Introduction

Real estate in Malaysia is gaining popularity as an investment and speculation opportunity due to the country’s strong economic growth and availability of affordable housing. The Malaysian real estate market has seen significant growth over the past decade, with the residential and commercial sectors being the most active. In recent years, the government has implemented several initiatives to encourage investment in Malaysian real estate, such as offering tax incentives, urban regeneration projects, and a liberalized foreign investment regime.

Read also: Are Real Estate Investment Trusts Right For You?

Key takeaways

• Real estate is an asset class that consists of land, buildings, and the rights to use them. Real estate investors typically seek to generate a profit from their investments.
• Real estate can be classified into several categories, including residential, commercial, industrial and agricultural. The purpose of each type of property varies.
• Real estate investing can be a great way to grow investors’ wealth, but it is important to do research and understand the risks involved.
• There are several ways to invest in real estate, including purchasing a home, rental property, or land.

What is Real Estate?

Real estate is a type of immovable property that consists of land and any buildings or other improvements that are permanently attached to it. It can also include rights of access, easements, and other rights related to the use and enjoyment of the land. Real estate can be divided into different categories, such as residential, commercial, industrial, or other types of properties.

Types of Real Estate

In the Malaysian real estate industry, there are four main types of real estate: residential, commercial, industrial, and agricultural.

Source: Property Guru

There used to be a clear-cut difference in terms of residential- and commercial-titled properties, as the names of the titles would already describe the respective usage. However, in recent years, we have seen an increase in the number of properties that fall under both commercial and residential titles. This is due to developers getting more creative with their projects in order to make them more marketable. Components of commercial developments are being opened up for residential use, such as serviced apartments, Small Office, Home Office (SoHo); Small Office, Flexible Office (SoFo); and Small Office, Versatile Office (SoVo). (PropertyGuru)

This popular urban trend in the property market is now expanding to meet the demand of young professionals who work on the go or from home. SoHos are small- to medium-sized units that include a living area, bedroom, and bathroom, while SoFos and SoVos are smaller. These units can be anywhere from 400 to 1,000 square feet and can be used as an office, home, or both. They're equipped with all the necessary facilities for both business and living. (PropertyGuru)

Important Factors for Real Estate Investing

1. Location

When investing in real estate, location is a key factor to consider. The location of a property can impact its value, rental demand, and appreciation potential. Properties in desirable locations often have higher rental rates and greater potential for long-term capital appreciation. Additionally, the location may affect the cost of maintenance, taxes, and insurance, which can further impact an investment's profitability. Therefore, it is important to carefully evaluate locations when making real estate investments.

2. Property Condition

When considering a property investment, it is crucial to assess the condition of the property. The condition can have a major effect on the long-term value and rental potential. Poorly maintained properties can be difficult and expensive to repair. An unattractive or unappealing property will likely deter potential tenants, resulting in lower rental income. By taking the time to inspect the condition of a property, investors can make a more informed investment decision.

3. Financing

Investors often choose to finance their real estate purchases in order to reduce the overall risk of the investment. By financing the property, investors can spread out the cost of the investment over a longer period of time and leverage their available funds. Financing can also provide investors with some additional benefits, such as tax deductions for the interest paid on the loan.

4. Market Trends

Current market conditions are an important consideration for anyone thinking about investing in real estate. By understanding the trends in the market, investors can make more informed decisions about when and where to invest, and what the potential risks and rewards might be. It is important to understand how the overall economy, population growth, and other local factors can affect the value of real estate investment.

5. Property Agent

A property agent can provide invaluable advice and expertise when it comes to investing in real estate. They can provide the local market knowledge and can advise on the best locations and properties to invest in. They can also help with the paperwork and negotiation process, which can save time and money. Furthermore, they can put buyers in touch with reliable and knowledgeable local service providers and tradespeople. Ultimately, utilizing a property agent can ensure that investors make wise decisions when investing in real estate.

6. Specific Rules

Real estate investment can be a lucrative way to generate long-term wealth. However, investors must take care to familiarize themselves with the rules and regulations governing these types of investments. Ignorance of the law could lead to costly mistakes or, worse, legal trouble down the road. Some important things to research include zoning regulations, building codes, taxation laws, landlord-tenant laws, and environmental regulations in your locality. Additionally, it behoves any prospective investors to study the local real estate market and understand which types of properties are most likely to appreciate in value.

Benefits of Investing in Real Estate

1. Potential for Appreciation

Real estate investments have the potential to appreciate in value over time, which can result in a higher return on investment than other investments. Appreciation occurs when the value of a property increases over time due to a variety of factors, including economic growth and changes in market demand. When the value of a real estate investment increases, the investor can sell it for a higher price and reap a greater return on their investment.

