Retire early via property investments
 How to retire in less than five years by accumulating good debts of more than RM3 million through property investments
I was having lunch a few weeks back with David (age 55), a past participant of my property investment program whom I had not met for many years. David works in the oil and gas industry and he was posted to the Middle East for the last five years. When he left Malaysia, he was a millionaire. When he came back for good, he was worth over RM5 million. Not a bad way to get rich quickly within such a short period of time. I am sure he would not have been able to make so much money so quickly had he remained in Malaysia.
Hence the important lesson here for all employees is to be adventurous and grab any opportunity to earn a high income in a strong currency. The amount you earn working overseas in one year is equivalent to at least 3-5 years of working in Malaysia! The amount of money you are able to save while overseas will enable you to leapfrog your peers when it comes to investing.
While away, David managed to accumulate over 10 residential properties and he paid cash for all the new purchases as he used to come home at least three times a year. David’s combined passive rental income today is over RM10,000 a month enabling him to retire very comfortably. He only took loans for the earlier three purchases he made before he went overseas.
When I asked David, why he did not take any loans for all the recent purchases he made while working overseas with a high income, he replied that he did not like paying the bank interest. He was also afraid of interest rates going up like what happened during the Asian currency crisis of 1997/98. Another reason was that he preferred his surplus cash to be used up instead of leaving in fixed deposits where the temptation to spend or make ‘silly’ investments would be extremely hard to resist. David told me that his goal was to retire debt free and he was happy that he was finally able to do so at a fairly young age.
While David did well for himself, I personally felt he could have done much better. Like David, many people’s goal is to retire debt-free early, preferably well before the age of 65. Did you know that it is possible to retire, if you so wish, within the next five years by accumulating good debts of RM3 million via property investments? Sounds too good to be true? Read on for the truth.
In my article in the June 2009 edition, I gave several reasons why you must aim to borrow intelligently as much as you can. They were:
Leverage
Transfer of Property Risks
Effects of Inflation on Bank Loans
How Your Net Worth Increases due to the Reduction in Liabilities
If you miss this must-read article, kindly visit this URL:
Here are more reasons on why it makes sense to borrow money:
1. Time Factor: It may take you five to ten years to save RM100,000, but less than one month to borrow the same amount for property investments. Hence why wait to save when you can start investing now using borrowed money! You will be able to get rich quicker by starting your investment journey much earlier.
2. Your ‘Hard Working’ tenants are paying your bank instalments, not you. Many people make the mistake of mixing up the bank instalments for their home and investment properties. For your own home, you are responsible to pay the bank instalments every month. Hence it is important to ensure that there is income or salary coming in every month. Alternatively, you must have a buffer to service three to six months bank instalments in case you temporarily lose your earning ability.
However, for investment properties that are being rented out, you are using the rentals collected from your tenants to pay the bank instalments. Even though you are technically responsible for the bank loans, as long as the properties are rented out and the rentals are sufficient to pay the bank instalments, there is really nothing to worry about as far as your own earning ability is concerned.
You can go a step further and reduce risks by ensuring that 10 months rental is sufficient to service 12 months bank instalments in the event your property becomes vacant or unexpected property expenses crop up, etc. If you own several investment properties, another way of mitigating risks is to ensure that 80 percent of the combined rentals collected (in case of full occupancy) are sufficient to service 100 percent of the bank instalments every month. Your worry now shifts from servicing the various bank loans to ensuring the rental from all your properties comes in every month.
3. Spread between the ‘yields’ and ‘interest costs’. To illustrate this, let us assume that you are investing in medium priced condominiums in the Klang Valley in good locations where it is possible to get:
Average Property Yields > 7.5% pa
Interest Costs on Bank Loans < 3.5% pa (Today, most banks are giving spreads of at least B.L.R. – 2.2% for residential housing loans)
Hence the Difference or Spread > 4% p.a.
Currently in Malaysia, there is a huge spread between yields and interest costs. In other countries like Singapore or Hong Kong, the spread is less than 1.5 percent pa. Personally, I do not think the spread will remain this wide for long. Over time, yields will come down as residential rental rates remain the same (in areas where there is an over-supply, it may even come down!) and prices of property increases due to inflation. The BLR may also increase once the economy recovers. Even if the spread reduces from the current four percent to let’s say two percent over time, there still exists a comfortable cushion to invest in properties. In fact, now is a far more ‘comfortable’ time to purchase investment properties compared to the future based purely on the spreads.
Assume the current spread is four percent pa, let’s look at the gains for loans of various amounts. See the Table below:
Loan (RM)
|
Gains per Year (RM)
|
Gains per Month (RM)
|
1 million
|
40,000
|
3,333
|
3 million
|
120,000
|
10,000
|
5 million
|
200,000
|
16,666
|
10 million
|
400,000
|
33,333
|
If you have RM1 million in bank borrowings, you are getting rich passively by RM40,000 per year or RM3,333 every month. By the way, this happens to be the worst case scenario where property prices do not increase, which we all know happens to be highly unlikely!
If your combined borrowings are RM3 million, your gains are RM120,000 every year akin to a passive income of RM10,000 every month. This is an amount that will enable you to retire comfortably if you so wish! Hence my contention that all it takes to retire is to accumulate at least RM3 million in bank borrowings and making sure your spread is 4 percent pa. If you are starting from zero borrowings, you can easily build up your borrowing quantum within the next five years no matter where you are financially today!
Once you have hit RM3 million in bank borrowings, are you going to stop there? I do not think so. In fact, I would recommend that you set a personal target of borrowing anywhere between RM5-10 million. The figures in the above table will give you sufficient reasons why you should set these achievable targets. In fact, the more you borrow intelligently for good property investments, the richer you become!
Further, the figures in the table assume that property prices do not increase. If we were to factor in a modest five percent per annum increase in property prices every year, the gains shown in the table would easily be higher by another 30-50 percent!
Coming back to David, what advice would you have given him? I frankly suggested that while he still had his last ‘high income’ pay-slip which was less a month old, he should quickly refinance all his properties and borrow to the maximum while he still could as the banks would not know that he is back for good. If David were to delay by a few months, he would find it more and more difficult to borrow money as he did not have any more fixed income and his age would not help either. And what to do with all the borrowed money? Go out and invest in more properties and pay cash for them!
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