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Saturday, July 3, 2010

Why is Property So Good

A lot of people know that property is a good investment but they normally can't figure out why. They see a lot of successful people owning many properties but often wonder how they do it. A latest report by a global private bank shows that their high net worth individuals (those with at least $5 million and above) have one third of their wealth in properties (residential and commercial). Asian HNWIs have even more of their wealth in properties (50-60%). What is it that these HNWI or "smart money" know about properties that the average Joe doesn't?

Somehow we have been conditioned to think that in order to invest we need a lot of money to begin with, and so that normally puts the average person off. And hence we think that property investing is only for the rich. I also thought like that until I read the book "Real Estate Riches: How to Become Rich Using Your Banker's Money' by Dolf De Roos.

I have invested in different investments like stocks and unit trusts but never really figured out why property was such a good investment, until I read this book. I would recommend everyone to read this before you start investing in property. You can visit his website: and there are some really good stuff available on-line. But, nothing beats reading and digesting what's in the book.

Dolf answers the question; Why is Property So Good by asking his four magic questions. It's in Chapter One so it must be important! By the time you finish reading this, you will nod in unison, and say "Aha, now I know why property is so much better than stocks or other investments".

Let's assume you have RM100,000 to invest:

  • First question: How many RM worth of stocks can you buy with RM100,000? And, how many RM worth of properties can you buy with RM100,000?

    • No, this is not a trick question. If you had RM100,000 you could possibly buy only RM100,000 worth of any stock (yes, some brokers do allow you margin financing but usually not at very high percentage). For properties, with generous financing from the Banks, you could borrow up to 90% of the value of the property. So, with RM100,000 and some clever financing you could well own a property worth RM1.0m or more. Of course, all you need to worry about is to have consistent rental income from it that can cover the monthly loan repayments.

  • Second question: The moment you buy RM100,000 of stocks like Maxis, or CIMB using RM100,000, how much is your stock worth? And the moment you buy RM1.0m property using RM100,000 cash and a mortgage of RM900,000, how much is your property worth?

    • Again this not a trick question. When you buy a stock like Maxis it is worth what the "market" (based on supply and demand) says it's worth; and normally it's not too far off what you paid for it: RM100,000. But with property, it could be worth RM650,000 (if you have been conned by the seller/agent) but at the same time, you could have found a bargain, and it could well be worth more, say RM1.5mil. Someone could have thought it was a dud and sold it cheap or perhaps they were in a hurry to leave town. Either way it is possible, as the property market is probably not as efficient as the stock market.

  • Third question: When you buy your RM100,000 worth of stock for price of RM100,000, what can you personally do to increase the value of your stocks? And, when you buy RM1.5m property for a price of RM1.0m, using RM100,000 cash and RM900,000 mortgages, what can you personally do to increase the value of the property?

    • Well, for stocks, there's not much you can do to increase the value unless you are part of a syndicate. Or, an analysts with extraordinary ability to talk up the share price of a company stock. But for property, there are tons of things you could do to increase the value, like repainting it, or adding an extra room, or an extension. Or something as simple as mowing the lawn and repairing the fences to increase the value: as they say "perception is reality". You can use your imagination to the fullest extent when dealing with trying to increase the value of property, and there are various books which can give you great ideas.

  • Fourth and final question: You bought RM100,000 worth of stocks, with RM100,000 cash – it has doubled to RM200,000, what must you do to enjoy the increase in value? And, you bought RM1.5m worth of property, for a contract price of RM1.0m, using RM100,000 cash and RM900,000 mortgages. It has doubled in value to RM3.0m, what must you do to enjoy some of the profit?

    • Notwithstanding the time frame it takes to double its value, what do we have to do to realise some of the profits? In the case of stocks you will certainly need to sell it if you want to enjoy the gains. But, that's like killing your golden goose, right? What about property that has doubled in value? Do you need to sell it? Well, there is the option to Refinance it with another bank loan. If the Property has increased in value, and it often does over time, you can realise the value without sacrificing your golden goose: refinancing let's you take some equity out, while still being able to continue to own it.

In summary, the wonderful thing about property over other investment is that, you can have fantastic leverage. With RM100,000 you could own property up to RM1.0mil or more (provided your rental income can cover the instalments of course). It also allows you some flexibility and creativity to help increase the value like doing renovation or repainting the property. Not to mention, with property where the market is not so efficient like the stock market, there are plenty of bargains out there to be found, from willing sellers. Finally, property investing allows you the option to cash some money out, while continue owning, as the value goes up, through the ability to refinance it.

All these reasons (and more) make property so good.


1 comment:

William said...

isn't there an implicit assumption that one must know how to manage debt?

if the price goes against you, this will wipe out your equity. Of course, the reverse also applies; you'd make lots more money if the price goes up.

usually, prices go up in the long-run due to inflation. one also has to be careful where there is deflation e.g. Japan or where there might be a structural change e.g. Jln Tengku Abdul Rahman to Jln Sultan Ismail

in summary, one must know how to master debt and know exactly what one is buying.