ReiJB.com » investment theory

Fact and Myth about Apartment Square Footage

ongkl — Mon, 24 Aug 2009 22:36:06 +0000

photo credit: TheAlieness GiselaGiardino²³

In most case, rent of shopping centers and office buildings is established on a dollar per square foot per month basis. A 500-square-foot office renting for $7.00 per square foot per month will bring $7.00 x 500 or $3,500 monthly income.

How important is the square footage of a rental apartment? Most rents are based on ‘x’ number of bedrooms per unit. An apartment that has two bedrooms will rent for more than a one-bedroom unit.

But can you expect a 1,000 square-foot, one-bedroom apartment to rent for more than a comparable one-bedroom apartment with only 900 square feet of living space? Probably not.

Rent for more or sell for more?
When a tenant has a choice of the two, at the same rent, all else being equal, he will obviously take the larger unit. Conversely, he will pay as much or more for the smaller one if it is in a better neighborhood, better maintained, or offers additional amenities. Market conditions are the primary determining factor.

Builders and developers, on the other hand, know how much an apartment complex cost them to build based on a dollar amount per square foot of apartment. In the initial establishing of sales, a developer may determine that he must sell his apartments at $100 per square foot in order to cover his cost in the project, spread out over the number of units he considers reasonable to break even his investment, plus make a profit. A 1000-sqaure-foot apartment will then sell for $100,000.

We have heard investors say, “those apartments are too small.” They chose to ignore the fact that the units were comparable in sixe to others in the area. More importantly, the building stayed rented at good, competitive rent, and that is the prime requisite in purchasing in the first place.

Sri Wangi apartment in Tampoi discussed in our previous post “How to increase the return of an investment property to more than 20%?” is a typical example. The 3-bedroom unit is less than 1200 square feet. There is another corner-type of 3-bedroom apartment there which is around 1300 square feet. One can’t expect to rent the corner-type for more than the 1200-square-foot type except expecting to buy it with a higher price.

When the building is suffering because of the size of the apartments or lack of closet space, the square footage consideration then becomes important.

(If you’re not already a subscriber to REIJB.com, subscribe here to receive FREE monthly updates of auctioned property from more than 10 banks and our latest articles via email.)

We write regularly about real estate investment. Some of our featured articles include:
“What must you know before buying auctioned properties?”
“Where to find cheap properties?”
“Why apartment can be the best real estate investment?”
“How important is location to an investment real estate?”

(Also, don’t forget to subscribe to our newsletter to receive a property investment evaluation tool. You can use this tool to estimate monthly cash flow, monthly installment and return on investment for your property. This tool will also show you if a property investment is worth borrowing/leveraging.)

Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

Fact and Myth about Apartment Square Footage

Why you should not make a verbal offer?

ongkl — Sun, 02 Aug 2009 22:20:52 +0000

photo credit: tranchis

In our previous post “How to negotiate the purchase?”, we have discussed about how to negotiate the purchase of the property you wanted. We would like to add another point here – try not to make a verbal offer to a seller.

Why? Don’t expect to walk up to the owner of a property and say, “I want to purchase your property, but $250,000 is too high, I’ll give you $230,000.” Do you know what he would say?

I will not repeat it here. You cannot buy a new car without signing a contract and making a deposit, so do not expect to purchase a $250,000 property without one. And yet, you would be surprise how many “knowledgeable” investors ask their property agents to “call up the seller and see what he’ll take.”

How to do it right
The proper way to negotiate a purchase is to prepare a formal written offer to purchase, spelling out all of the terms and conditions under which you want to acquire the property. Equally important is that the executed offer to purchase will be accompanied by an earnest money deposit cheque, preferably in the amount of two to five percent of the offering price.

When the purchase is a sizable one and you do not want to tie up even two percent of the price with the contract, you can offer a smaller amount, say $1,000, with the balance of the two percent earnest money due within a few days after the offer is accepted by the seller on terms also agreeable to you.

What is the difference between the verbal and written offer? Suppose you were the seller of the property and someone you did not know told you he would give you $230,000 for your property. What would your reaction be?

He is asking you to reduce your price by $20,000. If you agree, he may or may not purchase the property. You do not know, and he has not obligated himself to anything at this point. Even if he agrees to purchase it, you have no idea as to the terms he wants.

Maybe he is trying to buy your property with only a $5,000 or $10,000 down payment. Assuming you do not come to contract with this buyer and your property is still on the market, you cab be certain that every potential buyer will shortly know that the price is now $230,000 not $250,000. the next potential buyer will probably offer $220,000.

