MCO) in Malaysia.

The first sign of trouble for me was a tenant suddenly telling me that he wished to move to another state for work reasons when the first movement control order was announced. I’d suspected that he was a businessman and he was sub-letting my unit for short term stays. Him terminating the tenancy abruptly meant that he was cutting his loss early before things got worse.

The second sign of trouble was a reliable company providing AirBnB services requesting for a temporary reduction in rent and subsequently closing down its operations altogether.

And the third sign of trouble was when a tenant who was also a foreigner, lost his job and couldn’t pay the rent. He later chose to move back his home country.

In several places in KL I notice that rents are plummeting and property listings for auctions are increasing. This is simply the worst time in a long time for Malaysian properties.

For me property investment is high up in the pyramid of asset allocation because it carries a higher risk. Others may see this differently and that’s fine. In my opinion, the margin of error in buying properties is quite small if you intend to depend on it for income..

Cashflow is the lifeblood of businesses

Property investment is not too different from owning a business. For it to be successful, it needs to bring in cash from rents and if sold, it needs to bring in profits. Rents can only be paid by tenants if they are, in turn, paid salaries or if their businesses are bringing in cash. The moment the Covid-19 MCO was announced was like the moment businesses were getting a jail sentence. This affected many people’s income and therefore their ability to pay for their ‘Big Rocks‘ like rent, mortgages, bills and insurance.

To be fair, the government is between a rock and a hard place. If it didn’t announce the MCO, many lives would be lost to Covid-19 and that was unacceptable as well. What it could and did do was to mitigate the situation for everyone by freezing all loan payments for 6 months. That was a big relief for me as I still had property loans to pay while rental income was fast becoming uncertain. That 6 months also gave me time to shore up some cash as I have now started to pay the loans again.

Toughing out through 2021

Until everything returns to normal, I lower my near term expectations on rental income. It’s no longer realistic to match rental income with mortgage payment as rental prices have dropped more than the mortgage payments have with the lower interest rates. I will continue to dip into my cash reserves to tide through 2021.

At the same time, now is the best time to buy investment properties for those who do have the extra cash reserves. As the pandemic continues into 2021 there will be more and more people who need to let go of their properties to free up cash for immediate needs. If you intend to buy your first investment property, do consider the near term issues with cashflows as rental recovery will lag the economic recovery… and this is aside from the other issues with rental properties like hidden costs. And importantly, pick an area that you can be an expert in or look for the help of property agents who are familiar with the area.

Factor in the hidden costs in your cashflow calculation

2020 has been a tough year for properties (stocks are a different story). As difficult as it has been, it has been a wonderful teacher on what could go wrong with properties. It is up to us to learn from this teacher and be better prepared for the next downturn cycle in the future.

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