How to finance your real estate Investment For Maximum Return?

WHEN you want to take up a loan for your real estate investment, you may be confused by different loan packages offered to you. However, the three major factors that will affect the return on investment are loan amount, tenure and interest rate.

Making the decision to finance your real estate investment through a mortgage loan can be as simple as answering the following three questions.

HOW MUCH SHOULD I FINANCE?

If your real estate investment is worth borrowing, go for the maximum loan amount available to you; otherwise do not borrow to invest.

If a real estate investment is worth borrowing, the more you borrow, the higher the return, and the sooner you will take back all your capital.

WHICH TENURE OPTION SHOULD I CHOOSE?

Try to get the longest tenure available to you when you apply for a mortgage loan for your real estate investment. Why? Simply put, to minimise your holding cost - monthly loan repayment.

By selecting the longest tenure you enjoy the lowest monthly repayment. In other words, you will be able to save more money every month. You can save these monies for rainy day and earn interest from savings or fixed-deposit accounts, or invest them in other places.

The best thing is you still can repay the outstanding loan amount anytime with the extra cash you saved. And when you reduce your outstanding loan amount, you still can choose to shorten the tenure or reduce the amount of monthly repayment. This is because mortgage loan interest is calculated based on the outstanding loan amount.

Since the longer the tenure the lower the monthly repayment, invest in real estate while you are young. This is not quite a fair game for elders. Monthly repayment for a man at age 55 can be double of the monthly repayment for a man at age 35!

WHICH INTEREST RATE PACKAGE SHOULD I CHOOSE?

You may think this should be the easiest question to answer - just take the lowest interest rate of course. Yes, if you are talking about the lowest interest rate within the lock-in period of your loan.

Nowadays you will find almost every loan package offered by banks comes with a condition of lock-in period. All banks want to lock you in for a certain period of time before you can repay the full loan amount. You are required to pay a penalty fee of around three per cent of the total loan amount if you want to repay the balance loan amount or sell your property within the lock-in period.

You may want to sell away your property within the lock-in period when the price is right. So make sure you factor in the penalty fee as part of your selling costs.

Some banks offer lower interest rate in the first few years of repayment. Ask banks to give you quotations of different interest rate packages with the maximum loan amount and tenure available to you. Select the package with the minimum monthly repayment within the lock-in period.

In short, in order to get the maximum return from your real estate investment, which is worth borrowing:

1 Choose the maximum loan amount - for the highest return

2 Select the longest tenure - for the minimum holding cost

3 Select the interest rate package with the lowest monthly repayment within its lock-in period for the minimum holding cost

DR ONG KIAN LEONG (commonly addressed as Dr OngKL), is the creator of GoFinance. He is also the master trainer of Property Method and the blogger behind www.REIJB.com (Real Estate Investment Blog)