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Be a real estate owner the easy way.

Saturday, September 11, 2010

I have blogged about the importance of wealth building especially at a rate which would beat inflation.

I also mentioned that investing in real estate is part of a complete approach towards wealth building and how it could be a hedge against inflation.

I have shared on how this could be achieved and how there is no short cut.  Rome was not built in a day and for the vast majority of us, wealth building is an incremental process.

Recently, a customer whom I have known for many years had a conversation with me. He was quite excited and told me that there is a way to own real estate with no money or very little money. 

Right away, I remembered some ads I saw in the newspapers with some similar proposal.  I have always ignored the ads because there is simply no way one could own real estate without any money, or own anything for that matter without any money.

However, then, I was a captive audience and I listened as my customer went on to say all we had to do is to get 120% financing for a piece of real estate. Simple. With interest rates at record low and with rental yield at record highs, it is a no brainer. 

My customer is from Malaysia but I am not sure if he was referring to the situation in Kuala Lumpur. Rent out the property, pay the banks the required monthly repayment and the balance is ours to keep.  Simple again.  It sounds great from a cash flow perspective.

I asked if he would be buying a condominium unit using this method then.  He gave me a look that made me felt quite small and asked why only one?  Imagine the amount of money which could be flowing into our bank accounts every month if we had five or ten units! It is so simple!  It sounds irresistible from a cash flow perspective.

Easy money is always tempting but bearing in mind that there is no free lunch in this world, let us look at this proposal carefully.  Remember how I instinctively brushed away ads with similar proposals? 

Well, firstly, we cannot own anything unless we have paid in full for it with our own money.  If we had borrowed money to buy something, we do not own that thing, we simply have control and possession of it but we do not own it.  The lender could do a repossession if we failed to make repayments in a timely manner.

Secondly, 120% financing is leveraging in the extreme.  Yes, if the party continues for another decade, we could become quite rich.  The exact figures depend on how low the interest rate is for the loan and how high the yield could be from renting out the property in question. 

What if the party were to stop abruptly?

We would find ourselves suddenly under a ton of debt without any income. This would make Nightmare on Elm Street look like a walk in a park! Pardon my use of a piece of horror real estate as a comparison.

An environment of easy credit and rampant risk taking is helping to fuel inflation.  I continue to believe that we will see higher inflation in Asia (ex-Japan) over time. 

In Economics, linear relationships are the norm and this cycle will have its run.  Riding on this wave could be exhilarating but as any surfer would tell you, even the best surf would come to an end.

Related posts:
Grow your wealth and beat inflation.
Real estate as hedge against inflation.


Createwealth8888 said...


"Real estate is the safest and fastest way to make money, today," the expert at the free seminar preview will tell us.

That expert will likely to be the SAME expert to help us to find the best mortgage rate in town.

Do you know where the expert is coming from?

In the end, the expert makes from the training fee and later from commissions from our future mortgages? Do you get it?

AK71 said...

Hi CW,

It might certainly be the case. We just have to be careful of anything that sounds too good to be true because they usually are. :)

Anonymous said...

"the expert makes from the training fee"

Some years ago, when I was still very new to a massive (by my humble standards) HDB loan, a course pops up saying that there are ways to reduce this interest payment. Pay RM50 to attend this seminar in JB. I took that trip in heavy rain. Only to find that this (and typically Malaysian) "seminar", is a sales pitch about their RM3000 training course on property financing. There was nothing useful that I can walk away from this trip, except feeling cheated.

No more.

AK71 said...

Hi Anonymous,

Oh my. It seems that these experts made attendees pay RM50 each to cover the cost of organising the seminar. I think the decent thing to do is to at least offer the seminar for free. Anyway, the word seminar was misleading since it was really a sales talk!

Thanks for sharing your experience with us. Could I ask for your name or initials to be included in your future comments? Do visit often. :)

bummy said...

Hey AK,

120% financing ? I would be interested to find out more just to see how creative this has been package and how which company has such aggressive plans to be able loan out more than the available collateral

left_ray said...

Over leverage is what got US and some European countries in trouble. Austerity is the word of the west now. Your customer is playing a dangerous game.

I just got back from KL and feel KL is just getting too expensive even for a tourist from Singapore. My brother in law who live in KL told me the government is "cooling" down the property sector by raising max loan amount to 80%.

AK71 said...

Hi bummy,

I was really quite surprised when he said "120% financing" but I didn't pursue the matter. You know me. If I am not interested in something, I just ignore it and I could change the conversation topic quite abruptly. However, he is a customer and I just let he talk.

I remember how HDB investigated cases where flat prices were inflated in transactions so that the cash strapped buyers could get a bigger loan from the banks.

When my family sold our condo in K.L. some years back, the buyer did the same thing and asked for our cooperation. It seems that it is the norm in K.L.

AK71 said...

Hi left_ray,

At the end of the conversation with him, I just said "If the party ends suddenly, you might end up in an unenviable position."

However, I got the feeling that he didn't want to hear things to the contrary. He probably thought I was a wet blanket. Anyway, I wish him good luck. I will feel happy for him if he makes money. :)

Yes, the Malaysian Ringgit is strengthening. Despite this, the country is experiencing inflation. So, it is a double whammy for Singaporeans holidaying there. I hardly visit Malaysia these days but for a different reason. ;)

AK71 said...

I just learned that the customer I referred to in this blog post lost quite a bit of money. His brother told me it was apparently a scam! Another one...

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