One of the good things about properties is that we can borrow money to invest in it. In fact, we can borrow a lot of money, often time 80, 90 or even 100 percent the cost of the property. This enables us to buy a property that is priced significantly higher than what we can afford if we had to pay for it in cash. Next, because of the financing, it also enables us to make multiple purchases that, fingers crossed, will increase our net worth faster than if we had to use our own capital. Also, there are plenty of choices when it comes to mortgages. Banks are bending over backwards, fighting with one another to give us money, so there is certainly no shortage of choice. In fact, I think the only qualification one needs to borrow money today is to have a heartbeat! If you are alive, then you are qualified to get a mortgage!
Let an old hand explain
I suppose being an old hand at this game, I should explain a little about mortgages before some people, particularly those new to property investment, get carried away and mess up their finances.
First, it is true that to build serious wealth in our lifetime, we have to borrow money. The journey to financial freedom will be too slow if we use our own (limited) capital. So yes, we must borrow money.
But this does not mean that we should borrow to the hilt. If we do so, instead of making it big, we could wind up in the poorhouse instead should something not go according to plans. While a few have made it big by borrowing huge sums of money, a lot more – as in thousands – have lost their shirts on their backs. Worse, the financial devastation affects even their relationships – wife, children and family.
So this is why I cringe anytime I hear of success formulas that involve taking loans, especially when the amount runs into hundreds of thousands and millions of dollars. I have no doubt that most people will have little problem getting the loans. As I wrote earlier, all you need to get a loan today is a heartbeat. So getting the loans is not an issue; paying them back is the problem!
Why success formulas based on monster loans are dangerous
Now all these success formulas that are based on taking monster loans are great as long as everything stays rosy: interest rates remain low, prices keep on rising and your properties are rented out to tenants who pay their rent on time. In fact, if things stay as it is today, you will look like a genius to the power of ten when the seven properties that you bought with a 95 percent financing rise in value by 20 percent in just 18 months.
I hate to be a spoil sport but things do not stay rosy. For starters, the current interest rate will not last. Anytime someone points out that the interest rate in Malaysia has stayed below 10 percent for the last 20 years, I always ask them, what about the last 30 or 40 years? And in case anyone missed it, the rates have already climbed up by 75 basis points this year.
Next, prices do not rise to the sky. As a property owner myself, I hope it does, but I’m also old enough to not believe in Father Christmas and ever rising prices.
Third, the precarious events happening in the world today which includes the relentless printing of the dollar by the Federal Reserve, trouble times in Europe, the possibility of yet another war in the Middle East and the imminent implosion of the derivatives have left me breathless. I know trouble is coming; I just don’t know when or how exactly it will happen.
And when it does, it will hammer everyone. And the hardest hit will be on innocent investors that took monster loans to finance their property purchases.
In Summary
This is not to say to avoid buying properties. Buy them if you need a roof over your head (because we all need to stay somewhere), but buy them after doing your homework. I am on the lookout for bargains even as I write these words. Take a mortgage to finance your purchase; there is nothing wrong with that.
However, you must ensure that you will be able to pay back the loans; (a) without having to cut back elsewhere; (b) when interest rate rises.
So be careful when borrowing money.
Borrowing is easy.
Making more money on a regular basis is not so easy.
Let an old hand explain
I suppose being an old hand at this game, I should explain a little about mortgages before some people, particularly those new to property investment, get carried away and mess up their finances.
First, it is true that to build serious wealth in our lifetime, we have to borrow money. The journey to financial freedom will be too slow if we use our own (limited) capital. So yes, we must borrow money.
But this does not mean that we should borrow to the hilt. If we do so, instead of making it big, we could wind up in the poorhouse instead should something not go according to plans. While a few have made it big by borrowing huge sums of money, a lot more – as in thousands – have lost their shirts on their backs. Worse, the financial devastation affects even their relationships – wife, children and family.
So this is why I cringe anytime I hear of success formulas that involve taking loans, especially when the amount runs into hundreds of thousands and millions of dollars. I have no doubt that most people will have little problem getting the loans. As I wrote earlier, all you need to get a loan today is a heartbeat. So getting the loans is not an issue; paying them back is the problem!
Why success formulas based on monster loans are dangerous
Now all these success formulas that are based on taking monster loans are great as long as everything stays rosy: interest rates remain low, prices keep on rising and your properties are rented out to tenants who pay their rent on time. In fact, if things stay as it is today, you will look like a genius to the power of ten when the seven properties that you bought with a 95 percent financing rise in value by 20 percent in just 18 months.
I hate to be a spoil sport but things do not stay rosy. For starters, the current interest rate will not last. Anytime someone points out that the interest rate in Malaysia has stayed below 10 percent for the last 20 years, I always ask them, what about the last 30 or 40 years? And in case anyone missed it, the rates have already climbed up by 75 basis points this year.
Next, prices do not rise to the sky. As a property owner myself, I hope it does, but I’m also old enough to not believe in Father Christmas and ever rising prices.
Third, the precarious events happening in the world today which includes the relentless printing of the dollar by the Federal Reserve, trouble times in Europe, the possibility of yet another war in the Middle East and the imminent implosion of the derivatives have left me breathless. I know trouble is coming; I just don’t know when or how exactly it will happen.
And when it does, it will hammer everyone. And the hardest hit will be on innocent investors that took monster loans to finance their property purchases.
In Summary
This is not to say to avoid buying properties. Buy them if you need a roof over your head (because we all need to stay somewhere), but buy them after doing your homework. I am on the lookout for bargains even as I write these words. Take a mortgage to finance your purchase; there is nothing wrong with that.
However, you must ensure that you will be able to pay back the loans; (a) without having to cut back elsewhere; (b) when interest rate rises.
So be careful when borrowing money.
Borrowing is easy.
Making more money on a regular basis is not so easy.
Azizi Ali is Malaysia’s premier writer, speaker and coach on money matters. He is a Chartered Financial Consultant (ChFC) and holds an MBA from University of Bath, UK.
Log on to http://www.beahappymillionaire.com to find out more about Azizi and how he can help you lead happier prosperous lives.
Log on to http://www.beahappymillionaire.com to find out more about Azizi and how he can help you lead happier prosperous lives.
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