20 June 2011

Why Managing Cash Flow is So Important to Your Investment Process? - Part 1

From my previous post, as large portion of my portfolio is in property (as well as the liability), my main idea is to leverage on the power of the mortgage loan (You are able to take up to 80% loan for your 1st and 2nd property purchase in Malaysia but you cannot do so in Singapore Property, as currently Singapore government reduced the loan-to-value ratio to 70% for 2nd purchase) to build another property portfolio (or I can say leveraging portfolio) which is quite different from my equity portfolio that I am mainly invest in it after deducting the emergency fund. So now the question is, why managing cash flow is so important to your investment process?

I believe majority of the investors would agree that long term investment is suitable to property investment, as this is tangible asset and most of the female investors would love moderate return yet minimal risk (after doing some homework, we can conclude that if you purchased a property in correct location in correct price, you have higher possibility of enjoying a reliable income). However, as your investment portfolio now consists of the loan (which means that you have to make the interest payment to the mortgage bank), you must be very careful of managing your cash flow to avoid your invested property to be in the auction list one day later after you found that you are not able to produce enough cash flow for your interest payment.

As I am a savvy investor, I have certain confident level that I am able to produce enough cash flow to 'at least' make the interest payment to the bank. For this reason, I opted for a 'flexi-loan' for my mortgage loan. Some ideas behind it:
  1. I will soon be a self-employed person. For this reason, it is very suitable to me to opt for this option as it offers flexibility to me to make the advance payment to reduce the principal amount and hence reduce the interest to be paid to bank. On the other hand, I am also able to shorten my mortgage loan. 
  2. I am a poor saver. That means my savings in retail bank is very little (Just about 1%-3% of my portfolio). By opting for the flexi-loan, it becomes my savings account that I am able to enjoy BLR-2.3% return by putting there. It is also a benchmark to allow me to take out the money from there to invest in Equity market hoping to beat that benchmark.
  3. Prepare for Next Mortgage Loan. As the lock in period is for at least 5 years, I would need to pay the penalty if I settle it earlier. However, I understood that I am able to re-finance the loan 5 years later with larger amount (as property value appreciate as well).
 To be continue...

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