Taking up LOAN for REAL ESTATE INVESTMENT

Investing in real estate is all about financing. Even if you are cash-rich, it is always unwise to acquire a real estate investment with 100 per cent cash. Likewise, if you need to pay 100 per cent cash for a real estate investment, most probably it is not a good investment.

You may say, “I don’t like debt”, “I don’t want to mortgage my property”, “I don’t like to pay interest to bank”, “I hate the commitment to monthly installment”.

There are always good and bad debts out there. You can find out more about them from KC Lau’s new book Top Money Tips for Malaysian. In this article, we will show you the difference between good and bad debts in real estate investment from two real cases in Johor Baru.

In short, good debts give you higher return with lower risk. The more you borrow, the higher the return, and the sooner you will take back all your capital. We call them real estate investments worth borrowing or leveraging.

You will notice that if a real estate investment is worth borrowing money from bank, its return in percentage is definitely higher than investments that are not worth borrowing. capital investment is only 7.9 per cent! That means we would need almost 13 years to get all the capital (RM168,000) back, instead of just six years if we borrow 90 per cent from bank.

How can it be? We invested with more cash yet we get the lowest return of capital.

Now let’s look at another real case of a shophouse in Johor Baru. The double storey shophouse is situated in Jalan Tebrau with two loyal tenants of years. The owner is asking for RM810,000 while current rental income is RM4,150. Estimated monthly expenses on maintenance, insurance and tax cost about RM200.

If we take up a mortgage loan for 90 per cent of the purchase price with the same interest rate and tenure as the case of Larkin condominium, monthly repayment will be RM3,850. Although in this case the shophouse generates monthly cash flow of more than RM100, the return is only 1.3 per cent since the total capital required is almost RM95,000.

If we buy the sho house with 100 per cent cash, the expected return is 5.7 per cent. Obviously, in this case we can only get higher return without borrowing.

From these and other real cases, we discovered that real estate investments worth borrowing can get a minimum return of 7.5 per cent even if you pay 100 per cent cash to acquire them!

In such cases, the more you finance, the higher the return, and the sooner you will take back your capital.

So start looking for real estate investments worth borrowing — investments with higher return if you borrow from bank.

There is no magic behind this and it is not a numbering game. It’s all about the power of leveraging.

However, do remember that not every real estate investment is worth leveraging, just like not every real estate investment is worth investing. But when a real estate investment is worth leveraging, just like the case of Larkin condominium, it is certainly worth investing.

We are not talking about overstretching your capital or risking your money in gamble. We are talking about how to reduce your risk by making use of other people’s money (OPM) — the ultimate investing skill. You can find out more about OPM from Lechter Michael’s book OPM Other People’s Money.

Because it involves some technical details, we will write another article on how to identify real estate investment which is worth leveraging. Before that, you may still think that there are some other factors you need to consider when we talk about taking up a mortgage loan for your real estate investment.

Well, all you have to do is just be clear about the following three questions. Financing your investment will then become a clear and simple decision.

* How much should I borrow?

* How long the tenure should I choose?

* Which interest rate package should I choose?