Below is a question from Peng, a fellow reader of ours:
Years ago, like Peng, I had the same question too. I wondered, how is it possible for an individual to own 10, 20, or more properties in Malaysia, especially when most find it difficult to save up for their first property?
What is their secret?
Are they born rich?
And, how did they achieve such a phenomenal feat?
In this article, I’ll share 4 methods that I have discovered which enable a person to build a portfolio of 10+ properties in Malaysia and would list down their pros and cons for each method.
The purpose of this article is to illustrate how one could own multiple or maybe even unlimited amounts of properties in Malaysia without busting up his or her personal debt service ratio (DSR). Before I begin, the formula of one’s DSR is:
= (Total Monthly Debt Commitment / Monthly Income) x 100%
So, if a person earns RM 8,000 a month and he serves a mortgage instalment of RM 3,000 a month and car loan instalment of RM 1,000 a month, his DSR works out to be 50%.
= (Total Monthly Debt Commitment / Monthly Income) x 100%
= ((Mortgage Instalment + Car Loan Instalment)) / Monthly Income) x 100%
= ((RM 3,000 + RM 1,000)) / RM 8,000) x 100%
= (RM 4,000 / RM 8,000) x 100%
With that, let us move onto:
Method 1: The Conventional Way
For Malaysians, we are entitled to apply for a 90% loan-to-value (LTV) mortgage for two residential properties and 70% LTV mortgage for our third, fourth, fifth, … etc residential properties in Malaysia. Meanwhile, we are entitled to as much as 85% LTV mortgage if we intend to buy commercial properties. Thus, the total amount of down payment we, as individuals, need to place would be as follow:
If an investor wishes to buy 10 residential properties at a rate of one real estate per year where the cost is RM 300,000 per property,
For his 10 properties, he needs to place RM 780,000 in down payments and will obtain RM 2,220,000 in mortgages where he will pay monthly instalment of RM 11,380. The above calculation assumes:
a. The investor is young and obtains a 30-year mortgage for his 10 properties.
b. MRTA is excluded from the mortgage.
c. The interest rate for all mortgages is fixed at 3% per annum.
If the investor plans to maintain his DSR at a maximum of 50% and let’s assume that apart from the 10 properties, he has a car loan instalment of RM 1,000 per month, then, the amount of monthly income he needs to earn
is RM 24,760.
DSR = 50%
(Monthly Debt Instalment / Monthly Income) x 100% = 50%
((10 Mortgages + 1 Car Loan Instalment) / Monthly Income) x 100% = 50%
((RM 11,380 + RM 1,000) / Monthly Income)) x 100% = 50%
((RM 12,380 / Monthly Income) = 50% / 100%
Monthly Income = RM 12,380 / 0.5
Monthly Income = RM 24,760
Normally, the investor could raise his monthly income by increasing his amount of active income and charging rents for his 10 properties. I believe this could be the most stable method of building a sustainable property portfolio for it would demand an investor to be financially strong before adding on new property into his portfolio. But, the journey is not easy as a 30% down payment is required to purchase his third, fourth, fifth … etc property.
Thus, this leads us to:
Method 2: Proxy
Let me illustrate this method with a story:
Assuming we have Jim, a businessman who has 2 residential properties. Jim has the intention to invest in a new residential property and by conventional means of purchasing, he is required to place a 30% down payment for it. But, Jim has a better plan. He has Mike, a staff who has worked for Jim for 5 years. Mike earns a salary of RM 5,000 a month and does not own a property.
Thus, Jim proposes to Mike the following plan:
a. Mike buys the property under his name. He acts as a proxy to Jim.
b. Mike can obtain a 90% LTV mortgage as it is his first purchase of a property.
c. Jim is happy to place a 10% down payment for the property.
d. Jim is also happy to service its instalment and pay for all property expenses.
e. Mike assigns the property to Jim via a power of attorney (POA) document.
f. If Jim sells the property, he is willing to pay 20% of the profits to Mike.
In this case, Jim’s DSR is not affected as Mike is the one who obtains the loan. It allows Jim to have control over the residential property via the POA document. This method works only if they can work together for the common good. If not, things can get messy and complicated.
For instance, what if Mike betrays Jim and chooses not to sign the POA after he receives the keys to the residential property?
As such, some investors may choose:
Method 3: Co-Ownership
This is about pooling resources from multiple co-owners to own one property.
Let’s say, we have three brothers namely, Ben, Bob, and Barry. They wish to buy a residential property priced at RM 1 million and thus, requiring them at least a RM 100,000 in down payment. But, the three brothers do not have RM 100,000 individually to buy the property on an individual capacity.
So, they had decided to pool in their savings to collectively buy the property. Its title deed shall bear three names: Ben, Bob and Barry based on their amount of contribution.
This method is gaining popularity for it makes property ownership affordable to more people. But, this method has many flaws such as:
a. What happens if Ben and Bob want to sell and Barry does not want to?
b. What if Ben passes on without a will? What will happen to the property?
c. What if Ben passes on with a will and bequeaths his stake to other people?
Suffice to say, the administration of the property would be made complicated if the co-owners could not agree to how best the property should be managed. In this case, I think, it is better for investors to have knowledge on estate planning first before co-owning a property.
Method 4: Corporation
Here is how it works:
Let’s say, we have Rick, a serial real estate investor. He aims to buy a multiple of residential properties in the auction market, where each property costs nothing more than RM 500,000 and is priced at least 30% below its market valuation.
Rick intends to buy these properties with cash, no loan. Hence, Rick ropes in all his ‘investment kakis’ to form a corporation (Sdn Bhd) where each contributes a capital of RM 100,000. Rick, as a director of the formed company, would attend and bid for properties in the auction hall.
The company shall own these residential properties debt-free.
Rick and his investment kakis will have a stake in these properties through their shareholdings in the company.
As the properties are bought with cash, the DSR of Rick and his kakis would not be affected.
This would be a better method to own properties as compared to co-ownership of real estates. This is because the properties are manageable and transactable, even if Rick or one of his investment kakis passes on prematurely as all of these properties are owned by their company. If Rick is the one who passes on, then, it is his shares in the company that would be frozen and shall form part of Rick’s estates, not the properties within.
Next time, when you hear someone who has 10, 20, or more properties, maybe you want to take a step back and ask the following questions:
a. Is he the sole individual owner of all properties in his portfolio?
b. Did he purchase some of his properties via proxies?
c. Or, did he purchase some of his properties as a co-owner?
d. Or, did he purchase some of his properties under a corporation?
Then, you could identify the ones who are real investors from just hypes. By the way, the above is not a recommendation to any methods of building a property portfolio as each method has its pros and cons and is to be chosen according to one’s character, beliefs, entrepreneurial spirit, game plan, skill sets, insights and knowledge on the subject of property investment.
So, will you own 10 or more properties in the future?
Comment below and please do share how you intend to go about it: