Why you want to take up a loan for your real estate investment?

Investing in real estate is all about financing. Even if you are cash-rich, it is always unwise to acquire a real estate investment with 100% cash. Likewise, if you need to pay 100% cash for a real estate investment, most probably it is not a good investment.

You may say, “I don’t like debt”, “I don’t want to mortgage my property”, “I don’t like to pay interest to bank”, “I hate the commitment to monthly installment”…

Well, there are always good and bad debts out there. You can find out more about them from KCLau’s new book Top Money Tips for Malaysian. In this article we will show you the difference between good and bad debts in real estate investment from two real cases in Johor Bahru.

In short, good debts give you higher return with lower risk. The more you borrow, the higher the return, and the sooner you will take back all your capital. We call them real estate investments worth borrowing or leveraging.

You will notice that if a real estate investment is worth borrowing money from bank, its return in percentage is definitely higher than investments that are not worth borrowing.

It’s worth the debt
Let’s look again at the real case of Larkin condominium discussed in our previous article “How to know if a real estate investment is worth investing?” What would happen if we did not borrow from bank?

If we bought the condominium with cash, total capital required would now be RM168,000 instead of RM24,000, including down payment, legal fee and brokerage. Total monthly net income is RM1100 (rental income RM1400 less monthly cost RM300), that is a yearly income of RM13,200.

Though the total yearly income is now higher than the case when we borrow 90%, from bank (RM4080), the return in percentage of capital investment is only 7.9%!!! That means we would need almost 13 years to get all the capital (RM168,000) back, instead of just 6 years if we borrow 90% from bank.

How can it be? We invested with more cash yet we get the lowest return of capital!!

It’s not worth the debt
Now let’s look at another real case of a shop house in Johor Bahru city. The double storey shop house is situated in Jalan Tebrau with 2 loyal tenants of years. Owner is asking for RM810,000 while current rental income is RM4150. Estimated monthly expenses on maintenance, insurance and tax cost about RM200.

If we take up a mortgage loan for 90% of the purchase price with the same interest rate and tenure as the case of Larkin condominium, monthly repayment will be RM3850. Although in this case the shop house generates monthly cash flow of more than RM100, the return is only 1.3% since the total capital required is almost RM95,000.

If we buy the shop house with 100% cash, the expected return is 5.7%. Obviously in this case we can only get higher return without borrowing.

Power of leveraging
From these and other real cases, we discovered that real estate investments worth borrowing can get a minimum return of 7.5% even if you pay 100% cash to acquire them!!!

In such cases, the more you finance, the higher the return, and the sooner you will take back all your capital.

So start looking for real estate investments worth borrowing – investments with higher return if you borrow from bank.

There is no magic behind this and it is not a numbering game. It’s all about the power of leveraging.

However, do remember that NOT every real estate investment is worth leveraging, just like not every real estate investment is worth investing. But when a real estate investment is worth leveraging, just like the case of Larkin condominium, it is certainly worth investing.

We are not talking about overstretching your capital or risking your money in gamble. We are talking about how to reduce your risk by making use of other people’s money (OPM) – the ultimate investing skill. You can find out more about OPM from Lechter Michael’s book OPM Other People’s Money.

Because it involves some technical details, we will write another article on how to identify real estate investment which is worth leveraging. (If you’re not already a subscriber to Real Estate Investment in Johor Bahru, enter your email address in the box beside this article and subscribe to receive our FREE latest update via email.) Before that, you may still think that there are some other factors you need to consider when we talk about taking up a mortgage loan for your real estate investment.

Well, all you have to do is just be clear about the following 3 questions. Financing your investment will then become a clear and simple decision.

  1. How much should I borrow?
  2. How long the tenure should I choose?
  3. Which interest rate package should I choose?

We will discuss in our next article “How to finance your real estate investment for maximum return?” on how to answer these 3 questions easily.

About The Author


Coming from a humble little town named Tangkak in north Johor state of Malaysia, I am so lucky to have chances to learn and work both in Johor Bahru and Singapore - a conurbation with 6.49 million still fast growing population - since year 1996. Hope now I can have a chance to contribute back to the community by sharing what I see, what I know and what I learn in this wonderful place.


