This article is written for you if you consider yourself not savvy in investing.
Perhaps, you admire how some people can attain huge capital gains of, let’s say 50%, 100%, or more, in a short span of time from trading stocks, forex, and also cryptocurrencies. It seems that they had found the holy grail to trading and you feel that you are not that intelligent in attaining that kind of profits yourself.
If that is you, read on.
First, let me bring you some good news.
Many believed that a good investment is one that can bring massive profits, like 100%-200% in 1-2 years and it takes luck and guts to do so. Thus, this is why we will continue to see people trying their luck to pursue such gains all of the time. But, if we take a step back and observe carefully, how many of these people did achieve real long-lasting wealth and become multi-millionaires?
The answer is not many.
So, if you feel that you are not smart enough to earn 100%-200% in a year from these trading activities, that’s okay. You still have a shot in becoming wealthy. In fact, the desire for quick profits has killed many and has actually slowed down a lot of people from building real sustainable wealth.
Your lack of such ‘intelligence’ could be a blessing to you.
In this article, I’ll illustrate how all of us could easily beat the 100%-200% a year in trading profits aimed by traders and speculators with a real estate that grows at a rate of 3% per annum.
The prerequisite is for you to be sensible.
8 Magical Numbers to Know before Investing in a Property
You can use the following 8 magical numbers to assess your next property deal.
Let me illustrate how to use them below:
Here, let’s assume that you found a 800 sf apartment unit located within a nice, matured, and well-accessible neighbourhood in the Klang Valley. Presently, let’s also estimate that generally, the population living in the neighbourhood earns a monthly average income of RM 5,000-RM 6,000.
You have checked brickz.my and discovered that the average transacted price in the last 12 months for an apartment of that size is RM 350,000. In addition, you surveyed and found that its rental rate is around RM 1,000 a month. Thus,
Magic Number 1: Fair Valuation psf
The fair value of the 800 sf apartment is RM 350,000.
Thus, its price psf is RM 437.50.
This is to be compared with other apartments within the vicinity.
Ideally, you will want to buy a property at below its fair valuation in psf.
Magic Number 2: Average Monthly Income of the Population
This would be RM 5,000-RM 6,000 a month.
Thus, the population can afford to pay the RM 1,000 in monthly rent.
Magic Number 3: Average Gross Rental Yield
The average rent for a 800 sf apartment unit is RM 1,000 a month.
The fair value of the 800 sf apartment is RM 350,000.
Thus, its average gross rental yield is 3.43% per annum.
Formula: (Monthly Rent x 12 months / Fair Value of Property) x 100%
Ideally, you will want to achieve a gross rental yield of above 3.43% per annum.
Let’s say, you decide to buy a unit for RM 350,000. You pay RM 35,000, which is the required 10% in deposit. You obtain a 35-year mortgage worth RM 325,000, which consists of RM 315,000 (90% of purchase cost) and RM 10,000 (MRTA) at an interest rate of 2.9% a year. Thus, your mortgage is RM 1,233 a month.
In addition, you spend another RM 35,000 in transactions and renovation costs. Also, every month, apart from mortgage payments, you pay RM 267 in all other property-related expenses (service, sinking, quit rent, and assessment). Thus,
Magic Number 4: Purchase Price psf
The purchase cost of your 800 sf apartment is RM 350,000.
Thus, your price psf is RM 437.50, the same as (Magic Number 1).
Magic Number 5: Initial Capital Outlay
This includes the 10% deposit, transactions and renovation costs.
Here, your initial capital outlay is RM 70,000 (RM 35,000 + RM 35,000)
Magic Number 6: Starting Mortgage Amount
This would be RM 325,000.
Magic Number 7: Monthly Cash Inflow / Outflow
Let’s say, you managed to rent out your unit for RM 1,000 a month.
You spend RM 1,500 in mortgage payments and property-related expenses.
Thus, your monthly cash outflow is RM 500 a month.
Formula: RM 1,000 – RM 1,500 = negative RM 500 a month.
Magic Number 8: Your Gross Rental Yield
You rent out your property at RM 1,000 a month.
Thus, your initial gross rental yield is 3.42%, the same as (Magic Number 3).
10 Years Later
During the 10-year period, let’s assume:
a. You raise your rent by RM 100 a month once every 2 years. Thus, at the tenth year, you receive RM 1,400 a month in rental income. Meanwhile, your amount of mortgage payment and all property-related expenses had remained constant throughout the 10-year period. Thus, your cash flow for the last 10 years would be:
You incurred RM 36,000 in cash outflows for the last 10 years.
b. You estimate that the value of your property could appreciate by 2% per year for the next 10 years. Thus, after 10 years, the apartment unit that you invested in had appreciated to RM 470,371, from RM 350,000.
c. In that 10-year period, you have reduced your outstanding mortgage balance to RM 262,820. So, you have built a sizable property equity of RM 207,551 if we deduct RM 470,371 (Property Value at Year 10) from your mortgage balance.
So, What is Your Return from This Investment?
You placed an initial investment of RM 70,000.
For the next 10 years, you incurred another RM 36,000 in cash outflows.
At Year 10, your net worth had increased to RM 207,551.
So, by numbers alone, you have almost doubled your wealth in 10 years as your gain stands at RM 101,551 (RM 207,551 – RM 70,000 – RM 36,000). All this from just one simple real estate deal.
Can you earn RM 100,000 in profits from stock trading activities in 10 years?
How about growing your wealth by RM 100,000 with Bitcoin or Forex?
Here is the nugget.
You can make 100%-200% from your winning trades. But without quantum, you will not be able to match the returns from a simple real estate deal, even if all it did is to appreciate by 3% per annum. That is the power of leverage.
Do you need to be an investment genius to achieve this return?
Do you need to take excessive risk to earn RM 100,000 from your property?
Think about it.
If real estate is risky, why would banks lend you money to buy properties?
Why don’t they lend you money to buy Bitcoin or do Forex trading activities?
Conclusion: Short-Term Heroes vs Consistent Wealth Builders
Which do you prefer?
If you think you are not cut out to be a short-term hero, raking in 100%-200% in short-term profits from trading or speculative activities, that is okay as I believe that real wealth that is sustainable for the long-term is not built based solely on pure luck. Luck itself can only bring a person that far. Worst still, luck could also be a hindrance as he who gains via luck may have a tendency to feel ‘immortal’, often a recipe for an impending disaster.
Instead, I like to encourage all of us to be prudent in investing so that we would increase our chances of building wealth sustainably for the long-term. But, it all starts with a change of mindset from a belief that investing is about becoming a short-term hero to a new mindset that investing is about prudence and wisdom to gradually grow, sustain, and maintain our personal wealth.
At the end, you may find that the ‘long-termers’ often build sizable wealth from their investments while ‘short-term heroes’ may end up trying to trade, gamble or even speculate to get their next 100%-200% from their few thousand bucks.
Which do you prefer?