How do you make money when there’s a property bubble?

There’s a definite price bubble growing in the real estate arena in Klang valley to say the least. With the reports from various financial dailies showing strong or overwhelming growth in the nation as well as new and bold land acquisitions by several large developers, things are definitely gearing up for 2011. Without doubt, more prime located properties will be launched, and the prices are definitely on the upside.

As a matter of fact, just the other day, I was at an auction for a residential property auctioned for RM500K. To my surprise, it looked more like a night market than a high court auction. Never have I seen so many people so anxious to plough their money into properties before. There were more than 30 people in the courtroom! What baffled me was that most of the properties in fairly good locations were bid up and bought at above market value prices! The property auction I attended went for RM800K. For the life of me, I cannot understand the rational behind their actions.

I also experienced and heard of similar cases in the secondary market. Just the other day, I stumbled across a good deal in the market. It was a small residential property in USJ that was going for a reasonably good price. When I showed up for the viewing, there were more than 15 prospective buyers and real estate agents cramped up in the living room of the unit! From my observation, property prices in several hot spot areas such as Taman Tun Dr Ismail, Damansara, Bangsar, Subang, Petaling Jaya, USJ and Kota Kemuning, have increase by an average of 40% to 60% in the past seven months (since May 2010).

It’s true, the market is hot and it will only get hotter. Bank Negara’s implementation of the 70% capping on the loan-to-value (LTV) was in reaction to the tremendous increase in real estate transactions in the past six months. However, the question is, will it be enough to slow down the current market momentum?

The question one should ask is “What can a person do, in a situation like this?”

My response to this current situation can be split into two answers. The first answer is for those who currently own one or more properties, primarily for investment purpose. My answer to you is SELL. Run a check for the value of your property, both from the banks as well as from the market (i.e. you can ask your friendly real estate agents). Should the value achieve 30% or more appreciation value within the last two years or less, it is a good indication for you to consider a sale. If the rental rates are great, you might want to consider refinancing, so long as the cash flow remains positive. These are the best time for you to cash out from all the years of investing. Monitor the market well, depending on what type of properties you own and also what type of development you are experiencing in your location, you may want to find the best time within the next couple of months to let go of your property. I figured, within the next couple of years, the market will continue on an uptrend and cashing out during these times will be generally profitable.

For my second answer, if you have already sold all your properties, or don’t have properties to sell yet, then buy with caution. Invest into fundamentals, never on speculations. There are still opportunities in the market. With your ears on the ground, keep your feet firmly planted while shopping for properties. Keep a firm eye on the prices. The best reference is always the rental market. If you are going to buy property for investment purposes, you will need to either rent it out or sell. Selling prices are closely related to the rental prices as well, therefore, you always need to ask yourself “Who is going to rent your property and at what price?” Find out what the rental rates are like. With the exception of houses, a good benchmark for all residential investment grade properties is about 6% (or more) rental returns. The following is the formula to determine rental returns:

If a property cannot achieve such returns, i.e. the selling price is too high as compared to prevailing rental rates; it is definitely not a good idea to buy.

Let’s go back to the fundamentals. Besides rental returns, look out for the take-up rate of the properties in the surrounding areas and ask yourself, “Does it take too long for the tenants to fill up the space? Is there more demand or more supply of space in that area?” Also, who is your target market? Is it a growing or the numbers dwindling?

Regardless of whether you are busy selling or busy buying, start getting busy. The worst thing you could do right now is to freeze. Many are either sitting it out or just plain afraid to get into the market. These are probably the same people whom do not invest in the worst of times too. My question is, if in the good times, you do not invest, and in the bad times, you do not invest, then when do you?

I challenge you to make the best of things, in the best of times and in the worst of times. Happy investing!