2. Income

Income is one of the major benefits of investing in real estate. It can provide a steady stream of income through rental payments or appreciation in the value of the property. This income can be used to pay off debt, cover expenses, or reinvest in additional properties, which can create even greater returns. Moreover, renting out a property can help to create a passive income stream, which can help to provide financial stability and security.

3. Leverage

Leverage can be a useful tool for real estate investors looking to increase their return on investment. By taking out a loan to purchase a property, investors can benefit from the appreciation of the asset without having to put down the full purchase price. Other than that, leverage can also allow investors to enjoy higher returns on their investment, as the debt is typically secured by the asset and the investor only needs to pay the interest on the loan.

4. Tax Benefits

As property owners, investors may be eligible for income tax deductions on items such as mortgage interest, property taxes and operating expenses. These deductions can have a significant impact on their overall tax liability. Additionally, investors can write off any necessary repairs and improvements to the property, which can help to lower the overall cost of ownership. In some cases, investors may also be able to benefit from the depreciation of their property investments, allowing them to further reduce their tax burden.

5. Diversification

Investing in real estate allows investors to spread their risk across different asset classes and mitigate the risk of a significant loss in any one investment. Real estate investments are also a hedge against inflation, as they tend to appreciate in value over time. Real estate investments typically produce a steady income stream, which can be used to supplement other income sources.

Risks of Investing in Real Estate

1. Market Volatility

Real estate investing carries a certain amount of market risk, which is the potential for an investment to lose value due to changes in the economy or market conditions. This could lead to reduced liquidity for real estate investors, meaning it may be difficult to sell a property without taking a loss. In addition, real estate markets are often sensitive to economic, political, and social events, which can create volatility and cause prices to fluctuate. Before investing in real estate, it's important for investors to understand the risks involved and make sure they are comfortable with them.

2. Maintenance and Repairs

Property investors should be aware of the risks associated with maintenance and repairs. These costs can have a significant impact on profitability, and unexpected events can cause even more expenditure. Additionally, homeowners and tenants may not always report problems in a timely manner, which can lead to more costly repairs. To reduce these risks, investors should set aside funds for maintenance and repairs, and take proactive steps to keep the property in good condition.

3.Financing Risk

Financing risk is a top concern for real estate investors. If the cost of borrowing money to finance a property purchase is too high, or if lenders are unwilling to make loans, the investment may not be feasible. This risk is especially acute for investors who rely on leverage to finance their investments— even small changes in borrowing costs can significantly affect their returns. For example, if interest rates rise, the borrower may be unable to afford the higher payments, leading to a loss on the investment.

4. Vacancy

When a property is vacant, the investor incurs additional expenses, such as mortgage payments, maintenance, and taxes, without receiving any rental income. If the vacancy is prolonged, the investor may be required to make costly repairs to the property to make it more attractive to potential tenants. Vacancy also results in additional expenses for advertising, tenant screening, and legal fees.

5. Legal Concerns

When investing in real estate, there are a number of legal concerns to keep in mind, such as zoning laws, building codes, land use regulations, environmental regulations, and tax implications. It's important to be aware of the potential for costly litigation, including tenant disputes and legal action from neighbours, governments, or other parties. Understanding the intricacies of the real estate contract, loan documents, and title insurance is essential to protecting your rights and interests as an investor.

How To Get Started In Real Estate

Research the Market

If investors are thinking about investing in real estate, it's crucial that they understand how the market works. The best way to do this is to read books, attend seminars, and talk with experienced investors. In addition, it's essential to research the current market and make sure that the area they are looking at is a wise investment. This means examining the local area and economic trends, as well as considering things like demographic and employment data. Also, be sure that there is a high rental demand in the area. All of these factors are important to take into account before making any decisions.

Determine Investment Goals

It's important that investors have a good understanding of their goals and timeline before starting to invest. This will help them figure out what kind of property they're looking for. Are you looking for something to generate long-term passive income? Or are you looking for a property to fix up and sell quickly? Knowing this ahead of time will save investors a lot of time and energy in the long run.

Develop a Budget

As investors begin their journey in real estate, it's important to establish a budget. This means taking a close look at their income and determining how much they can realistically afford to invest. Once they have a number in mind, start estimating the budget for each individual property they are interested in. Keep in mind that these estimates should include costs for repairs, renovations, loan payments, and any other associated expenses. By doing this, investors will be in a much better position to make smart and informed investment decisions.

Select Investment Property

When searching for an investment property, investors should consider various factors that will affect the property's performance. These include the location of the property, rental demand in the area, and potential rental income. By taking all of these factors into account, investors can find the right property to suit their investment goals and budget.

Connect with Professionals

It can be extremely helpful to connect with local professionals who are knowledgeable about the real estate industry. These individuals can offer valuable insights and guidance, especially when it comes to the purchasing process. Furthermore, they can provide market analysis and negotiating assistance – both of which can be immensely helpful when making decisions about what type of property to buy and at what price point.

