The Property Business: Maximizing your income in today's everchanging market

Property investors with a lot of money can simply get multiple units of the right size and desirability to maximize their return, they can even benefit from the economies of scale in servicing and furnishing the units. But whether cash-rich, or cash-strapped, many investors fail to get the second tool of yield maximization working for them. That tool is leverage.

Property mortgage loans are for those unable to afford what they want? Well, yes in principal, but it's actually the oldest most reliable way of turning property investment into multi-million dollar careers even in stable non-berserkly rising markets.

Can't go into the precise tactics here, but you can get the idea from this:

One investor with 620K, buys a 600K condo and furnishes it with 20K, rents it out at 4000 per month and nets 43,000 per year after service charges and maintenance, and is quite happy.

Second investor has 620K, buys TWO 600K condos by borrowing 60% of the price from his favourite financier, ending up only spending 480K. He furnishes both for a similar amount as before. He rents them out at same rental as the first investor. He collects 8,000 per month, pays 3,000 to the bank which is the monthly mortgage payments for both, so he nets 5,000 per month, or 50,000 per year after service to both apartments.

You might think that these are close numbers, second investor is not getting that much higher return for the added exposure of bank loan and an extra condo. Well there are TWO benefits that you might have missed on.

1- He ended up spending 480K plus 40K for furniture. That means he started out the project with excess cash of 100K that can be used for other investments or to get a bigger apartment, and still has enough to meet any service charges or surprises that might crop up before the property gets a tenant, so he isn't that tight.

2- He has TWO apartments that are appreciating over time, while the bank payments are slowly adding capital value to his name. Assuming the rent collected over the three years was used as income, and let's suppose the apartment increases in value over three years to RM650K: First investor would have had capital appreciation of 50K, while the second would have had capital appreciation of 100K, in addition to gained capital share from the lowered mortgage. If they sell, first investor would net 650K plus used furniture in total. Second investor however would net back 480K plus 100K capital appreciation plus 70K value paid in already by the monthly mortgage settlements net of financier's interest, plus 21,000 higher rent collection over the three years, plus the 100K that wasn't used in the beginning, making his total cash closer to 771K, plus used furniture for two apartments.

Are you getting the picture?

Here are the final numbers in a different way:

Both investors started out with 620K. First investor used RM 620K, and produced RM 179K (43K times three years plus 50K capital appreciation), which means his return on investment is 28.9%, or annualized return of around 9.6%. He was cash-strapped for the first many months as he used all he had.

Second investor used RM 520K, and produced RM 320K (50K times three years plus 100K capital appreciation plus 70K left over when closing the mortgage), which means his return on investment is 61.5%, or annualized return of 20.5%. He was liquid with 100K from the start.

Which one of those investors should you be?

Price, and leverage, tools of the trade that you need to use to accelerate your property endeavours.