I am often asked:
“I have RM100,000 to invest. Shall I buy one property valued at RM100,000 with no loan? Or shall I use the RM100,000 as a 20% down payment, borrow $400,000 and buy a combination of properties worth a total of $500,000?”
The younger you are, the greater the risk you can afford to take as you have a lot of time ahead of you, if anything goes wrong. In life we all have to take risks, especially when it comes to earning and investing. You must take greater risks while you are still young. Failing which, you may be forced to take greater risks when you become older.
a) Borrowing money for property investments also entails taking some risks. The younger you are, the more money you ought to borrow. Hence it makes sense to use the RM100,000 as the down payment and borrow at least RM400,000 to buy a combination of properties worth more than RM500,000. Further, you will be able to take loans of longer tenures, thereby reducing your monthly installments, compared to someone who is older.
b) If you are retired or approaching retirement, the answer will be to play it safe and buy one property for $100,000 with cash.
c) If your age is somewhere in between, then your answer will be to borrow up to a level you are comfortable with.
Whatever your age, always ensure that your potential returns are more than the borrowing costs. It always makes financial sense to borrow money to buy assets like properties that appreciate in value and not things that have no value (e.g. holidays, etc.) or worse still depreciates in value (e.g. cars, television, etc).
2. Risk profile
Different people react to and manage risks in different ways. Some are ultra conservative while others are super aggressive and some are even die-hard gamblers. Only you know who you really are deep down. It will be extremely difficult for someone who does not know you well enough to recommend suitable investments or strategies suited to your risk profile.
There are many types of Risk Profile Questionnaires available, most of which are too simplistic in my opinion. I have yet to come across a Detailed Risk or Investment Profile Analysis similar to those available for Personality Profiling. The latter will give you a detailed, objective analysis of your personality or character’s strong and weak points, the type of people you can comfortably work with, the type of jobs suited to you, and so on.
Another important factor to keep in mind is that your risk profile is not static. It will change as you become older, wiser and start gaining experience. Usually, the first one or two properties are usually the most difficult as your learning curve is steep. Your subsequent purchases will get easier.
3. Emotional mindset
Investing tends to be very emotional as your hard-earned money is at stake. The key emotions involved are Greed, Fear, Patience, Discipline, Guts, Ego, Worry, Temperament, etc. If you are unable to control your emotions, you will become your greatest enemy.
4. Time perspective
If you want to get rich fast, say make RM1 million in the next five years, you have to take greater risks as compared to someone who is contented with making RM1 million over the next ten years. The greater the speed of your financial plan and/or the shorter your time perspective, the more risks you have to take.
5. Strengths and weaknesses
You need to exploit your strengths and constantly work on improving your weak areas. If you are married, you also have to take into account and leverage on your spouse’s financial strengths and weaknesses. For example, if your Personal Communications and Negotiation skills are weak because you are a shy person by nature, you will find it difficult to succeed in property investment as you have to deal with a lot people like property negotiators, sellers, bankers, lawyers, tenants, etc.
6. Current financial standing
A trained and experienced financial consultant would need to analyse your Income Statement, Expenses and Balance Sheet which list out your Assets and Liabilities. This will give them an idea of your:
a) Earning capability
b) Lifestyle and living expenses: Are you a Saver or Spender?
d) Type of assets and their returns
e) Financial obligations (existing loans)
Then, they can determine what sort of additional loans you can comfortably take on.
7. Number of “headaches” you are comfortable managing
Each property is a “headache” in terms of property and tenant management. If you prefer to have one small headache, then use the RM100,000 to buy one property. If you are able to manage more headaches, then by all means borrow and buy more properties. Some of my graduates have bought over 30 properties and yet they have all the free time in the world. The trick is to find a good full-time property manager and train that person well to manage the day-to-day headaches for you.
8. Free time
Depending on your work and family commitments, everyone will have different free time available that they can allocate to study and monitor the markets and put in the required effort. You need to find the right investment products or investment styles that suit the amount of free time you have.
You must find the time if you want to become a successful investor. Most successful investors like Warren Buffett, George Soros or Peter Lynch are full-time investors. It’s difficult, though not impossible, to become a successful part-time investor. The more time you can allocate towards investments, the greater your chances of becoming successful. The big advantage real estate has over other investments is that the bulk of the effort you need to put in is usually one-time only at the point of purchase. As long as you keep the property, it will continue working for you.
There is a saying that you can bring a horse to the water but you can’t force it to drink the water. Likewise, your inclination to certain investment products will give you certain inherent advantages. For example, some people love driving around in the hot sun admiring properties and visualising what the place will look like in the future. Naturally these people will have an advantage in property investment and they would be more comfortable borrowing money for property purchases.
10. Current financial IQ
The more you know what you are doing and why, the less risks there are.
11. Social factors
For example, your marital status (single, married or divorced), the number of kids (or “financial liabilities”) you have or plan to have, support your parents financially, etc. All these will have an indirect bearing on the amount of borrowing you are comfortable with as you will need to put aside some cash for any unforeseen circumstance.
Knowing all the 11 points above will give you an excellent idea of what your unique investment profile is. From here, it will be much easier to determine the direction your financial roadmap, the speed of your plan, the sort of investments you ought to be looking at, the type of risks or borrowings you can comfortably manage and so forth.
Many people are forever searching for a detailed step-by-step guide or “magic formulas” or “how to” solutions to getting rich. In my opinion, there is none. It’s extremely difficult, if not impossible, to find any one or two solutions that would fit everyone. The answer lies not so much on what’s out there, but what’s inside you, that is, your internal financial mindset.
Just like there are many ways of earning money and becoming millionaires, there are many ways of investing. There is no “right” or “wrong” way of investing. There is only what is “right” for you. That’s why Investing is an Art, not a Science.Hence, I believe that it’s extremely important for everyone to first learn and discover who they really are and what exactly they want out of life.