Answer: Multiple Loan Submissions.
Correct. This is exactly what I intend to write about today.
For those of you who had the answer above, I believe you are most likely aware of this ingenious technique of financing multiple purchases of real estate. Some of you may have learnt it from property gurus via their workshops or real estate bootcamps which cost thousands or tens of thousands of Ringgit per entry.
Today, if you wonder, ‘What multiple loan submissions are and how they enable one (especially an average wage earner) to acquire three to four real estate in a short span of time?’, this article is written for you. I’ll share:
– The mechanism of multiple loan submissions.
– Why some buyers choose to use this technique to buy properties?
– Key considerations before using this technique to buy properties.
– Lessons to be learnt by all property investors.
Adam is a 20+ year-old who earns a fixed salary of RM 5,000 per month. He has a car loan where its installment is RM 1,000 per month. Apart from that, he has no outstanding debt.
Let us assume, most local banks today adopt a credit policy which limits each of their individual borrowers to a maximum of 60% in debt-servicing ratio (DSR). It means, Adam is eligible to obtain a mortgage where its maximum installment is RM 2,000 per month.
The calculation is as follows:
Maximum Loan Installment
= (Adam’s Monthly Income x Maximum DSR) – Adam’s Existing Debt Obligation
= (RM 5,000 x 60%) – RM 1,000 (Car Loan Installment)
= RM 3,000 – RM 1,000
= RM 2,000
Hence, he may obtain a mortgage worth RM 450,000 assuming that its interest rate is 4.2% per annum. You may estimate this figure via Loan Street.
Property Show Gallery
Adam paid a visit to a property show gallery.
The experience was amazing and Adam was impressed. He was totally ‘sold’ on the property project and wished that he could afford to buy more units. He had revealed his ‘wishes’ known to the real estate agent when they were discussing about the project details. The real estate agent shared with Adam the following:
– The gross selling price for Adam’s unit is RM 500,000.
– It would be the price stated on the Letter of Offer (LO).
– If Adam wishes to buy, he must first place a booking of RM 5,000.
– Then, he will submit the LO to get a mortgage at 90% of the property price.
– If approved, Adam’s mortgage works out to be RM 450,000.
– The developer is offering a 10% discount for the unit.
– Thus, the actual net selling price for Adam’s unit is RM 450,000.
– The bank disburses RM 450,000 to the developer.
– Once the developer receives the money, it agrees to reimburse the RM 5,000 in initial booking fees back to Adam.
Essentially, if Adam is interested to buy a unit, all he needs to do is to first place a RM 5,000 booking fees. Awesome, isn’t it? This is an example of how one may buy a property with very little amount of initial capita. Read my article here.
What if I have RM 15,000 … ?
The explanation given by the agent was a pleasant surprise to Adam. Hence, he asked the agent the following:
‘If I have RM 15,000, does that mean that I can buy three units from you?’
The agent replied: ‘Well …, if you really want to, you may choose to do multiple loan submissions to finance the purchase of these properties.’
Adam became ecstatic and asked: ‘How does it work?’
The agent explained the following:
– Adam places three bookings for Unit A, Unit B, and Unit C for RM 5,000 each.
– Adam submits LO for Unit A to Bank 1 to obtain RM 450,000 in mortgage.
– Adam submits LO for Unit B to Bank 2 to obtain RM 450,000 in mortgage.
– Adam submits LO for Unit C to Bank 3 to obtain RM 450,000 in mortgage.
– The three mortgage were applied almost simultaneously.
– Each bank assesses Adam as if he is buying only one property.
– Each bank do not know that Adam have sent in two more loan applications for two different units with two different banks.
– If approved, Adam’s mortgage works out to be RM 1,350,000.
– Adam’s monthly mortgage for the three properties is RM 6,000 a month.
– Adam will collect RM 15,000 in reimbursement from the developer as a result of its offering of 10% discount to Adam for the three property units.
