I promised to share with you more on Uncle A’s investment.   Uncle illustrated 2 shophouses he invested recently.

Shophouse 1 in Iskandar

The first one is a 3 storey shophouse in the new Iskandar site in Johor Bahru. He bought it at RM $650k. The shophouse unit obtained TOP at end 2008, but he delayed the take-over till middle last year. The reason being that the shophouse is located in the new township, and he would want the developer to take maintenance of the unit till the last minute if possible. It is very true in Malaysia context. While the site is very big and town occupancy is not very high, there is high chance of break-in and damages. Since Uncle A is not staying at the area, the developer was still able to take care of it during the period the unit not leased out.

In the middle of 2009, Uncle A took over the unit. Towards the end of the year, Uncle A managed to lease out the 3 storey unit to 2 different tenants: shop front at level 1 to a car repair at $1950, 2^nd & 3^rd storey to a tuition centre at $1250.

 Gross rental yield

= Annual Gross rental / Price

= 12 months x ($1950+$1250) / $650,000

=   $38,400 / $650,000

= 5.9%

Uncle A is not so excited with the return, though the gross yield at 5.9% may sound very high to most of us. However be mindful this property is in Malaysia, where the financing cost and political risks are high. You would have to command higher yield return to justify the high risks.

In Singapore the average gross yield is 2.5% to 3.5%, which is considered relatively low in comparison to Australia & Malaysia. It could be explained by the political stability and economic weather in Singapore. Also the financing cost is relatively low, with Sibor rate hovering at the lowest point well below 1%.

Back to Uncle A’s property shophouse in Iskandar. He paid up fully on the project, and he is not concerned with the financing cost. He thinks the rental yield is ‘so so’ (as he could get a better return from stocks and his business). However he sees the future of the development, which has great potential to have great buzz and activity. In long run the shophouse should have a healthy growth in price appreciation.

Shophouse 2

Uncle A stays in a small town in Johor. This town has not much developed in the recent years, since many people have left for big cities in KL, JB or even Singapore. It is pretty laid back. Almost every one knows every one in this town.

There is this main road running across the town. The shophouses along the main road are pretty run down and poorly maintained. In the beginning of the year, Uncle A bought one corner 3 storey shophouse at a prominent junction. Though the location is good, the shop was pretty dilapidated and it comes with no carparks space. And it had been vacant for quite sometime. Maybe due to the reasons, the price Uncle A got was pretty attractive at $350k.

Since the shop was really old and run down, Uncle A sunk in RM$80k in renovating it. In addition, he divided the shopfront at ground floor into 4 units. Similarly to our HDB central small shoplots selling handphone set, he leased out the units easily with good rental, even though there are no carpark spaces! The ground floor units are leased out for selling ing budget products, handphone trades and magazine stalls.

Forgot to ask him on the 2^nd level rental, since I was so caught up when he told me that he intend to use the 3^rd floor for swiftlet farming for bird nest! Ha ha, if you are not familiar with this new trade, this is the up and coming sunrise industry involves the conversion of people-centric buildings into buildings used to house and produce bird nest. This is quite an interesting phenomenon, and I will cover it in details if given the chance.

Even before he has fully leased out all the shopunits, he is already commanding $4000 monthly. Let’s work out the gross rental yield.

 Gross rental yield

= Annual Gross rental / (buying price + renovation cost)

= 12 months x ($4000) / ($350k + $80k)

=   $48,000/ $430k

= 11.1%

Imagine a shophouse of less than 100% occupancy getting 11.1% return. The return is simply phenomenal!

Uncle A commented the return is much higher due to the trouble involving in getting the renovations done and authority clearance check. Doing investment and business in Malaysia is not as fortunate as in Singapore that every rule laid down clearly for us to check. However the return definitely worth the trouble caused.

If you find the Uncle A story interesting, drop me your comments so I could share with you more:)