Went out with a friend for lunch today. He casually told me that he had seen a couple of properties in Jakarta and was keen to buy an apartment or condominium in Jakarta.  However he said that property prices were too high right now and was adamant in his belief that it will fall in one or two years time. He went to view a condominium in Menteng, a studio unit of about 40 sq. m on the high floor with a asking price of U$76,000.  He mentioned that he would loved to buy a property for investment if it is reasonably cheap.

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I told my friend that there are properties in the United States going very cheap; in fact he could get a home for a price of a set dinner in a good Chinese restaurant – that is One hundred US dollars or approximately RP885,000. He was shocked and though that I was joking until I explained the facts to him. If you looked at Detroit which is the largest city in the state of Michigan, there are thousands of properties that are under foreclosures and even abandoned properties. Why would the owner of a property be willing to sell you his home for just US$100? That is because he is in debt and is unable to pay the property taxes for his home. So instead of incurring this property tax every year, he would rather sell it off cheap. But beware of buying such properties, because most of it are in very bad condition and in areas where it is either crime ridden or in abandoned neighbourhood. Property tax are high in the state of Michigan and are payable in advance of the year in which they are due. The property tax is calculated based on State Equalized Value ( SEV ) which is normally half of the assessed value of the property. Bear in mind that just because your neighbour’s home in Detroit is paying say US$2000 in property tax, it does not mean that your property next to him will be the same amount.

My friend then asked me whether there are good investment properties in Michigan. I explained to him that there are plenty of good value properties in Michigan. The key is not to look at the assessed value but focus on the cash flow. When I focus on the cash flow, I am looking at the rental income generated from the property which I have purchased.  Take the annual rental income and less of all expenses such as property taxes, insurance, maintenance, management fees, etc and if it still gives you a positive cash flow of above 7%, then I would consider looking into this property. In Detroit, there are plenty of good valued properties being sold at US70,000 onwards but you need to do your homework. You would want to buy a property in a prime location so that you will enjoy capital appreciation of your home once the economy picks up.

So whether you are buying properties in Jakarta or in United States, the important issue is not the valuation of the property, it is not the selling price of the house or the economy, it is just the cash flow and potential capital appreciation. I want to know what type of tenants can I get and how much is the net rental income ( after deducting all expenses ) per year. As for capital appreciation, prime location will also be the first to appreciate in prices when property prices moved up.