19 July 2011

Leveraging - Pros and Cons to Your Property Investment - Part 1

Follow up from the Introduction post, I would like to share my opinion and discuss with you on questions below:

1. How do I fully utilize the Maximum Loan To Value ratio given by the bank?

For a normal person, the Maximum Loan Payment to Income Ratio is about 35%, it means that if your monthly income (basically is salary for working person) is 5,000.00, then your maximum monthly loan payment is about 1,500.00. With current BLR for Malaysia (6.6%), you may only take up loan up to 300,000.00 (rough figures). If your salary is 10,000.00, then you may take up loan up to 600,000.00. So what should you do if you wish to get more money from bank? Here is my suggestion to you:
  • Rental Income is the best to get additional money from bank. It is one of the techniques that we use other people's money to get other people's money. However, tenant management skill is crucial and you have to master it time by time. 
  • Re-finance is another alternatives to get extra money from bank. Via re-finance, you may get lower loan rate (according to market condition) as well as extra money comes from property appreciation. Please note that not 100% that real estate can appreciate in long run. If you purchase a property during property bubble, you may end up losing your money + risk on too high current debt to be paid to Bank. 
  • Sell & Buy is another alternatives. As your experience gains more, you will be able to tell when is the right time to sell the real estate and purchase the real estate back at the right time. As what I am always telling you, that please treat your investment as a business.

2. How do I manage my cash flow and strive a a balance?

You can read through my posts on cash flows to understand how cash flow works in your personal portfolio.

3. What are the Pros and Cons of Leveraging (Taking maximum Loan from Bank)?

  •  It is always a wise choice to get other's people money to purchase an investment property. Why am I say so? Because by using other's people money, you are saving your time to save the money to purchase the property. Why takes so long time just to buy 1 property? You might as well invest your money in real estate when you are young and enjoy appreciation in value in long time while seeing your long term debt decreasing over the period.
  • Debt management skill is not easy (ya, also not hard) as you think. You must always equip with the knowledge of the debt & management skills. You can find some clues on my personal portfolio management demo.

4. What to take note when we are using financial leverage
  • Must fully understand the law and rules & regulation on the mortgage loan in Singapore / Malaysia.
  • Must always consult your accountant on reducing the tax payable to government. Especially for Singaporean, you have to take note the property tax (around 10%) paid to Government. 
  • Must understand the tenant management if you are doing rental business. 
  • Must always leave cash in your emergency fund. It is crucial so that your property will never get into trouble (for example, auction).


What are your own opinion with the questions above? Welcome to write your comments below.

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