Home buyer or real estate investor ????? Many people do not know how to select the right approach when they first come to real estate investment. This is because we all have the same mind set as if we are buying a home. I have to admit that it took me quite a while to learn the difference between buying a home and an investment property before I acquire my very first investment property in Kuala Lumpur-Malaysia. As a home buyer, we don’t like to pay more interest to bank. This is understandable since buying a home can only be considered as an expense instead of an investment. Why? Very simple, because we don’t get any income from our home… So we should try to pay as little interest as possible when we buy our home. If possible, purchase it with cash. On the other hand, in real estate investment, or maybe all other kinds of investment, what we emphasise most is the maximum return – how can we get the highest return from the minimum amount of money invested? 100% cash or 90% loan. Why do you need to pay so much interest to bank ????? Take the case showed in the above table as a an example. Yes, if you borrow 90% to purchase the property, total net profit in 30 years is RM43,166 only, compared to RM157,680 in the same period of time if the property is purchased with 100% cash. However, take a look at the money required by both scenarios. For 90% loan, the required capital is RM31,750, compared to RM166,750 if you purchase it with 100% cash. That is more than 5 times different!! If you invest the RM166,750 in 5 similar properties with 90% loan, the total net profit that you can expect in 30 years is RM43,166 x 5 = RM215,830 instead of RM157,680! If you can earn another RM58,150 with the same amount of money (RM166,750), will you still use that money to buy one property only with 100% cash? Even if you can just find 4 similar properties, the total profit in 30 years (4 x RM43,166 = RM172,664) is still higher than one 100%-cash property’s, and not forgetting, you still have RM166,750 – (4 x RM31,750) = RM39,750 cash on hand. Moreover, with 4 or 5 properties on hand, capital gain from the appreciation of estate value is also 4-5 times. I think this should be enough to stress my point – focus on the maximum return that you can get from real estate investment instead of the interest. Interest is only part of your costs of investment. Just take all the costs into account before you calculate your return, and then choose the right strategy to go for maximum return. For the above example, I would definitely go for 5 properties with 90% loan, even if I can buy one with 100% cash. What about you? Do the math :)
Posted on: Tue, 30 Jul 2013 16:55:52 +0000
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