A formal letter of offer/intent or contract protects both buyer and seller. Professional property agents normally have a standard form of letter of offer/intent for buyers. You can check with them to alter the standard terms of offer if you want.

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Post from: Real Estate Investment in Johor Bahru

Why you should not make a verbal offer?

How to negotiate the purchase?

ongkl — Thu, 23 Jul 2009 22:39:05 +0000

photo credit: moron noodle

Purchasing real estate is an unique experience. Even the most experienced investors like to “haggle” or negotiate the price. Before entering into a formal offer to purchase the property you have selected, you need to understand what will probably happen when you start to negotiate and what you need to prepare in order to get what you want.

Prepare yourself
Now, you are ready to buy the property that fits your needs. Where do you go from here?
Assuming this is your first investment purchase, consider using a knowledgeable investment Realtor to assist you. Purchase contracts can be tricky.

It is interesting to note how some investors feel it is wise to negotiate the purchase of investment real estate without professional help, even though they are probably about to spend the largest sum of money in their entire life. And yet, they will call a mechanic friend to look at a used car before they buy it to certain it’s a good deal for the price they are paying.

The first step in negotiating a purchase is to determine exactly how much you are willing to pay for the property and under what terms you want to pay. We have discussed some basic techniques that help you to prepare yourself in our previous posts (“How to find good real estate/property agents?”, “How to estimate the value of a property?”). However, there are always outside factors that enter into a possible modification of your purchase criteria.

Know the market
First of all, you must get a “feel” for the market. What are comparable properties in the area selling for. When you are in a seller’s market, where prime investments are difficult to find and buyers, your competitors, are plentiful, you may have to revise your minimum standards for purchasing.

Remember, while you are deciding what is best for you as a purchaser, the seller is deciding what is best for him/her as a seller.

Generally speaking, you hope to meet somewhere in the middle. You may go into a property negotiation hoping for a 10% cash return. The seller may has a price on the property that will only give you a 5% return on your investment.

You then try to reach a happy medium with him/her, one that you both find acceptable and you both can live with. Neither you nor the seller can expect to get everything you both want. This is the reason for determining your maximum acceptable price and minimum acceptable terms before you meet the seller face-to-face.

If he/she doesn’t get within reasonable range of these terms, don’t give in and buy anyway. You may be sorry later. Again, I must emphasise that you must be realistic in your request. You may end up with a little less than you hoped for, but do not lose sight of two facts:

- Fact #1: you have chosen this as your first priority investment. it was better than any other you have been able to find.
- Fact #2: even at a higher price or terms somewhat less than you hoped for, how will it stack up compared with your present investments?

How much should you offer?
It is customary to assume that any seller has “padded” his asking price to allow for negotiating with a prospective buyer. It is also customary for a buyer to make an offer below the price he expects, and is willing to pay. With this in basic unwritten law in mind, you need to determine how much you should offer.

Never offer full price, unless the property is such a “good deal” that it is well worth what the seller is asking and you have been told by him/her that he will not negotiate on the price.

Conversely, a “low ball” offer, one way less than the listed price, may not be taken seriously by the seller. Unless he/she is highly motivated to sell, he/she will probably be insulted by an obvious attempt to “steal” his/her property and you may not get a counter offer at all.

When this happens, the buyer will have a difficult time getting the seller to consider another, more reasonable, offer. He/she might as well start looking for another property.

So, what should you offer? Assuming the property s priced fairly close to fair market value, try 5 to 10 percent less than the listed price. Your offer should be such that the final price you will accept is halfway between the listed price and your offer.

For example, assume you are willing to pay RM240,000 for a condominium, which are being offered for RM250,000. Your offer will be RM230,000 or about 8% below the listed price.

Keep in mind that this is a rough rule of thumb. Circumstances may dictate an even lower offer. These could include:

- A highly motivated seller – he/she must sell;
- Distressed or problem properties; or
- An offering price far above current, comparable prices in the area.

In any event, make an offer and be prepared to negotiate with the seller. That’s half the fun of buying investment real estate. You may even end up paying less than you expected, but you won’t know unless you try.

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Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

How to negotiate the purchase?

When you should sell your property?

ongkl — Thu, 16 Jul 2009 22:34:44 +0000

photo credit: samismail

How do you decide when it’s time to sell your property?

The average individual has an annual physical examination to check up on his physical condition. Your investment, like you, needs an annual check-up to ensure it is still functioning well and is healthy.

