Borrow Intelligently as Much as You can
Date: Jul 01, 2009
By: Milan Doshi
During a recent seminar, I challenged all the participants that each one of them must have a goal of having at least RM5 million in bank borrowings for property investments, provided the returns are higher than the borrowing costs. Many participants almost fell off their seats, as it was a little difficult for many of them to comprehend such a figure. Most of them never had any sort of goal as to how much money they should aim to borrow. Let me explain why you should be an intelligent borrower and aim to borrow as much as you can:
1. You can Leverage and get Rich using the bank’s money and less of your own. The key advantage properties have over other investments such as mutual funds is that you can easily borrow up to 90 per cent of your purchase price. With only RM10,000, you can purchase a property worth RM100,000.
If prices were to increase by 10 per cent, your property is now worth RM110,000. Against your original cash outlay of RM10,000, this is a 100 per cent gross rate of return! Instead, if you had invested RM10,000 in a mutual fund and if prices were to go up by 10 per cent, you would have only made RM1,000.
Do bear in mind that Leverage is a Double Edged Sword. If prices were to drop by 10 per cent, your loss on the property would be 100 per cent. Compare this against a loss of only 10 per cent in mutual funds. Hence, you really need to be an intelligent investor as well as careful borrower.
2. Even if you have RM100,000 cash and can afford to purchase the property without any loans, it’s still advisable to borrow money. Reasons being:
a) All important documents such as the title, etc are kept by the bank. If you were to keep the documents on your own and were to lose or misplace them for any reason, it will be a cumbersome process to get a duplicate copy. In case you need to sell, the certified duplicate copies may not be recognised by your buyer’s bank.
Some years ago, a student at my seminar had purchased a shop lot in Sungai Wang and he was sharing with us the problem he faced. Since the individual titles have still not been issued after more than 25 years, owners are required to keep original copies of all Sales and Purchase agreements (SPA) from the developer all the way to the present owner.
It so happened that for the shop he purchased, there were at least seven changes of ownership in the last 25 years and one of the original SPA was lost. Even with a certified true copy of the missing SPA, the buyer’s bank refused to release the loan as the documentation was considered to be incomplete. My student was very lucky to get all his deposits back in this case.
b) When you borrow 90 per cent of the purchase price, you are transferring 90 per cent of the risks to the bank. Many savvy rich overseas investors who invest in Malaysian properties prefer to take bank loans from the local banks even if they don’t need to borrow. The reason they do so is that in a worst case scenario (e.g. developer going bust, country in political turmoil, etc), their loss is only limited to the down-payment of 10 to 20 per cent instead of 100 per cent if they had not taken any bank loans.
3. Suppose you are paying RM1,000 every month for your fixed term loan for the next 25 years.
Due to inflation, the purchasing of RM1,000 per month today and RM1,000 per month in the future will be vastly different. If RM1,000 today can purchase 1,000 lollipops, 25 years later the same RM1,000 can probably purchase 300 lollipops less.
4. Since Your Net Worth = Assets – Liabilities, with properties, you get to enjoy double benefits. Your asset value increases over time thanks to inflation, while your loans are gradually being reduced by your hard-working “employees” or tenants. With other asset types, you only get to enjoy the appreciation aspect only. Even then, part of the return is constantly being eroded by inflation. Inflation works for you in property investments whereas it works against you for other investment vehicles.
5. Let’s assume you have total borrowings of RM1,000,000 spread over the next 25 years at seven per cent per annum. Your yearly instalment RM85,811* (monthly = RM7,150/month) is being covered by the rental income. See the table below for more details
At the end of Year 1, your loan has reduced by RM15,811 which equates to RM1,317 per month. Frankly, it is nothing to really get excited over.
In a worst case scenario where property prices remain unchanged, your Net Worth is increasing passively, thanks solely to the reduction in your outstanding loan. Over 25 years, you will be getting richer by RM3,336 per month if your total borrowing is RM1 million.
What if your total borrowings are RM5 million as per my challenge, which I feel is achievable? All the numbers above are multiplied by a factor of five. Over the next 25 years, your net worth will be increasing by RM16,680 (i.e. RM3,336 x 5) per month in a worst case scenario where property prices do not increase!
If you factor in a modest price increase of five per cent per annum, your net worth could easily be increasing passively at double the above figures. Some of my more aggressive students have even set personal borrowing targets of RM10 million. When they hit their borrowing limits in Malaysia, they start investing overseas in countries like Singapore, Australia and others as their
*Note: Formula in Microsoft Excel is “=-PMT(0.07,25,1000000)” borrowings there begin at zero.
With the right knowledge and the right properties in good locations, it’s not too difficult to set up an autopilot investment vehicle that increases your net worth passively every month. In fact, the more you borrow intelligently, the richer you get!
If you have any comments on this article or questions, please email to me at achievers88@yahoo.com. I would highly recommend that you sign up at our moderated getrichbook egroups at:
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Article Contributed by:
Milan Doshi
Financial Trainer and Best Selling Author of
“How You Can Become a Multi-Millionaire Real Estate Investor!”
For more information, visit www.milandoshi.com
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