For many investors, buying real estate is considered a good way of building up wealth. Is it entirely true? Must the investor be discerning or can any property enhance wealth? Are there any pitfalls along the way?

The desire to own land and buildings is quite a natural human emotion. Investors considering ownership of real estate assets face a bewildering selection of choices. The investments can also vary in amount and timing of expected benefits. For some investors, decisions to invest are made from "snap" judgments based on little more than hunches or "hot tips". Yet others will go through rigorous research and sophisticated analysis before making the decision to invest. Keeping things in perspective, it is always best that investment decisions should be based on logic and analysis rather than emotion.

This article explores issues concerning ownership of real estate for investment purposes.

Many Malaysians own their houses. This is by and large a reflection of the successful effort of the government since independence to ensure that Malaysians of all income levels have accessibility to adequate, affordable and quality houses. The Employees Provident Fund's withdrawal scheme for housing in which a subscriber is allowed to withdraw up to 30 per cent of his savings to purchase or build a house has also helped promote a house-owning society.

However, when it entails more than the one house that the investor lives in, then owning real estate takes on a different dimension as it involves making an investment decision after taking into account other available investment products.

Generally, investments in land and buildings are matters requiring specialised advice. Direct investment in property can take several forms. The purchaser can purchase the freehold or leasehold interest in factories, warehouses, offices, shops, supermarkets, restaurants, hotels, houses, flats, land for agricultural use, land for building development, or car parks.

The buildings may be freehold, that is, ownership of the buildings may include the ownership of the land on which they are situated; or they may be leasehold, that is, ownership of the buildings may be separate from ownership of the land on which they are situated. In the latter event, ownership of the buildings will, unless extended before the expiry period, eventually pass to the owner of the land.

It is more common for an investor to buy a house, live in it and then sell the house for capital gain at an opportune time.

This form of investment is commendable. It provides the owner, while he lives in it, with a guaranteed tax-free income, representing the rent that he would otherwise have to pay, and, if it is his main residence, free of tax on any gain he may make on selling it. All this can be achieved with complete protection against the effects of inflation on the future cost of his housing. Buying a house with money borrowed from a financial institution is one of the most useful forms of saving that an investor can engage in. Should the house be sold later, the investor should remember to take into account the transaction costs, rates, maintenance, redecoration, renovation and improvements in order to correctly reflect the net gains from the sale.

A non-owner-occupied property comes under a different category as there are pros and cons related to this form of investment.

Before acquiring it, the owner would be faced with the expense of having it surveyed and its value assessed in light of prevailing property values. Then the owner would be faced with the legal expenses of having the property transferred to him. Then he would have the job of selecting tenants, fixing rents, collecting them, keeping the property in a proper state of repair and generally supervising his interest.

The yield from rental income varies with the type of property owned. Generally, new units in condominiums fetch better yields than landed properties during the early years of use. The yield diminishes, however, with the age of the property as tenants prefer to pay top rentals for newer condominium units.

For example, from a recent newspaper advertisement, consider a Bangsar three-bedroom condominium bought for RM350,000 with rental at RM2,000 a month. The yield before expenses is about 10 per cent. By comparison and using a similar price, a single-storey Bangsar terraced house that rents at RM1,400 a month will yield only 5.0 per cent. Likewise, an SS2, Petaling Jaya, semi-detached house costing RM950,000 and a rent of RM2,500 a month gives a yield of only 3.0 percent. Such is the diversity in rental yield as generally, landed properties such as terraced or semi-detached houses do not give as high a yield as condominiums.

The compensating factor for the low rental yield in landed properties is the potential capital appreciation. Assuming appreciation grows at a rate of 10 per cent a year, using the same examples, the Bangsar single-storey gives a total return on investment of 14.8 percent and the PJ semi-detached gives a total return on investment of 13.1 percent. Generally, the returns may be somewhat better where the property is specifically built or located for rental.

The owner of a rental property is in a sense in business. If he had many properties, the business can be full-time, unless he has arranged to have the work of supervision transferred to agents working on his behalf. Even then, for the unwary owner, there is the odd errant tenant ever ready to skip paying rents should the opportunity arise. Some errant tenants do get away with not paying a few months' rent despite eviction notices from the owner's lawyer, as the cost of future legal proceedings may not make it worthwhile to go to court.

Some investors need to assess whether the inherent worries that come with owning rental properties are worthwhile compared with other passive forms of investments. Also, unlike other investment products such as shares and unit trusts, the investor maybe unable to dispose of the property as easily. A prospective buyer will want to be assured, just as the owner himself had earlier been satisfied, that it is a sound property and the price is reasonable. For unlucky house owners, some government action -such as road widening, re-zoning, or even retention for heritage preservation -may reduce the worth of their property.

In general, house ownership, apart from ownership for one's own occupation, can be a sound investment but it must be managed well for investors to realise the annual return on investment. The services of a property expert can certainly minimise mistakes in the purchase and management of the investment.

Apart from shophouses or individual units of offices or factories, owing to the high cost, the majority of individual investors do not participate directly in the ownership of commercial buildings or the development of large-scale property developments. However, participation can be indirectly through a property pool such as property trusts, or unit trusts or pension funds that have holdings in property-based counters.

An important aspect of property investment is adequate diversification. It is not enough only to look at the list of long-lease tenants that reflect the highest calibre. If the general market in the area is declining, it can be difficult to retain tenants; when leases expire, other landlords will try to lure the tenants away and only realistic rental reviews can help keep tenants. For this reason, having a diversified list of tenants within the same building is not sufficient diversification. What is really required is a spread of property by geographical location as well as type

A distinction should be made concerning owning agricultural land as an investment versus using the land for a business, like farming or horticulture. This article looks solely at agriculture land as an investment.

Owning agricultural land can be encouraged through tax incentives offered by governments as has been done in many developed countries over the years. These tax incentives encourage activities such as clearing trees, installing dams and other capital improvements to enjoy reasonable returns.

For the lucky few, agriculture land on the fringe of townships have indeed turned out to be excellent investments following conversion of the property for residential, commercial or industrial use. In Malaysia, a good example can be seen from the way agricultural land prices around Sepang escalated following the decision to develop an international airport in the area.

Many factors affect the outcome of a good return in property investment. They include location, the real estate cycle, inflation, supply and demand, politics, taxation, general economic conditions and interest rates.