There are four possible motivating factors, any of which will tell you it’s time to get out of you present real estate investment and into another.

Incurable problems
If you are experiencing problem that you cannot cure, it is probably the time to sell. Hopefully, this will not happen because your chance for realising appreciation on the sale will also be affected by the problems your property is experiencing.

These problems include such things as a deteriorating neighborhood, major expenditures needed to upgrade the property, or continual vacancies due to an abundance of more desirable rentals in your area. Each of these problems could have been avoided by carefully locating an investment.

Changes in goals or situation
Investors may decide it is time to sell because their investment criteria have changed. They may be ready to retire and take life easy. They may want to make one last change in properties and structure it to give a lifetime steady income. Equity buildup may no longer important to them. Their heirs will have the concern.

Perhaps something has happen in their lives that has made a change in their investment goals and the present property does not fit their long-range investment program. They may be tired of rental apartments and want to try a small office building or shopping center. Perhaps they have suddenly changed jobs.

Whatever the reason, investors from time to time have logical reasons for an investment change, and I stress logical.

Profit
Assuming you have been giving your investment and annual check-up, you have probably noticed that your property is worth considerably more than you paid for it. This fact really hits you when the property next to yours sells for almost twice what you paid for and you “know” that yours is a better property.

At this point of time, you may want to rush out and sell it, since there is no capital gain tax in Malaysia on your big profit. However, if you still want to own the property, you may consider refinancing it and taking some profit out of it.

Increased equity but decreased return
The remaining reason for selling your property is the result of a large increase in equity brought by a combination of appreciation and mortgage principal reduction. This is where many investors make a drastic error in analysing their present position in their property.

Once you include your equity buildup and mortgage reduction into the calculation of your return on investment after the first year, if your total return continue to diminish each year, this will be an excellent indication that it’s time to sell. We will further discuss this analysis with example in another post.

In short, you should consider selling or exchanging your property when any of the four reasons are affecting the return you are making on your invested capital.

(If you’re not already a subscriber to REIJB.com, subscribe here to receive FREE monthly updates of auctioned property from more than 10 banks and our latest articles via email.)

We write regularly about real estate investment. Some of our featured articles include:
“How to find good real estate/property agents?”
“What must you know before buying auctioned properties?”
“Where to find cheap properties?”
“Why apartment can be the best real estate investment?”
“How important is location to an investment real estate?”

Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

When you should sell your property?

Do you still want to invest in real estate through a company?

ongkl — Wed, 01 Jul 2009 22:46:44 +0000

photo credit: striatic

Some investors have been asking us about the tax benefits they may enjoy if they invest real estate through a company. General discussion about this and other advantages/disadvantages of investing through a company was posted in “Should you invest in real estate through a company?”. Common understanding is that a company enjoys more deductibles than an individual in terms of tax benefits.

Most investors understand also in Malaysia if you have 4 or more rental properties, then your rental income can be considered as a business income. (Details about this can be found from the special treatment for a company where rent can be regarded as a business source under section 5 of the public ruling of income from letting of real property.) What most people don’t know is that there are terms and conditions that restrict you to enjoy tax advantages on this “business income”, particularly the definition of an investment holding company.

If you are just started to invest in real estate or you just owned a few properties, you better calculate carefully before you incorporate a company to invest in real estate.

Investment holding company
A company is considered as an investment holding company if more than 80% of the company’s income is rental income or income generated from investment properties that it holds. Regardless how many properties a company owns, as long as its business income other than rental income is less than 20% of the total income, it is considered an investment holding company. In other words, you do not need to have 4 rental properties in order to create an investment holding company.

However, allowable deductibles for investment holding company are much less than a normal company – only 25% of the total operating expense is deductible, and this amount should not exceed 5% of the total rental income.

Now we understand why investment holding company is excluded from section 5 of the public ruling of income from letting of real property.

If your intention to create a company is to hold all your properties and enjoy the deductibles that individuals cannot enjoy, most likely you will be disappointed. Check again with your accountant or tax consultant before you insist to do so.

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Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

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Do you still want to invest in real estate through a company?

Why do you need to pay so much interest to bank?

ongkl — Sun, 07 Jun 2009 22:30:23 +0000

photo credit: Material Boy

Recently I received an email from a humble 22-year-old student questioning about why should we borrow and pay so much interest to bank for our real estate investment.

