Tenure of property titles
Property is non-movable piece of land or/and a building sitting on it. In Malaysia, there are three types of land titles namely, freehold, leasehold and Bumiputra reserve. Freehold property has “interest in perpetuity”; meaning that you can own the property forever. The right of ownership can also be passed to your heirs. The price of the similar type of free hold property at the same location is about 10-15% higher than leasehold property.
Leasehold property has a limited duration of lease, usually 99 years, but can be 60 years or even less, depending on the location. Owners of leasehold properties usually need to obtain consent from the land office before it can be transferred, sold or charged to another person or institution, whereas no such consent need to be obtained for freehold properties. However, there are rare cases where it is vice- versa, meaning that there are certain properties whereby consent is required for freehold properties whereas no such consent is required for certain leasehold properties. But such cases, as mentioned, are very rare.
If you buy a leasehold property with less than 30 years left on the lease, you may not to obtain a bank loan. Upon expiry of the lease of the leasehold property, the owner can apply to the land office to extend the lease by paying a premium. Bumiputra reserve properties are reserved for Malays or those with Bumiputra status. These properties can be sold only to another Bumiputra. As such, the market demand is limited and therefore the capital gain is relatively slower for this type of property. A building may be built on a piece of land regardless whether it is freehold, leasehold or Bumiputra reserve title, provided the status of land usage have been converted to either residential, commercial or industrial status. You are usually not allowed to erect such buildings on a piece of agricultural land.
Usage of land
As mentioned above, land can be divided into different categories according to its usage. Agricultural land is for plantation or poultry farming use. Residential land is for building homes. Commercial land is for building commercial properties such as shops, offices or shopping complexes. Generally, commercial land is more expensive than residential land. Residential land is usually more expensive compared with agricultural land within the same vicinity. Common plantations include palm oil, rubber and fruit trees such as durian, rambutan or banana. Residential property is for building apartments, condominiums, link/terrace houses, semi-detached houses and detached houses, also known as bungalows. Different types of residential property command different prices. People buy apartments for convenience sake and it is among the cheapest types of residential property. Condominiums are usually for safety, link/terrace houses are for comfort, semi-detached houses are for luxury and a bungalows are for building dream homes.
Common types of properties
The two most common investment properties are residential and commercial property. As mentioned earlier, people do invest also in agricultural land, and industrial properties such as factories and warehouses. Commercial property is for business purposes such as shop offices and retail lots. Serviced apartments also come under the category of commercial property. The shop office comprises a ground floor for retail and the higher floors for offices. The shop office apartment has a ground floor to be used for retail, the first floor for office and the higher floors for people to live in. A factory can be a terrace/link or semi-detached or a bungalow unit. There are also flatted factories where such factories are built on an apartment-type of industrial complex but such types of industrial buildings are more common in places like Singapore and Hong Kong rather than in Malaysia. Generally, a preferred factory should have a show room, office space and a production and store area. A retail lot is one that is located at a shopping center or shopping complex. Residential and commercial properties can be grouped into landed or high-rise properties (Figure 1.1).
High-rise residential properties are apartments and condominiums. High-rise commercial properties are office space, retail outlets and serviced apartments. High-rise properties come with a monthly maintenance or management fee. High-rise properties have higher rental yield and are usually located in a highly populated areas. Landed residential properties are terrace/link, semi-detached and bungalow houses. Landed commercial properties are typically shop offices and factories. Landed properties normally do not require paying of maintenance fees; therefore, maintenance is the responsibility of the landlord.
The latest trend in residential property development is towards gated and guarded communities with security, green environment and resort-type lifestyle facilities. The latest trend in commercial-cum-residential properties such as SOHOs, which stands for “small office home office”.
Rental income is governed by factors such as:-
- Occupancy rate
- Usage of the property
- Quality of maintenance
Residential homes are for the basic need of shelter. Everyone needs a place to stay. The demand for residential homes is relatively stable and consistent. Residential homes in a highly populated area are very easy to rent out.
Residental homes are divided into landed and high-rise categories. Landed residential properties include terrace/link, semi-detached houses and bungalows. High-rise residential properties are apartments and condominiums. Low-cost flats are also called low-cost apartments in most places. However, the word “flat” may refer to expensive apartments in some countries such as England, although in Malaysia flats are usually occupied by people from the low-income group.
In our neighbouring country Singapore, the HDB Flats are occupied by the low-income group as well as the middle- income group. About 80% of the population in that country live in HDB Flats, which are rather of a much higher quality and prestige compared with the flats in our country.
Generally, high-rise residential homes yield a relatively higher rental income but has a lower potential for capital gain. In contrast, landed residential properties give us a relatively lower rental income but has much higher potential for capital gains. The examples in this book use estimates to show you the process of how money is made from properties. The example below is based on a loan obtained at an interest rate of 4.5% per annum for 35 years. (Figure 1.2)
From the financial statement above, the condominium appreciated from RM180,000 to RM200,000. On the other hand, the double storey terrace house appreciated from RM180,000 to RM360,000. The capital gain of landed houses generally increases faster than high-rise residential property. The price for both the condominium and the double storey terrace are the same initially at RM180,000. However, the condominium commanded a higher rental of RM1,000 whereas the terrace house only fetched RM800. It’s a difference of RM200.
Commercial properties are used for doing business. Examples of commercial properties are shop offices, factories, warehouse and retail lots. Commercial properties usually generate a relatively good rental income and higher capital gain compared to residential properties. The actual example below is based on a loan’s interest rate of 4.5% per annum for 25 years. ((Figure 1.3)
Two-storey shop offices cost RM500,000 each 12.5 years ago. It could be bought with a down payment of only RM50,000. The price has since appreciated to RM800,000 based on current market. The net worth of the shop office correspondingly increased from RM50,000 to RM575,000. The rental has also increased from RM2,500 at that time 12 and a half years ago to RM3,500 today. The monthly loan repayment remains the same of RM2,630. The monthly cash flow therefore increased from -RM130 to RM870.
Commercial properties in the right location enjoys relatively good capital appreciation as well as the corresponding increase in monthly rental.
Serviced apartments are a hybrid between residential and commercial properties. They are built on commercial land. There is another type of hybrid property called the back-to- back bungalow or cluster bungalow, but that is residential property.
Land in a right location also enjoys high capital gain potential. Land can also be used as a parking lots, for plantations or for building houses, shop office and factories. Rental income is from the usage of the land and/or the building on it.