What is the Best Investment? A House or Land?

What is the Best Investment? A House or Land?

This is a question that I am often asked. The long answer is it depends what your investment objectives are. The short answer is a house is the best investment. The advantage of investing in a house is that you can rent it out and get an immediate return. With land, you may not get a return for years.

 Another big advantage of buying a house, compared to land is, you don’t have to pay for it! If that doesn't whet your appetite, nothing will. Your tenant will pay for your house, or most of it. Apart from your deposit and initial costs, the rental income will pay for most of the house loan. A nice arrangement.

You will have to maintain the property, and there will be occasions when the house will be empty, but otherwise you have a very generous tenant who also acts as an unpaid janitor that takes care of your house. It is a fantastic investment.

 WHAT IS THE BEST HOUSE FOR INVESTMENT?

What type of house should I buy? In the old days... well, never mind them!

Let us just say that times have changed in Brunei. There was a time when ‘the bigger the better’ was the rule for house buying. Investors bought big, detached houses and the government rented them for three or four thousand dollars, often more, a month. Bank loans were typically repaid over a seven-year period. Nowadays it is more likely to be a 20-year repayment period. That says it all!

Times have changed. There are fewer European expats living in Brunei and the demand for expensive rental homes has fallen. For the same reason, rents have dropped dramatically. The 'bigger the better' days have gone. In today’s market, ‘less is more’. Your prospective tenant wants a smaller, less expensive, but more modern rental home. For the investor, it is better to buy two smaller houses for $250,000 each, rather than one big house for $500,000. The smaller houses are easier to rent out and the rental return is usually better.

HOW TO MAKE A SUCCESS OF YOUR PROPERTY BUSINESS

Being a professional property owner is a serious business. You have invested perhaps, two or three hundred thousand dollars or more in your business. To protect your investment and to make it profitable you must look after it and maintain it to a high standard. Just as a taxi driver must service and maintain his vehicle, so the professional property owner must service and maintain his house. Allowing it to fall into disrepair is bad for your business.

Many older houses in Brunei have not been properly maintained or modernised and they are no longer desirable to renters in the higher end of the market. Houses built in the boom years of the 80’s and early 90’s that have never been properly maintained, can only be rented if the rental is very cheap. Many of them have sub-standard kitchens and bathrooms and are in poor condition generally. These houses need to be fully modernised to make them attractive to higher paying renters. 

HOW DO YOU MAKE YOUR HOUSE ATTRACTIVE TO POTENTIAL TENANTS?

The most important rooms in a house are the kitchen and the bathrooms. They should be equipped with modern fixtures and fittings. Many older houses have badly designed and built kitchens and bathrooms. They are simply unacceptable in the 21^st century and many tenants will not even look at them. These houses are still suitable for use as cheap rental accommodation for workers. If you want to attract a higher paying tenant then you have to invest and renovate your property.

The kitchen is the most important room in the house. It is the heart of the modern home. It is like a small factory. Food has to be stored and prepared in a hygienic and modern environment. Houses that have old, poorly equipped kitchens are difficult to rent. The old-fashioned concrete, tile covered, kitchen cupboards are only acceptable to tenants looking for cheap rents, around $600 to $800 per month. Renters paying more want a modern, hygienic kitchen with plenty of cupboard and workspace and a modern cooker.

Bathrooms are also very important.  A shower stuck on the wall, without a proper shower cabinet or even a shower curtain, belongs in the past, along with the squat toilet, and is no longer acceptable in the 21^st century. You must replace bathroom and kitchen tiles that are grimy, blackened and cracked, with new tiles. The same applies to dirty or torn curtains.  

Cupboard doors that are broken or damaged, (in kitchens and bedrooms), have to be repaired or replaced. Walls that are dirty or grimy must be repainted. And please, not white! White paint is OK on the outside of a house, (if you cannot think of anything better), but inside white is a poor choice, it gets dirty very quickly. Paint interior walls in an attractive pastel colour. In addition, a single colour is better than using half a dozen different colours! It is also easier and cheaper for you to touch up and maintain.  

HOW MUCH RENT CAN I CHARGE?

There are not so many companies renting houses today, and those that are, usually want fully furnished properties. They pay about $1600 to $1800 per month for a fully furnished house in BSB. In Kuala Belait, rents are much higher.

