PERSONAL

FINANCIAL
PLANNING
Tutorial 7
Investing in Property
Main Text Chapter 7
Short Answer Question : 2, 4
Discussion Questions : 1,2
Additional Questions : 1 to 5
 Short Answer Question 2
•

RM

Gross rental income (April to December 2018) 4,500 x 9 40,500

Less : Allowable Expenses

Quit rent and assessment (1,300)

Maintenance fees ( 210 X 9) ( 1,890)
Interest on loan instalment (2,650)
------------------------
Statutory rental income for year of assessment 2018 34,660
================

Cannot claim deductions unless there is sufficient documentation and evidence available .
 Short Answer Question 4
• For freehold properties the land on which the property is built has been sold by
the state authority to an individual in perpetuity (i.e. forever).
• For leasehold properties, the lease is for a finite period for instance 30, 60,99
years.
• Upon the expiry of the lease, the ownership of the land and any construction
attached to it reverts to the state land authority. The state government could
convert the type of lease from a residential to commercial purposes. Thus,
making it unsuitable for the purpose intended by the tenant. In any case,
renewal is very expensive as the tenant as to pay up the lump sum of the
future lease payments (e.g. 99 years)
• The state authority has the right to terminate the lease if the tenant is found to
be unfit, the lease may be terminated, and the remaining monies forfeited due
top non-performance of lease terms.
• For the reasons above, leasehold property prices tend to get cheaper the closer
to the maturity of the lease. Buyers need to be aware of this.
 Discussion Question 1
REITs Property Related Company
Corporate structure ▪ Trust fund ▪ Company
(e.g. SP Setia, Ecoworld, Sime Darby
Properties, Gamuda etc)

Governance ▪ Management company approved ▪ Board of Directors under the Companies

by Securities Commission Act
▪ Trustee
Scope ▪ Defined investment policy – ▪ Business not restricted to property
restricted to management of investment and development.
portfolio of real estate for income
generation

Fees ▪ Investor is subjected to Not applicable

management fees (inclusive of
fund and property management).
▪ Trustee fee
Tax Individual investors are only subject to Dividends are subject to company tax.
10% withholding tax for dividends if (Y/A 2023= 24%)
the REITs company pays out 90% of
its income as distribution.
 Discussion Question 2
Note :
▪ Only good financial standing property developers would be able to offer this scheme

Pros :

• Pay for the property upon the award of the Certificate of Fitness - No major capital outflow
until the completion of the project
• Greater protection to the consumer as it reduces risk of loss caused by project abandonment
by the developer.
• End-financing of loans do not start until the completion of the project. Maximum losses
subject to the down-payment paid.

Cons:
• It is likely that the developer/seller will/could pass on some of the borrowing costs to the
buyer/investor driving up the price of the completed property.
 Additional Question 1
• Discuss the factors that would affect the returns on
real estate investments
 Macro Factors
• General Economy → Property
market prices
• Immigration trend → Migration of
people to major cities (KL, Penang
and JB) → Price increase
• Interest rate → Low interest rates
reduces costs of mortgage loans, vice
versa
• Lending policies of banks
• Government policies
• Supply and demand factors
Micro factors
• Location and location within location
• Tenure – Freehold versus Leasehold
• Age and condition of property
• Physical attributes
• Environment, accessibility and facilities
• Economic, functional and physical
obsolescence
• Economic obsolescence – Development in
surrounding areas e.g. changes in zoning in
neighbouring areas from residential to
industrial
• Functional obsolescence – Poor outdated
design, layout, size → No demand and loss
in value
• Physical obsolescence – Property in in bad
shape – Cost more to repair than rebuild
due to mismanagement and neglect
Adapted from : CFP (2017) Module 3
 Additional Question 2
• Discuss the risks associated with property/real
estate investments.
 Risks of investing in property
• Real estate property is indivisible and lack liquidity.

• High entry and exit costs

• Need to consider real property gains tax, stamp duties, legal
fees etc

• Greater government regulations →

• If the property market is overvalued, government can intervene
to increase stamp duties and borrowing rates for mortgage loans
• Potential re-delimination of development zones

• Affected by market factors → e.g. economic downturns

Adapted from : FPAM (2017) CFP Module 3

 Additional Question 3
Discuss the advantages and disadvantages of a fixed
versus variable rate mortgage loan.
 Fixed Rate Loan
Advantages
• Interest savings if interest
rates are rising
• Ease of budgeting
• Peace of mind for working
households worried about
interest rate fluctuations →
Suitable for risk averse
investors
Disadvantages
• Expensive to switch back to
variable rates if interest rate
falls
• Fixed rates are usually higher
at point of application as banks
need to guarantee the rate for
a predetermined period
• If extra funds previously paid to
account → Refunds not
allowable
• Does not allow you to make
extra payments to reduce
principal amounts
Source : Un (2014)
 Variable Rate Loan
Advantages
• Usually comes with flexi loan
features → Borrowers can opt to
make extra payments to offset the
interest payable against the loan
payable
• Variable rate could be lower
compared to fixed rate loan
• Depends on bank offers
• Zero lock-in penalty
• Withdrawal facility
Disadvantages
• Lack of stability – difficult to
budget
• Extra interest if interest rate is on
the rising trend→ Higher
repayments
• If interest rate is decreasing →
the instalment remains unchanged
→ extra savings can only be
enjoyed through shorter term of
the loan rather than lower
repayments
Source : Un (2014)
 Discussion Question 4
• Discuss the financial and non-financial
considerations one should make before purchasing
a house.
 Considerations
Buying a house in Malaysia
Location Type of property Ownership Type
- Basic amenities ▪ Landed versus High ▪ Freehold – Indefinite
- Surrounding area shops, Rise ▪ Leasehold – Usually up
banks, schools, hospitals to 99 years from State
etc Authourity
- Public Transportation
- Distance to work
- Traffic condition
- Security

Title Developer’s Reputation

o Individual – Landed ❑ Reputation ❑ Past customer’s
o Strata – ❑ On time delivery satisfaction
Condominiums/Apartments ❑ Quality of work ❑ Adherence to promise in
advertisements

5-14
 Considerations
Buying a house in Malaysia
❖ Down-payment
❖ Loan instalments
❖ Property investment yields
❖ EPF – Account 2 withdrawals
❖ Debt to income ratio (< 40%)
❖ Loan to Value ratio
❖ Margin of financing
❖ Lenders can lend up to 90%
of purchase price

5-15
 Discussion Question 5
• What are some common pitfalls in property
investment?
 Common pitfalls in property investment (Yee, 2013)

• Over-committed finances – Taking too much mortgage debt

• Buying an unproductive property
• Vacant land – No rental
• Rental income < Mortgage installments → Negative cash flow
• Speculation versus investment
• Investment→ Long term – focus on rental and capital gain –
Requires patience
• Speculation → Short term – focus on quick profits → Higher risk
and is more suitable for very seasoned investors.
• Not understanding property cycles, supply and demand.
• See also pitfalls for home loan refinancing in lectures