It is very encouraging to read his email. As a student of his age, I have to say it’s not easy for him to think so deep about issues of real estate. He has performed some in-depth observation and analysis using our property investment evaluation spreadsheet to prove his points. I still can remember 10 years ago when I was at his age – as a student also, I didn’t even bother to know what is a mortgage loan…

Here is a summary of his mail:

Hi Ongkl, in your previous article “How to finance your real estate investment for maximum return?”，you encourage us to get the longest tenure available to us when we apply for a mortgage loan.

But, isn’t it the longer the tenure the higher the total interest payment?
Also, isn’t it the more we borrow the more the interest payment?

Let’s take the default values from your property investment evaluation spreadsheet as an example. We assume that:
1. The property is not sold for the next 30 years.
2. The interest rate and maintenance cost are fixed for these 30 years.

According to the table above, the total net profit in 30 years is increasing as the % of loan is decreasing.

Then why should we still want to take the highest % of loan and the longest tenure? Let’s say we have cash on hand, shouldn’t we put as much cash as possible into the down payment? Even if we can’t make a full payment with cash, 30 to 40 thousands still can reduce the amount of interest payment substantially.

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 Singapore.

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
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?

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Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

Why do you need to pay so much interest to bank?

What is MRTA and do you really need it?

ongkl — Tue, 02 Jun 2009 22:30:07 +0000

To most of the investors, taxes and insurance create a cash drain of money that can be invested elsewhere. People always want to know how they can pay the minimum, if not zero, for taxes and insurance.

In our previous article, we discussed about the “Top six tax deductions for landlords” that may help real estate investors in a way to minimise their taxes. In this article, we will talk about an insurance specially designed for mortgage loan borrower – MRTA.

What is MRTA?
In Malaysia, one will always come across this term “MRTA” when taking up a mortgage loan to buy or refinance a property. What is it?

Mortgage Reducing Term Assurance (MRTA) is frequently referred to Mortgage Life Insurance. MRTA helps you settle your mortgage loan in the event something happens to you.

Technically, MRTA is designed to provide coverage and protection for borrowers who take up mortgage loans. It covers the borrowers against Death and Total Permanent Disability (TPD) due to Natural or Accidental causes, on the outstanding mortgage loan, on decreasing sum assured basis. This initially is for an amount equal to his/her outstanding loan, which will be reduced in accordance with the installment payments (according to the Table of Reducing Sum Assured attached to the policy).

By way of Mortgage Reducing Term Assurance, in the event of the borrowers’ untimely Death or TPD, MRTA settles the repayment of the mortgage loan. In this way, it assures that the borrowers’ loved ones are free from indebtedness in having to settle the outstanding mortgage on the house.

What is the cost?
Premium factors of MRTA depend on the sum assured, interest rate, term, construction period, premium financing, joint-life, age at next birthday. If you are between 18 and 60 years of age and in good health, you are eligible to take up MRTA. The younger you are the cheaper the premium.

The premium of MRTA is reasonable, and it can even be financed by your bank, i.e. incorporated into your monthly installment of mortgage loan. For example, premium for an outstanding mortgage loan of RM100,000 assured over 10 years is around RM700 for a borrower who is 35 years old. If the borrower’s mortgage loan tenure is 30 years, the premium only adds less than RM5 to his monthly installment.

When do you need a MRTA?
Apparently, if you are taking up a mortgage loan to buy a home, MRTA provides a good and yet affordable protection to you and your loved ones. If you are buying an investment property, do you need MRTA?

Our suggestion is simple, if you intend to flip your investment property in a very short time, then you don’t need MRTA.

If you have an intention to keep your property for a while but sell it away in near future, take the shortest term of MRTA. Normally the shortest term of MRTA offered by banks is between 5-10 years.

If you want to keep your property and pass it to your kids, take the longest term of MRTA which should be equivalent to the whole tenure of your mortgage loan.

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Your comment and feedback on our posts are very much welcome. Please visit our blog posts to view other readers’ comments and write your feedback.

Post from: Real Estate Investment in Johor Bahru

What is MRTA and do you really need it?

Top six tax deductions for landlords

ongkl — Wed, 27 May 2009 22:34:02 +0000

photo credit: amishsteve

No landlord would like to pay more than necessary for utilities or other operating expenses for a rental property. But, every year, millions of landlords pay more taxes on their rental income than they have to. Why? Because they fail to take advantage of all the tax deductions available for owners of rental property.

Rental real estate provides more tax benefits than almost any other investment. Often, these benefits make the difference between losing money and earning a profit on a rental property. But tax deductions are worthless if you don’t take advantage of them. Here are the top six tax deductions for owners of rental property.

