Three biggest errors people make when investing in properties

“You cannot make money buying properties in Malaysia!” exclaimed a relatively disgruntled investor from Singapore. It was a statement made when we made a visit to our neighboring country. We were in Singapore in collaboration with Malaysian Property Incorporated (MPI) to promote real estate investment in Malaysia.

We ended up having a meal with the gentleman and listening to his experience of investing in properties in Malaysia. To my surprise, he was an extremely well informed person with amicable knowledge of investments and had invested in other countries as well. However, his ventures have had somewhat mixed results. Some turned out mediocre results, some incurred losses and some were profitable ventures. He concluded saying: “Nothing beats investing in your own country”.

His story is not uncommon. I have had similar encounters with many foreign investors - both in Malaysia and abroad. After some research, I realised there were some fundamental errors that most investors made when they ventured into unknown territories or countries. I would like to share three of the most common errors made by foreign (and even some local) investors.

1st common error: To FLIP or to KEEP?
The first common mistake most investors committed is to invest without figuring out who their target market is.

First things first. Are you investing to FLIP or to KEEP? What’s flipping or keeping? Well, flipping is buying with the intention to sell with profit. Keeping is buying with the intention of profiting from renting the property out.

Properties for flipping are usually the ones with has the highest capital appreciation in the shortest amount of time. These are usually the landed properties.

Here’s a simple formula to calculate capital returns:

The returns will be the total returns you would get. Assuming you achieved 30% returns in 3 years, the next thing you need to do is to divide that to determine your simple returns per year (as compared to compounded returns)

Properties for keeping are the ones that fetch rental returns higher than 6%. These are usually high-rise in nature.

Here’s the formula for rental returns:

It is key that you decide what strategy to adopt before deciding what type of property to invest into. Also, it’s crucial to estimate the returns of investment you desire and the timeline of which to exit. Having exit strategies prior to starting is critical to your success.

Knowing your strategy before investing is crucial. Assuming you are planning to flip, next question is, who is your target market?

2nd common error: Not getting to know the area well.
“I bought into an apartment in the city center (worth RM1.8mil) three years back and I couldn’t sell it out till today!” claimed the Singaporean investor. “Who were you planning to sell it to?” I asked then. “Anyone la!” he replied.

If you go around with a strategy like that, you might end up including the super natural market as well! Look, if you don’t know who you are going to sell or rent your properties out to, why buy it in the first place?

You should know your target market very well before even investing into real estate in the area. Understand what the market needs, and what it is lack of.

What I see most investors do is to trust the developer or the agents to do the research for them. Why would you trust someone else with hundreds of thousands of ringgit (if not millions) of your own money?! Even if they were right, you still need to verify it. Remember, regardless of whether the developer or agent is right or wrong, they make their money when they sell their properties to you, and their liability stops there!

My advice for both locals and foreigners investing in Malaysia is to make the effort to visit the places of interest for you over and over again. Study the market and get to know the locals before you finally make the decision to invest.

3rd common error: Not understanding the locals
How many of you would invest into a RM14.5mil condominium near the city center with the intention to rent? How many of you would invest RM10.5mil for 1,250 sq ft of retail space in a new retail mall in Dengkil? While there may be some sane reasons to do so, majority would agree that you wouldn’t do either one of the deals. Although the examples are extreme, the common errors people do in investment are obvious here.

Some investors lose money because of this error - not understanding the lifestyle of the locals. You should always study the lifestyle of the locals.

Allow me to give a couple of examples:

I once met an investor who focused only into FLIPPING properties. I asked him how he’s able to consistently make returns of 50% to 70% in the market, regardless of whether it was an up market or a down market.

He shared with me that he only invests in properties of RM500k to RM700k. He focuses on the trends of the people buying in the area. In other words, he focuses on the lifestyle of homeowners and what they were seeking. He further shared: “I usually ask my working colleagues, around the age group of 30 to 40, where they would buy to stay. I take note of the areas and the type of properties they would buy, should they be able to afford properties within my investment range.”

“I also keep track on the latest types of properties the developers are rolling out into the market. They usually have done their research before investing millions into marketing and developing such properties. Then I look into the areas and types and buy the best deal.”

“I never guess. I always make sure that whatever I invest into, I am 99% sure that its going to give me at least 30% returns or more, before I even bother to go it. It’s all in the research and it’s all in the network. If you want to make money, must consistently be in the market la. There’s no such thing as a good time, only a good buy!” he added with a smile.

So, if you want to make money investing to FLIP or to KEEP, does he’s advice make good investment sense? Again, most of us fail to do any sort of research prior to investing into the properties. The key to successful investment is to gather enough good information from the marketplace and make the money in the difference.

In many of my talks that I give these days, I mention to people that while it can be a good time to make money in the market, invest wisely. Keep yourself grounded and stick to the fundamentals. The best way of losing money is when you start speculating in the market.

Last advise, always remember to focus on the bottom line. Define your entry and exit points, keep to your strategies and always focus on making money.

Happy investing!

