How You Can Leverage Your Property Portfolio
Property can be leveraged by using bank loans and your EPF savings. For example, the property price is RM100,000. Downpayment would be 10% or RM10,000, the balance of RM90,000 can be financed by taking out a bank loan. A lot of residential properties in good locations can be financed with 100% loan. You can also withdraw your EPF savings about two weeks after signing the sales and purchase agreement.
You can also leverage with your age by stretching your loan as long as you can to service the monthly installment payments to the bank. Most banks would allow you to stretch your property loan repayment up to the age of 70. This means that if you are young, time is on your side and you can stretch your loan longer, thus lowering your monthly installment commitment and increase your monthly cash flow accordingly. If your rental income is RM600 per month and you take up a 20-year loan, your monthly loan repayment would be only RM400. Your monthly cash flow would then be RM200.
You may ask, what about the increase in interests if I take up a longer loan tenure? The secret to successful property investment is buy positive cash flow property. The increase in interests due to stretching the loan’s tenure can be taken care by the equity gain and capital gains from the property. If you buy one property with positive cash flow of RM200 every year, your cumulative cash flow after 10 years would be RM2,000 every month. (Figure 1.1)
You can leverage on your property’s monthly cash flow for financing and save for your next property’s downpayment. What if you purchase five such positive cash flow properties every year? The returns would be tremendous.
You can also leverage on the property market cycles. (Figure 1.2)
At point A, due to limited supply and high demand for property with good economic conditions, property price is at its peak. After six months to a year, usually after a stock market crash, property price will drop in tandem to point B and eventually recover and peak at point C. this pattern is repeated from point C to D and E. The interesting observation is that point D is higher than point B. This means that if you are a long term investor, the short term price drops should not bother you as long as your property is tenanted. That is a very important feature about property markets which investors must understand.
In the long run, landed property at good locations not only increase in price but also increase in monthly cash flow. See example in Figure 1.3.
If you buy a shop office at the good location with a down payment of RM100,000 from your savings and a 20-year loan at an interest rate of 4.5% pa, after 10 years, about half of your loan would have been paid off by your tenants. Your loan would have been reduced to RM225,000. At the same time, your shop office would have appreciated from RM550,000 to at least RM700,ooo. The most exciting part is that your net worth has gradually increased from an initial RM100,000 to RM475,000. At the same time, your rental has also increased from RM2,500 to RM3,500. Your monthly loan repayment remains the same. Your monthly cash flow has changed from a minus RM347 to a positive RM653. You can use this cash flow for your new car installment or your new home or you may now go for your holiday.