1. Interest. Interest is often a landlord’s single biggest deductible expense. Common examples of interest that landlords can deduct include mortgage interest payments on loans used to acquire or improve rental property. In Malaysia, from 2009 to 2011, this tax benefit has been extended to the mortgage interest of your first home. However, interest payment on mortgage refinance loan is not deductible for both rental property and home.

2. Repairs. The cost of repairs to rental property (provided the repairs are ordinary, necessary, and reasonable in amount) are fully deductible in the year in which they are incurred. Good examples of deductible repairs include repainting, fixing gutters or floors, fixing leaks, plastering, and replacing broken windows.

3. Insurance. You can deduct the premiums you pay for almost any insurance for your rental activity. This includes fire, theft, and flood insurance for rental property, as well as landlord liability insurance. And if you have employees, you can deduct the cost of their health and workers’ compensation insurance.

4. Legal and Professional Services. You can deduct fees that you pay to attorneys, accountants, property management companies, real estate investment advisors, and other professionals. You can deduct these fees as operating expenses as long as the fees are paid for work related to your rental activity.

5. Employees and Independent Contractors. Whenever you hire anyone to perform services for your rental activity, you can deduct their wages as a rental business expense. This is so whether the worker is an employee (for example, a resident manager) or an independent contractor (for example, a repair person).

6. Casualty and Theft Losses. Finally, if your rental property is damaged or destroyed from a sudden event like a fire or flood, you may be able to obtain a tax deduction for all or part of your loss. These types of losses are called “casualty” losses. You usually won’t be able to deduct the entire cost of property damaged or destroyed by a casualty. How much you may deduct depends on how much of your property was destroyed and whether the loss was covered by insurance.

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Post from: Real Estate Investment in Johor Bahru

Top six tax deductions for landlords

What risk you may face if you borrow too much and how to manage it?

ongkl — Thu, 14 May 2009 22:18:03 +0000

photo credit: Andres Rueda

“There is always a price to pay for everything”

“No risk no gain”

For a real estate investment with “infinite return” as discussed in our previous article “Is it possible to have an infinite return on investment?”, the price to pay and the risk involved sometime can be significant, although supposingly you don’t need to pay a single cent in this type of investment.

Impact of interest rate hike – another power of leverage
Let’s take the real case of tan81 in the article as an extreme example since it is 100% leveraged.

If the base lending rate (BLR) bounces back to above 6.25% and his rental income is still the same (RM1450 per month), his rental property will stop putting money into his pocket but will start drawing money out from his pocket every month.

This is because every 0.1% increment in interest rate will cause an increase of RM14 in his monthly installment. His monthly cash flow from the property is around RM100 only, while every 1% increment in interest rate requires him to pay another RM140 more every month.

Unless he is taking a fixed interest rate package, otherwise he is exposed to the risk of interest rate hike. Imagine, an increase of 1% only in interest rate will require him to increase rental income by almost 10% to break even…

This is an effect of leverage. The power of leverage can help you to magnify your return on real estate investment through financing (as demonstrated by our real case in “How to increase the return of an investment property to more than 20%?”). However, it can also magnify your repayment cost even with a slight increase in interest rate, if you borrow too much for your investment property.

Managing the risk – keep your monthly installment below 60% of rental income
As discussed in our previous article “Inflation may come back soon (or it has never left?)”, if inflation strikes, which will cause the interest rate to go up, your cash flow from rental property should increase also.

However, in order to have a “robust” cash flow from your investment regardless of economy condition, we encourage for each investment property, monthly installment should not exceed 60% of the income generated from the property.

For example, if you can collect RM1000 every month from a rental apartment, keep your monthly installment below RM600, which should be enough to service a loan amount of RM130,000 with interest rate 3.75% and tenure 30 years.

This is to provide some room to maintain a positive cash flow should your bank revises interest rate to even double of the existing rate.

If you look at our rental apartment in Tampoi discussed in “How to increase the return of an investment property to more than 20%?”, we did follow the guideline of keeping monthly installment below 60% of rental income.

However, if you look at another case study from our reader in Penang (“How to turn a property to become worth borrowing/leveraging?”), which the main objective was to turn her property to become worth borrowing, you will find that if the reader borrows 90% she will not be able keep her monthly installment below 60% of her rental income.

