Oct 29, 2010
by Michael Tan
In the second part of this write-up, let’s look at the overall picture. Instead of asking which is better, primary or secondary market, ask yourself, “How many properties or how much in total value (RM) do you need to acquire before you can safely retire?” You should decide on your finish line before starting the race.
Once you’ve determined your finish line, e.g. the total value of property you would like to acquire, then decide how long you would like to take to achieve this number.
How much time do you give yourself to acquire that total amount? Ideally, you shouldn’t take longer than five years.
Now that you’ve got these two numbers, congratulations, you now have an achievable goal, both in total value (RM or number of properties) versus the deadline to complete your acquisition. Ok, this is the part where we turn up the heat. How do you do it quicker, safely? “How many properties do you need to buy in order to achieve your financial goals and how quickly do you want to do it?” Now, this is a very technical question that involves financing the deals.
Assuming that you are not an heir or heiress to a multi-billion dollar empire, most newcomers would need to take a loan to finance their deals.
Assuming that you’ve determined your financial freedom number and have decided on the number of properties you can buy, the next question is, “How fast do you want to be financial free?” The answer would usually be, “The shortest possible time.” Leverage on loans The secret is to make the banks your best friend. For the life of me, I cannot understand why people do not leverage on loans.
My key to financial freedom is through leverage. So, in terms of investing into property, a lot will depend on how much you can borrow. Do you know that the total amount of loan you can borrow is dependant on how much you earn as well as how much existing loans you have? There’s two parts of this equation. How much you earn versus How much are your borrowings? These two parts will determine how fast you can go in terms of property investment. Just think of it like a scale. Neither side should be too heavy, otherwise the scales will tip. If it’s heavy on the income side, it just means that you’re not investing enough. If the borrowing side becomes too heavy, it means that you may not be allowed to obtain new loans.
To understand this further, let me explain what income and borrowing is. Your income is derived from your salary, commissions, dividends, rental and so forth. Your borrowings include credit cards, personal loans, car loans and housing loans. So technically speaking, you can go as fast as you can, so long as the scale do not tip to one side too much. For most banks, the ratio is about 0.4.
This means that your borrowing must not be more than 40% or your income. Some banks allow up to 0.8 these days. Please check with your friendly neighbourhood banker for more up-to-date information regarding these ratios.
Primary vs. Secondary market What has income and borrowing got to do with primary and secondary market properties? Let me elaborate: • Primary market properties, i.e. purchase off the plan or from developers, adds solely to the borrowing. • Secondary market properties, i.e. purchase from third party buyers or auctions, adds to both borrowing and income via rental.
Therefore, the secondary market has more potential to balance the scales, allowing more purchases to be made. Most newcomers have relatively low income from salary and/or commissions. Therefore, it is advisable to stretch the loans as much as possible and look for properties that give rental returns i.e. the secondary market.
If you were to purchase a project that has yet to be built or is under construction, this would tie-down your credit because the property is not ready for rental yet. You would have to wait for two to three years before you can invest again.
If you are highly geared and cannot purchase anymore, then you’ll have to sit out on all the good deals and opportunities that come along. Trust me, that’s no fun. However, do learn how to pace yourself throughout the journey. This should be a marathon, not a sprint. There are only two ways to profit from property — capital appreciation and rental returns. Learn to master both strategies to get you to your finish line faster and safely.
Capital first My advice is to always start with capital first. Like all investments, property is capital intensive. The best way to get capital is from income sources. Cultivate good saving habits by saving your salary, bonuses and/or commissions.
Ideally, start investing in property only when you have RM3,000 to RM5,000. Then focus on cash flow. Why? Because it is good for you and the banks. Look into properties that give you good rental returns. Anything from 6% to 10% is good. My average investment portfolio stands about 8.5% p.a.
Once you get the hang of it, you can start investing for capital returns. Use investment strategies like No-Money-Down, flipping (buy-to-sell) through auctions, or buying from developers and selling upon completion. There’s no hard and fast rule to it, but I try to keep my developer profile to only one a year. The rest of the year, I invest in secondary market only. I seldom purchase auctioned properties. It’s just my personal preference.
Alternating strategies takes time and experience. Be patient and learn from both your successes and mistakes. It is important to go easy on yourself. Learn to roll with the punches. So if you make an error, learn how to correct it, learn from it and move on. It only becomes a failure when you give up. Take care of your investments Always seek professional advice to deal with your property matters. Hire accountants, tax consultants, good lawyers, bankers and so forth, to help you develop a healthy profile.
Some people like to look for opportunities to get rich quickly. My advice? Don’t. Declare and pay your taxes, get consultants and pay them well and set up a proper structure to manage your portfolio wisely. Understand that you are in this for the long-term. If you take care of your investments now, they will take care of you for life. If you want drama or excitement instead, might I suggest jumping off a bridge with a rope around your ankle. Keep property investments safe and boring.
These days, the market is “hot”. I hope and wish that all investors make tonnes of money. Please invest wisely and avoid getting burnt. In my next article, I’ll share about the secrets to finding good property bargains in the market. Until then, happy investing.
Michael Tan conducts property investment seminars and workshops throughout the year. For details, call +603 – 2283 1740 or visit www.freemen.com.my