  • KCLau

    Reply Reply December 14, 2008

    I never realized about the fact that when a property is worth to incur debt in order to acquire, the more you finance, the higher is the return!

    I love your blog man!!

  • aw

    Reply Reply December 15, 2008

    There is one big problem with the 1st scenario. How many people have actually bought a condo for RM168,000, or even RM200,000 and manage to rent it out for RM1,400 within even the 1st 6 months? Agent fees alone is 1 month.

    AFAIK a condo that is worth RM168,000 in JB or KL can only be rented for around RM1,000.

    I would stand corrected if someone is able to have proven to own a property worth RM168,000 that fetches RM1,400 monthly rental. This does not include a property bought several years ago for RM168,000 but renting at RM1,400 now (in which case in the first few years there would prob be negative cash flow).

    • ongkl

      Reply Reply December 16, 2008

      Hi aw, thank you for your comment.

      Yes, not many people are able to spot such good deal from the market.
      If we spend some time searching for wholesale bargains like fire sales by developers, desperate owners or bank auctions, we will be surprised by their offering prices and quality of properties.

      Some apartments/condominiums in Larkin area worth RM160,000-RM190,000 now are rented for around RM1200-RM1500 (fully furnished). The unit in the 1st case was found in the same area with existing tenant from a local company. 2 weeks after we found the unit, our agent was able to rent another unit out in the same building (2 floors higher) for RM1500 within a week!

      However, we cannot deny that there are many units of these apartments/condominiums currently rented below market price (RM800-RM900). They may be rented to owner’s friends or relatives or rented several years ago.

      “Seeing is believing” – that’s what we always say in the market. We will share more of our experience in finding diamond from rubbles in our upcoming articles. We also look forward to hearing more from investors who have successfully found their diamond.


  • JB

    Reply Reply February 25, 2009

    There’s another major advantage which you didn’t mention. And that’s the fact that Interest incurred due to the loan can be used to offset your taxable income that you declare to LHDN. This of course will reduce the amount of tax payable.

    For example, if you rent out at RM1000 per month and maintenance is RM200 per month, so your total income for the year would be RM9600 (ignore other fees like QR, Assessment etc) which you have to declare to LHDN. If your upper tax bracket is, say, at 24%, then this means you have to pay tax of 24% x RM9600 = RM2304.

    Compare that to: Example if your monthly loan interest is about RM700, then you can deduct out RM700x12mths = RM8400 from the taxable income, leaving you with only RM1200 to be declared to LHDN. That means tax payable is much lower, only 24% x RM1200 = RM288.

    My example is very conservative. Normally for the first few years of the loan, the interest incurred on the loan is very high, sometimes resulting in “negative” income after deducting other costs like maintenance, QR, assessment, insurance etc.

    • ongkl

      Reply Reply February 26, 2009

      Hi JB,

      Thanks for sharing with us this advantage. If our personal tax bracket is as high as 24%, the saving of payable income tax from deductible interest is very significant as shown by your detailed demonstration.

      Compared to tax brackets enjoyed by personal, however, the tax benefit from deductible interest is more significant if we invest real estate through a company (sdn. bhd.), which is requird to pay corporate tax at a flat rate of 20% for profit below RM500k and 28% for profit above RM500k. We will write an article to discuss more about the tax issue of real estate investment since it is not uncommon for big investors like foreigners to invest in real estate through company.

      Hope can hear more from you, JB.


  • JJ Khor

    Reply Reply June 30, 2015

    Hi.thanks.i am wondering if i were to take up 90% loan for condominium of rm400,000 at mutiara mas scientex skudai incurring installment abt rm1500 per mth good idea..or not.I do not know how much rental / mth..j.j.khor.Johore Bahru.

    • ongkl

      Reply Reply July 15, 2015

      Hi JJ,

      Sorry for the late reply.

      You have to find out the expected monthly rental income and monthly maintenance costs in order to know if it is going to generate cash flow to you.

      For example, if you can only expect to rent it for RM1700 but every month the condo requires RM250 to maintain, then you know that it can’t generate any cash flow to you but requires you to top up RM50 (RM1700-RM1500-RM250) every month.

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