The main reason is rental income of the property was relatively low (RM600) in this case. Because of this we suggested the reader to borrow just RM40,000 (or 38%) in order keep her monthly installment at RM184 only while increasing the return on investment from 4.23% to 6.21%.

In real life, most of the time we just can’t have the best of both worlds unless we do things right in the first place. That’s the reason why risk management is so important to every investment.

How to make sure we do things right in the first place?

Make your assumptions boldly but verify them carefully.

photo credit: me and the sysop

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What risk you may face if you borrow too much and how to manage it?

Is it possible to have an infinite return on investment (or free money)?

ongkl — Mon, 11 May 2009 22:41:07 +0000

photo credit: oskay

If you have read Robert Kiyosaki’s books about financial education, you must be familiar with the term “infinite return on investment” mentioned in many of his books (sometime referred to as “free money”). If you have not heard about him, an investment with “infinite return” actually means an investment that requires no money from you but you receive return in term of money from the investment.

“Is it really true in real life?” Many people may ask as it sounds too good to be true.

In this article, we will discuss a real case of such investment in real estate shared by tan81, a blogger who shares his investment experience at tan81 investment and rich secret. tan81 has shared the latest progress of the acquisition in his blog.

A real case
tan81 found a furnished rental property last month, which was valued at RM280,000 by Hong Leong bank. He managed to negotiate the purchase price to RM230,000.

The property is currently rented to a tenant for RM1450 every month. Monthly maintenance fee is RM200. Total monthly maintenance cost is around RM250 including other expenses like quit rent.

In one of his articles, he estimated the transfer fee for a property worth RM260,000 should be around RM7470, which includes:

Stamp Duty 1st RM100，000 X 1% = RM 1，000
RM160,000 X 2% = RM 3, 200

Legal Fees 1st RM 150,000 X 1% = RM 1,500
RM 110,000 X 0.7% = RM 770

Other costs = RM1，000
Total = RM7470

Here we assume RM7500 is required for the transfer of the property.

Housing loan package offered by Hong Leong bank to him is Mortgage Plus with floating interest rate BLR-2.2% (up-to-date BLR is 5.55%), tenure 30 years, zero entry cost and 5 years lock-in period.

If he loan 90% of the purchase price, the projected cash flow and return are shown in the following table.

From the above table, we can see tan81 has found a property worth borrowing with monthly cash flow of RM287.72 and a cash-on cash return (cashflow yield) 11.32% if he loans 90% of the purchase price. An upfront cash of RM30,500 is required in this case.

However, as mentioned in his blog, tan81 decided to borrow RM250,000 from bank, which is about 89% of the bank’s valuation (RM280,000). With the approval of this loan amount, which is enough to cover all expenses, he effectively doesn’t need to fork out any money for this acquisition!

Look at what happens to the projection of cash flow and return now.

From the above table, tan81 will still get a cash flow of nearly RM100 every month even though he doesn’t need to pay anything to buy this rental property. This is a typical example of “infinite return on investment”!

How can it be true?
Though this is a real example of “infinite return on investment”, it is a bit different from those cases described by Robert Kiyosaki. In most of his cases, Robert would still need to pay a certain amount of down payment in cash.

The only thing that made Robert’s cases “infinite return” was that he borrowed this cash from somewhere else. For example, friends, overdraft (OD) or term loans with – most of the time – much higher interest rates.

In the case of tan81, which solely depends on a housing loan to cover all expenses of an acquisition, is something that can be happened quite uniquely in Malaysia. We normally call it 100% (sometime can be more than 100%) loan or sometime “loan with mark-up”.

In Malaysia, banks will normally offer a mortgage loan amount based on the purchase price stated in sell and purchase agreement (SPA). For example, up to maximum 95% of the purchase price is quite common for new development projects.

So how can a borrower borrows up to or more than 100% of the purchase price?

As far as we know, the trick is in the purchase price stated in SPA.

For example, in tan81’s case, since bank’s valuation of the property is RM280,000, that means bank is willing to lend up to 90% of this valuation amount (RM252,000), provided financial strength and credit record of the borrower meet the requirements of bank.

Once you know the bank is willing to lend up to RM252,000 for the property you want to buy, all you need to do is to use the valuation amount (RM280,000) as your purchase price in your SPA and submit this SPA for loan application. If your financial strength is strong enough and your credit record is clean, you might just be offered with the maximum loan amount of RM252,000.

Simple right? But wait… is there any risk?

In our next article, we will discuss the risk that you may face and how you can manage it.

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Is it possible to have an infinite return on investment (or free money)?