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

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.