– Adam is now officially a ‘Property Millionaire’ with three property units worth RM 1,350,000.
Why Some Buyers Choose Multiple Loan Submissions?
There are two reasons for Adam to opt for multiple loan submissions. They are:
Adam’s maximum loan installment is RM 2,000 a month. If he chooses to invest in the second and third unit at different periods of time, he would need to raise his monthly income from RM 5,000 to RM 10,000 to qualify for their mortgages as his banker will assess his loan application for the second and third unit as his second and third property (not his first property).
The idea for using this technique is to outwit our present banking system, thus, ‘fooling’ bankers into believing that Adam is indeed buying one property when, in fact, he is buying three different properties.
In Malaysia, a property buyer is required to place a 10% down payment if he is buying his first and second property.
But, for the third property onwards, the down payment required is 30%.
With multiple loan submissions, Adam is able to avoid putting down the 30% in required down payment for the loan application for his third unit is assessed as if he is buying his first property.
Financial Intelligence or Insanity?
Remember, Adam is still making a fixed salary of RM 5,000 a month.
Now, he has a mortgage of RM 1,350,000. His installment is RM 6,000 a month. Inclusive of his car loan installment of RM 1,000 a month, Adam has as much as RM 7,000 in monthly debt obligations.
Doesn’t he need to eat, drink, travel (petrol, car park, toll and car servicing) and spend on other necessities of daily living?
Where would Adam find money to cover his monthly shortfall?
Answer: His savings.
Make a guess: ‘How much cash do you think Adam might have in hand to really cover for his monthly shortfall?’
Let’s assume, he has RM 50,000 in cash-in-hand. His monthly shortall, inclusive of RM 3,000 in living expenses, is RM 5,000 a month. His cash-in-hand may last him for a period of 10 months. Subsequently, Adam would be broke.
Desperate Measures …
Before becoming broke, Adam would be nervous as he sees his cash reserves in his bank account dwindles rapidly. Now, Adam realises that if he don’t fixed this issue quickly, he would be broke in no time.
As such, Adam decides to sell his properties for RM 500,000, which were prices stated in their SPA. He calls up his real estate agent to market his units. But, the response is slow for the local property market is experiencing a slowdown. This is indeed desperate times for Adam.
Time is of the essence. Adam is months away from bankruptcy. Thus, he lowers his offer to RM 450,000 (his actual net purchase price).
But, there are no takers.
There are two options left for Adam.
He may choose to sell his units at prices below RM 450,000. Let’s say, Adam has managed to find a buyer for RM 420,000 and has a mortgage of RM 445,000 on that property. Upon his sale, Adam needs to pay the difference of RM 25,000 to the bank. Question: ‘Where would he get the money to make that payment?’
If Adam runs out of money and fails to secure buyers for his three units, Adam’s properties would be foreclosed by his bankers. Then, the units will be marketed at the auction market.
In any of the two options above, there is a huge possibility that Adam would be pronounced as a bankrupt, shattering his dreams of being financially free.
Lessons to be Learnt
Here, I’ll conclude by offering a few key lessons to all property investors:
- Be a responsible borrower. Buy real estate according to your affordability.
- It is okay to buy one property at a time.
- Prepare a cash buffer before investing into properties. Best not to invest into any if you don’t have much cash-in-hand.
- Avoid projects where the buyers are ‘investors’, especially those who use this technique to finance their purchases. Imagine. If you’re Adam’s neighbour, your property value would be greatly affected. How can you sell your unit for a great price when Adam is ‘killing the market’ by offering his at discounted prices?
- Shop for good properties at auction markets. Who knows? You might land an awesome deal which is 30% – 40% below its actual market value.
It is my intention to create awareness of multiple loan submissions, particularly to new and young property buyers, as it becomes more well-known in Malaysia presently.
I’m not an expert in this topic and may need your feedback, if they are helpful.
If you have questions or constructive feedback to share with us, please leave us yours below. Thanks: