Are you property-rich but cash-poor?

WE have all heard tales of the middle-class investing in multiple properties and making their fortunes in the millions.

The underlying concept here, inspired by Robert Kiyosaki’s Rich Dad Poor Dad and his own “success” in the real estate market, revolves around acquiring multiple properties and collecting rent to cover the mortgage repayments.

Eventually, when the mortgages are paid off, the properties become assets that generate passive income. Ultimately, one can choose to enjoy a steady passive income stream or sell the properties to liquidate their value.

To most people, this sounds like a fantastic idea. And yes, many have made some amount of passive income by implementing this in a smaller scale, perhaps with one to three properties.

However, owning one property is very different from owning dozens. Managing numerous properties requires not only a keen attention to detail or a good and trustworthy property manager, but it also exposes you to significantly higher risk.

As I’ve emphasised repeatedly, putting your entire nest egg into one asset class, particularly property, is highly risky – it is a practice that I would never recommend as a wealth management adviser.

In fact, I have had numerous clients approaching me in financial distress as a consequence of such investing mistakes.

One client stands out distinctly in my memory: Julian, a Robert Kiyosaki superfan if you will, who was thoroughly inspired by the investment guru’s books and career.

When I first met Julian, he was deep into property investment, having accumulated 12 properties under his name. He believed that he could replicate the success and wealth-building journey and become very wealthy, just like Robert Kiyosaki.

Julian initially started off by acquiring three properties under his name. This worked well for him, as he was able to rent the properties out and cover both the mortgage and property management costs.

The trouble started to emerge for Julian when he decided to expand his portfolio with another two properties. Securing tenants for his properties became challenging at this point. However, despite these initial difficulties, Julian pressed on and went on to purchase an additional 12 properties.

By the time Julian came to us, he had about Rm6.6mil worth of properties.

However, his total rental collection amounted to only RM120,000 per year, about a third of what he needed to cover his mortgages and property management fees.

Notably, seven of his 12 properties remained unrented, and three of these vacant properties were poorly maintained due to their less-than-prime locations.

Another property was abandoned halfway through construction, but Julian still had to service the loan.

Julian came to me seeking advice to determine if he could achieve his financial goals for himself and his family given his current financial situation. He intends to retire at 55 years old with RM120,000 yearly living expenses.

Additionally, he plans to set aside RM500,000 for each of his children’s tertiary education and another RM500,000 for both his and his wife’s medical expenses during their retirement years.

What do you think? Are Julian’s goals too unrealistic? Is it too late for him to come to us to rectify his investment mistakes?

To answer these questions, we construct a holistic financial plan (see chart ) for Julian to help evaluate his current status and project whether he is able to achieve his financial goals. First, we gather the facts of Julian’s financial status:

• He is 45 years old and his wife is 39, with four children aged 12, nine, six and two.

• He is the single breadwinner of the family, and earns an annual income of RM400,000.

• He has the following financial assets:

• A fully paid-up house – Rm1.2mil

• Properties – Rm6.6mil with mortgage loans of Rm3.2mil

• Bank Deposits – RM150,000

• EPF – RM650,000 (himself), RM80,000 (wife)

• He and his family currently enjoy a lifestyle of RM120,000 per year, excluding mortgage repayment, insurance premiums and income taxes. They spend another RM50,000 on vacation, which they take twice annually.

• He intends to retire at 55, with RM120,000 retirement living expenses per year.

From the roadmap, we can observe the trajectory of Julian’s wealth which starts at slightly below Rm4mil, and grows to about Rm4.8mil, followed by a slight decrease as he allocates funds for his son’s education.

Upon reaching the age of 55, Julian will get to withdraw from his EPF funds, resulting to a peak wealth of Rm6mil.

After reaching this peak, Julian’s wealth will gradually decline as he enters retirement and allocates funds for his children’s education. By the age of 69, he would have exhausted all available funds to sustain his retirement.

It’s only after looking at this graph that Julian realises his property investment decisions haven’t served him well. Up till this point, while he was somewhat aware of his underperforming property returns, he never truly felt the pinch as he currently has enough to cover for his mortgage payments and other costs.

This often reflects the experience of high-net-worth individuals as they gradually encounter financial downfall. It’s not an overnight event but rather a gradual process unfolding over time.

Due to poor investment decisions, these individuals lose money, yet their high income inadvertently cushions the blow, shielding them from immediate financial strain.

As a result, they don’t feel the same financial pain that other middle-income folks do when facing poor investment decisions. In fact, the absence of immediate consequences does not deter them from persisting with their flawed investment choices.

However, what they fail to realise is the opportunity cost of such mistakes over time. Had Julian invested his money in other quality investments, instead of using it to settle his mortgages and property management costs, he would have had the potential to grow his wealth further.

Most people in his position only realise their mistake when it’s too late and too drastic to make an effective turnaround.

However, thanks to the holistic financial planning exercise, Julian gains insight into how his wealth will play out over the years and can make the adjustments now, while still earning a high income.

This underscores the advantage and benefit of drawing out a holistic financial plan – being able to visually observe how your money will stretch over the years, and project the result of making several adjustments.

Coming back to Julian’s roadmap, he will need to make several adjustments to fulfill his desired financial goals.

The first order of business for Julian will be to scrutinise his property investments and sell off non-performing properties. My recommendation is for him to sell these properties at no lower than Rm2.8mil.

The primary goal here is to get rid of these liabilities, even if it means selling at a slightly lower price than optimal, and recoup some capital in the form of cash, which we will then strategically invest to begin growing his wealth.

Once Julian sells his properties and repays his mortgages, he will have at least Rm1.2mil in cash. With the monthly mortgage loan repayments reduced, he will also be able to save an additional RM12,000 per month in cash. This additional cash flow can also be redirected into an investment to further grow his wealth.

In addition, Julian will need to secure a tenant for the one vacant property that he wishes to keep. This will generate him an additional RM40,000 in rental every year.

With the properties sold and more cash at hand, Julian’s wealth is now projected to last him seven more years than before.

But we are not done yet – 75 is still considered too early for Julian and his wife’s cash to run out. Therefore, further adjustments and strategies will be necessary to ensure their financial security beyond that point.

My next recommendation is for Julian to reduce their annual family vacation budget. Instead of indulging in two luxurious getaways per year, each costing RM50,000, I suggest they halve their budget to RM25,000 for one vacation or opt for two more affordable vacations.

Julian’s family’s roadmap to financial freedom now indicates that their funds will last them in their retirement until they reach the ripe age of 81. Finally, a fantastic outcome for a not-so-fantastic start to their roadmap.

In Julian’s case, they are fortunate that they sought our assistance before depleting their wealth to a point when recovery would be challenging. The adjustments that Julian had to make – selling off their properties and reducing their vacation budget – were minimal and did not drastically impact their lifestyle.

Such, is the value of a holistic financial plan. Sometimes, we are unable to feel or see the damage that our investment decisions have on our family’s future, and thus we may severely underestimate its long-term impact.

This is why it is important to draw out your holistic financial plan as early as possible in your financial planning, and to revisit it when significant life changes occur.

Because Julian came to us fairly early, we were able to recommend effective ways to move forward and adjust. With the holistic financial plan at hand, he now knows how to monitor his expenses and investments to achieve his desired return on investment, ensuring he can fulfill financial goals for the family.

Most importantly, he can provide his children with the tertiary education they deserve.