Find Financing

Investors can benefit from securing financing before investing in real estate. This provides them with a clearer understanding of the financial implications of the investment and enables them to make an informed decision about it. They will also have an idea of the type of loan needed to finance the investment and be able to secure the best possible interest rate. Having financing in place before investing will give investors more negotiating power with sellers and help them close deals more quickly.

Real Estate FAQs

1. What is the process of buying a property in Malaysia?

The process of buying a property in Malaysia involves several steps, which include finding a property, obtaining loan approval, paying the down payment, submitting the sale and purchase agreement, and completing the sale.

2. What are the taxes and fees associated with buying property in Malaysia?

Taxes and fees associated with buying property in Malaysia include a Real Property Gains Tax, Stamp Duty, and Legal Fees. Real Property Gains Tax (RPGT) applies to the sale of any property held for more than five years and is based on the increase in the value of the property. Stamp Duty is a one-time fee that is paid when the property is transferred to the buyer and is based on the purchase price or the market value of the property, whichever is higher. Legal Fees are paid to the lawyer who handles the transaction and is based on the purchase price of the property.

Source: PropertyGuru (2022)

3. What are the costs associated with buying a property in Malaysia?

The costs associated with buying a property in Malaysia include the down payment, loan interest, stamp duty, legal fees, property agents’ fees, home insurance and home renovation. The down payment is usually between 10% and 15% of the property’s price, and the loan interest is the interest rate charged on the loan. (iProperty)

4. What is the current market trend for real estate in Malaysia?

Malaysia's real estate market is expected to grow slowly but steadily. Property prices are anticipated to remain stable in the short term as the market continues to adjust to the economic fallout from the COVID-19 pandemic. Although demand has been fairly steady, buyers are gravitating towards more affordable housing options. The market is expected to become more competitive as we move into 2023, with more property deals and promotions being offered.

Source: PropertyGuru (2022)

5. What is the rental market like in Malaysia?

The rental market in Malaysia is quite competitive, with high demand for rental properties in both urban and rural areas. Rental prices vary greatly depending on location, but generally speaking, rental rates are lower than in many other countries. In Kuala Lumpur and other major cities, rental rates can be quite high, while in rural areas, they can be much more affordable. The demand for rental properties is expected to continue to grow in the coming quarter, as factors such as higher interest rates and rising inflation make buying a home more expensive and unattractive for many people. This trend is likely to have a positive effect on the rental market, making it a good investment opportunity for those looking to get into this sector. With the current economic situation, the rental market in Malaysia is expected to remain competitive for the foreseeable future.

Source: PropertyGuru (2022)

6. What are the differences between freehold, leasehold, and strata titles?

• Freehold: A freehold title is the most common form of land ownership. This type of title grants the owner full ownership and control of the property, including the right to use, sell or transfer the property as they wish.
• Leasehold: A leasehold title grants a person or entity the right to use and occupy a property for a fixed period of time, usually in exchange for a lease payment. At the end of the lease period, the property reverts back to the owner.
• Strata Title: A strata title is a form of land ownership that divides a large piece of property into separate units. Each unit is owned by one individual, and the common areas are jointly owned by all the unit owners. This type of title gives each owner exclusive ownership of their unit, with shared ownership of the common areas.

The Bottom Line

Investors who want to be successful in the real estate market should have a comprehensive plan, effective strategies to maximize profits and minimize risk, and a sound financial understanding of the market. Furthermore, investors should be able to research and identify profitable real estate opportunities and have the discipline to stick to their plans.

Be patient – don’t rush into a real estate deal. Take the time to consider your options and find the best deal for you!

References

• Alicia. 2020. 5 Things to Know When Buying Properties in Malaysia
• ASHLEY KILROY. 2022. Real Estate Investing: What Is It And How Do You Get Started?
• FMT. 2022. 5 risks when investing in Malaysian real estate
• Ian Tai. 2020. 5 benefits of investing in real estate in Malaysia
• James Chen. 2022. Real Estate: Definition, Types, How to Invest in It
• PropertyGuru. 2021. Residential Title Vs Commercial Title: How Do The Differences Affect You?
• PropertyGuru. 2021. The 11 Different Types Of Properties And Houses In Malaysia
• Reena Kaur Bhatt. 2022. 2022 Stamp duty, legal fees and 5 other costs when buying a house in Malaysia

Author

---

This article is written by Lim Wuan Chin, Research Analyst Intern

Lim Wuan Chin is currently majoring in Finance and Investment at Tunku Abdul Rahman University of Management and Technology (TAR UMT). Wuan Chin joined TED Optimus Sdn Bhd for 3 months as a research analyst intern. She has participated in Bursa Malaysia Derivatives Virtual Trading Challenge 2021. She is an in-house author from TED Optimus.