If you have a new house that cost you $350,000, and you rent it for $1800 per month, you are getting about 6% gross return on your investment. That does not sound too bad, but you will have to deduct some costs and expenses from that. Like all businesses, you have to look at your costs. If you have a bank loan to repay that will be a major expense. You must also consider the property taxes that you will have to pay from next year. Add to that the cost of furnishing and maintaining your properties, and times when you have no tenant, and will have to bear all these costs yourself, then the net rental return is lower.

In other countries, the main source of profit from a rented house is not the rent itself, but the capital gain. That is, the amount that the property increases in value over time. Capital gain is not a factor in the Brunei property market, so you have to try to get the best rental return that you can from your house rental business.

IS IT BETTER TO OFFER A FURNISHED OR UNFURNISHED HOUSE?

If you want to reduce your costs, you may consider renting out an unfurnished house. But first, let us clarify what an ‘unfurnished house’ IS NOT! It is not an empty concrete shell, with just doors and windows. An unfurnished house should include fixtures and fittings that make a house 'liveable' like, air cons, water heaters, built in cupboards in kitchens and bedrooms, plus a cooker and curtains.

These are not ‘furniture’. These are fixtures attached to the walls of your property like lights and doors. Your tenant is not going to buy these things for your house because he knows that when he leaves they are no use to him. These are standard fixtures in todays' homes and they add value to your property. If you do not have them then get them fitted. It will make your house a much more attractive proposition to clients and it will give your business an advantage over others.

Never forget that you are in a business. And a very competitive one. Part of your job as a business owner is to stay one-step ahead of the competition. The tenant should be able to move in his furniture and live in the house he is paying good money to rent. He is not the house owner and he should not have to buy fixtures and fittings!

The main advantage of renting out an unfurnished home is, you do not have to buy furniture and you do not have to repair or replace it. In addition, a tenant who provides his own furniture is likely to be more careful and considerate with your property. So renting out an unfurnished house may be worth considering.

If you want your business to be a success you have to take care of your customer; the tenant. If you do, just like any other businessperson, you will have a good chance to be successful.

INVESTING IN LAND

I do not propose to say as much about investing in land as the reasons for doing so are more varied and complex.

Land can be developed for profit or simply held and re-sold later when, (and if), prices and demand rise. Well-located land, within say 30 kilometres of the city centre is a good future investment, but it is already becoming quite expensive.

Buying land for your children can be a great investment for them. Investing in land for your children can be an excellent way to help secure their financial future. If you are buying for the long term, for your kids use for example, consider buying land in more distant locations. They may seem out of the way today, but they are still affordable and they will be busy suburbs in the future.

We can expect land outside the 30 kilometre zone to be an attractive option for the future and many Bruneians are investing in land in Lumapas, Batong, Maraburong and other locations well outside the BSB city boundaries. If the bridge connecting Mukim Lumapas is built then Lumapas land will become much more valuable. If you are considering buying land for long term investment, it should be considered.

Supply and demand plus location determines the value of land. There is a huge supply of land in Brunei compared to population size. Most is state land so it can be ruled out as an investment. In addition, much of the most desirable land never goes on the open market. It changes hands privately between families and friends. For this reason, it can be difficult to buy well located land close to town. Land within a 30 kilometre radius of BSB can be considered desirable. Land within 15 kilometres of the city centre, very desirable. And already expensive! However, if you can afford it, it should prove a good investment for possible development. We always have clients looking for land to develop in the right locations.

Property is one of the few things that it is worthwhile borrowing money to acquire. If you buy a new car, by the time you have finished paying for it, it may be worth very little. If you borrow money to buy a house, it will always be valuable, and if rented out, will provide you with an income for the rest of your life. It will pay for itself many times over.

Whether you choose to invest in a house or land you will be following in the footsteps of many of Brunei's wealthiest businesses, whose growth and prosperity has been based upon inherited or acquired land.

Consider investing in property carefully and get good, professional advice to help you avoid the pitfalls. It could be the best decision that you ever make. It can help assure you of a happy and prosperous future and it can provide a legacy that will be appreciated by your children and their children, for generations to come.