Total Quality Control in Construction

Quality control in construction typically involves insuring compliance with minimum standards of material and workmanship in order to insure the performance of the facility according to the design. These minimum standards are contained in the specifications described in the previous section. For the purpose of insuring compliance, random samples and statistical methods are commonly used as the basis for accepting or rejecting work completed and batches of materials. Rejection of a batch is based on non-conformance or violation of the relevant design specifications. Procedures for this quality control practice are described in the following sections.

An implicit assumption in these traditional quality control practices is the notion of an acceptable quality level which is a allowable fraction of defective items. Materials obtained from suppliers or work performed by an organization is inspected and passed as acceptable if the estimated defective percentage is within the acceptable quality level. Problems with materials or goods are corrected after delivery of the product.

In contrast to this traditional approach of quality control is the goal of total quality control. In this system, no defective items are allowed anywhere in the construction process. While the zero defects goal can never be permanently obtained, it provides a goal so that an organization is never satisfied with its quality control program even if defects are reduced by substantial amounts year after year. This concept and approach to quality control was first developed in manufacturing firms in Japan and Europe, but has since spread to many construction companies. The best known formal certification for quality improvement is the International Organization for Standardization’s ISO 9000 standard. ISO 9000 emphasizes good documentation, quality goals and a series of cycles of planning, implementation and review.

Total quality control is a commitment to quality expressed in all parts of an organization and typically involves many elements. Design reviews to insure safe and effective construction procedures are a major element. Other elements include extensive training for personnel, shifting the responsibility for detecting defects from quality control inspectors to workers, and continually maintaining equipment. Worker involvement in improved quality control is often formalized in quality circles in which groups of workers meet regularly to make suggestions for quality improvement. Material suppliers are also required to insure zero defects in delivered goods. Initally, all materials from a supplier are inspected and batches of goods with any defective items are returned. Suppliers with good records can be certified and not subject to complete inspection subsequently.

The traditional microeconomic view of quality control is that there is an “optimum” proportion of defective items. Trying to achieve greater quality than this optimum would substantially increase costs of inspection and reduce worker productivity. However, many companies have found that commitment to total quality control has substantial economic benefits that had been unappreciated in traditional approaches. Expenses associated with inventory, rework, scrap and warranties were reduced. Worker enthusiasm and commitment improved. Customers often appreciated higher quality work and would pay a premium for good quality. As a result, improved quality control became a competitive advantage.

Of course, total quality control is difficult to apply, particular in construction. The unique nature of each facility, the variability in the workforce, the multitude of subcontractors and the cost of making necessary investments in education and procedures make programs of total quality control in construction difficult. Nevertheless, a commitment to improved quality even without endorsing the goal of zero defects can pay real dividends to organizations.

SHARE BY DR VEERA (PE)

HISTORY OF PROJECT MANAGEMENT

As a discipline, Project Management developed from different fields of application, including construction, engineering and defense. In the United States, the forefather of project management is Henry Gantt, called the father of planning and control techniques, who is famously known for his use of the Gantt chart as a project management tool, for being an associate of Frederick Winslow Taylor’s theories of scientific management, and for his study of the work and management of Navy ship building. His work is the forerunner to many modern project management tools, including the work breakdown structure (WBS) and resource allocation.

The 1950s marked the beginning of the modern Project Management era. Again, in the United States, prior to the 1950s, projects were managed on an ad hoc basis using mostly Gantt Charts, and informal techniques and tools. At that time, two mathematical project scheduling models were developed: (1) the “Program Evaluation and Review Technique” or PERT, developed by Booz-Allen & Hamilton as part of the United States Navy’s (in conjunction with the Lockheed Corporation) Polaris missile submarine program; and (2) the “Critical Path Method” (CPM) developed in a joint venture by both DuPont Corporation and Remington Rand Corporation for managing plant maintenance projects. These mathematical techniques quickly spread into many private enterprises.

At the same time, technology for project cost estimating, cost management, and engineering economics was evolving, with pioneering work by Hans Lang and others. In 1956, the American Association of Cost Engineers (now AACE International; the Association for the Advancement of Cost Engineering) was formed by early practitioners of project management and the associated specialties of planning and scheduling, cost estimating, and cost/schedule control (project control). AACE has continued its pioneering work and in 2006 released the first ever integrated process for portfolio, program and project management (Total Cost Management Framework).

In 1969, the Project Management Institute (PMI) was formed to serve the interests of the project management industry. The premise of PMI is that the tools and techniques of project management are common even among the widespread application of projects from the software industry to the construction industry. In 1981, the PMI Board of Directors authorized the development of what has become A Guide to the Project Management Body of Knowledge (PMBOK Guide), containing the standards and guidelines of practice that are widely used throughout the profession. The International Project Management Association (IPMA), founded in Europe in 1967, has undergone a similar development and instituted the IPMA Competence Baseline (ICB). The focus of the ICB also begins with knowledge as a foundation, and adds considerations about relevant experience, interpersonal skills, and competence. Both organizations are now participating in the development of an ISO project management standard.

Modern Project Management 1900-1950 – Henry Gantt

Project Management. was not really the same

The history of project management: A search for world best practices

BY Dr Veera (PE)

drveerair@gmail.com