Many believe that a good investment is one that can bring massive profits overnight.

While there are some people who can reap huge capital gains in a short span of time from trading stocks, forex, and cryptocurrencies, many tend to attribute this to good fortune.

However, if you observe carefully, there is a more stable and consistent way to achieve similar capital gains at a more measured rate.

In fact, if you play it right, you can steadily grow your wealth with a real estate investment that delivers a rate of 3% per annum.

Assume you’ve found the perfect 800 sq ft apartment in the Klang Valley. Assume that the population living in the neighbourhood earns a monthly average income of between RM5,000 to RM6,000.

You have learnt that the average price for an apartment of that size in the last 12 months is RM350,000. In addition, you surveyed and found that the rental rate is around RM1,000 a month.

1. Fair valuation per sq ft

The fair value of the 800 sq ft apartment is RM350,000, thus, the price per sq ft is RM437.50. This is to be compared with other apartments within the vicinity. Ideally, you should buy a property at below its fair valuation per sqft.

2. Average monthly income of the population

This would be the aforementioned range between RM5,000 to RM6,000 a month. Thus, the population can afford to pay the RM1,000 in monthly rent.

3. Average gross rental yield

The average rent for a 800sqft apartment unit is RM1,000 a month, whereas the fair value of the 800 sq ft apartment is RM350,000. Thus, the average gross rental yield is 3.43% per annum.

Formula: (Monthly rent x 12 months / Fair value of property) x 100%

Ideally, you will want to achieve a gross rental yield of above 3.43% per annum.

Assuming you decide to buy a unit for RM350,000. You pay RM35,000 (10% in deposit) and you obtain a 35-year mortgage worth RM325,000, which consists of RM315,000 (90% of purchase cost) and RM10,000 (MRTA) at an interest rate of 2.9% a year. Thus, your mortgage is RM1,233 a month.

In addition, you spend another RM35,000 in transactions and renovation costs. Also, every month, apart from mortgage payments, you pay RM267 in all other property-related expenses (service, sinking, quit rent, and assessment).

4. Purchase price psf

The purchase cost of your 800 sq ft apartment is RM350,000. Thus, your price per sq ft is RM437.50, the same as (Magic Number 1).

5. Initial capital outlay

This includes the 10% deposit, transactions and renovation costs. Here, your initial capital outlay is RM70,000 (RM35,000 + RM35,000)

6. Starting mortgage amount

This would be RM325,000.

7. Monthly cash inflow/outflow

Assuming you managed to rent out your unit for RM1,000 a month. You spend RM1,500 in mortgage payments and property-related expenses. Thus, your monthly cash outflow is RM500 a month.

Formula: RM1,000 – RM1,500 = negative RM500 a month.

8. Your gross rental yield

You rent your property at RM1,000 a month. Thus, your initial gross rental yield is 3.42%, the same as (Magic Number 3).

After 10 years:

• You raise your rent by RM100 a month once every two years. By the tenth year, you receive RM1,400 a month in rental income. Meanwhile, your amount of mortgage payment and all property-related expenses had remained constant throughout the 10-year period. Thus, you incurred RM36,000 in cash outflows for the last 10 years.
• You estimate that the value of your property could appreciate by 2% per year for the next 10 years. Thus, after 10 years, the apartment unit that you invested in appreciated to RM470,371, from RM350,000.
• In that 10-year period, you have reduced your outstanding mortgage balance to RM262,820. So, you have built a sizable property equity of RM207,551 if you deduct RM470,371 (property value at year 10) from your mortgage balance.

Following these calculations, you have almost doubled your wealth in 10 years as your gain stands at RM101,551 (RM207,551 – RM70,000 – RM36,000). All from one simple real estate deal.

So yes, you can make 100%-200% from winning trades. But without quantum, you will not be able to match the returns from a simple real estate deal, even if all it did was appreciate by 3% per annum. That is the power of leverage.

This is precisely why banks lend you money to buy properties, and not to buy Bitcoin or perform Forex trading activities.

At the end, you may find that the ‘long-termers’ often build sizable wealth from their investments while ‘short-term heroes’ may end up trying to trade, gamble or even speculate to get their next 100%-200% from their few thousand bucks.

The question is, which do you prefer?

This article first appeared in kclau.com.

Ian Tai is a financial content machine, dividend investor and author of over 450 articles on finance featured in KCLau.com in Malaysia, and ‘Fifth Person’, ‘Value Invest Asia’, and ‘Small Cap Asia’ in Singapore. He is a regular host and presenter of a weekly financial webinar with KCLau.com.