Money Matters

1. We all want financial freedom. The question is, just what is Financial Freedom?
2. It varies from person to person. Some say it’s when passive incomes surpass living expenses. Some say, it’s when there’s no debts to pay. Others define it as when one does not have to work for a living.
3. All are correct from their perspective. To each, their own.
4. The journey to financial freedom has many routes. Just like climbing a mountain, we always start from the bottom.
5. Fundamental to a proper financial plan, is having proper protection via a suitable insurance policy. As a bare minimum, Medical and Debt Cancellation Plans are of utmost importance.
6. With so many Medical plans in the market, just how does one choose a suitable plan?
7. Well, as a general guide, these matters should be considered before a decision is firmed up :-
8. - Choose a plan that is renewable at your option. Imagine the nasty surprise where an insurer kicks you out just when you need it the most.
9. - Study the amount for Internal Limits, if any. These are restriction in usage for specified illnesses such as Outpatient Cancer and Kidney Dialysis, which could be much lower than limits for all other illnesses. Avoid policies that discriminate. If unable to, then ensure that limits are as uniform as possible.
10. - Evaluate whether a policy has any Deductible or Co-Insurance elements. In the case of the former, the insured’s liability is fixed while most Co-Insurance plans go along shared percentage on the total bill.
11. - Do you want a policy that grows to keep up with inflation or one that remains stagnant? What RM100k can do today is superior to RM100k a decade into the future.
12. The next important policy is a Debt Cancellation plan. As the name suggests, the objective of this plan is to ensure debts taken by the insurer is settled in the event of a triggering event and the family are in not burdened by the outstanding loan.
13. Most banks offer this type of protection in the form of Mortgage Reducing Term Assurance (MRTA) when borrowers take on housing loans. However, most borrowers are not aware of what is known as Mortgage Level Term Assurance (MLTA).
14. The MRTA shadows the loan value while a MLTA remains constant despite the reduction in loan with each instalment paid. For those who wish to purchase more than one property, MLTA is a better option where one policy can be tailored to cover a few loans. MRTA on the other hand, varies according to number of loans and can prove to be confusing at times.
15. A very important element when taking MRTA/MLTA is the inclusion of Critical Illness (CI) coverage. Most standard policies cover only Death and Disability as triggering events. The statistics of falling into serious illness far outweighs the odds of meeting an untimely Death.
16. With insurance policies put into place to secure the income source, the next step of Savings and Accumulation can be put into motion. We will explore that topic in the next article.

Property Investment Musings

1. An interesting situation happened some time ago to a friend whom I know very well. He had the pleasure of purchasing a semi-detached house located at Horizon Hills in late 2011 for a then princely sum of RM900k.
   
   
2. Construction was in an advanced stage when he purchased and the house was promptly delivered by the developer around mid 2012. Armed with the keys to the property, he had a change of heart and decided to sell the unit although the original intention was for own occupation.
   
   
3. The main incentive for the change of plans was the rapid rise in prices for new launches, which was only due for completion some 2 years in future. He now had a property that was ready for occupation and was in high demand.
   
   
4. By October, a buyer was found for Rm1.35m and it so happened to be a foreigner who incidentally was a Privilege Banking customer of a UK based bank. In a matter of days, a loan amounting to 60% of purchase price was secured, with the bank accepting full valuation.
   
   
5. A Conditional Sales and Purchase Agreement (SPA) was signed because State consent was needed for transactions involving foreigners.
   
   
6. The buyer placed a deposit amounting to 10% of the purchase price and the SPA was drafted such that in the event State consent was not obtained, then the SPA will be terminated with full refund of any monies exchanged between both parties.
   
   
7. However, once consent was obtained, the SPA will thus become unconditional and all parties are bound by the contract entered into. Any termination by either party at this stage will incur damages that must be compensated to the aggrieved party.
   
   
8. Due to year end and the uncertainty of the impending General Elections, State approval got delayed longer than expected and was only obtained in early March 2013. By then, 5 months has gone by since the SPA was entered into.
   
   
9. In this short time, the purchaser’s financial situation has deteriorated due to unforeseen medical expenditure incurred by a family member. He was unable to raise the remaining 30% of the purchase price amounting to RM405k.
   
   
10. Since State consent was obtained, the buyer is now caught between forfeiting the initial 10% amounting to RM135k or come out with a further 30% to complete the purchase.
    
    
11. Sadly, he had to forfeit. The SPA was aborted and in the end, everyone involved in the process got paid except the buyer and the loan officer who processed the loan.
    
    
12. The lesson learned from this misadventure for the buyer can be summarised as follows :
13. -When big ticket items are involved, conclude it as fast as possible as a change in circumstance may lead to severe losses.
14. -Segregate funds carefully so as not to mix them up when entering into legally enforceable obligations. 
15. -Always keep an extra amount of funds just in case unexpected costs come up. One can never be too prudent when anticipating expenditure.
16. -Always be careful of local laws when dealing with overseas ventures.
17. -On top of the loss of deposit, there were abortive legal costs. The final loss might be financially crippling.
    
    
18. Back to the friend. He was now RM135k richer, less legal costs incurred, which incidentally was very insignificant as the bulk of charges was incurred on the purchasers side.
    
    
19. By then, property prices have raced even higher and he now decided to stay in it as per original intention. The only difference is, he now has an extra RM135k for the renovation budget.
    
    
20. Hence concludes the tale of the boomerang property.
    
    
21. Happy reading.

Property Investment Musings

1. Is it the right time to purchase a property now? Should I delay until the price falls? Should I buy now before prices go up?
2. These are the common questions that we hear on and off. Sadly, for both the person asking and us listening, we simply just can’t see the future. If we could, well, the firm will be a very wealthy for we will be able to foresee the next 4D draw and place all funds on the winning number.
3. The questions, however, are not without answers. Let’s assume the property is for own accommodation. Then, the answer is simple. It just simply doesn’t matter when one buys.
4. Allow us to illustrate our reasoning. Let’s say a double storey house in Nusa Idaman is purchased at Rm800k for own stay. Due to persistent demand, in one year’s time, similar units are now being sold in both in the primary and secondary market at amounts in excess of Rm1m. How does this augur for the purchaser?
5. Well, for starters, there is a gain of Rm200k due to capital appreciation. The purchaser will be patting him/herself on the back for such a fantastic investment decision. Heck, he/she might even be claiming bragging rights on such foresight!
6. The glaring thing however, is that the gain is merely a paper profit where it’s only academic unless it is disposed and the value is monetised. Secretly, the purchaser may be cursing for not getting 2 units in the first place, one for dwelling and the other to flip.
7. What if the situation is reversed instead? Prices take a dive for whatever reason and the market value is now hovering at Rm700k range. What now? Did the purchaser lose RM100k?
8. Again, it’s just a paper loss. Maybe a bruised ego to boot but that’s about the damage that the buyer is going to sustain. Since he/she is occupying the house, a sale is unlikely and thus no loss will be recorded.
9. So, in the end, it really does not make sense to time the market when there is a genuine need. The only thing is the natural human behaviour of wanting a bargain where an item is procured on the lowest possible price. In essence, it’s merely to satisfy the inner ego.
10. The matter is entirely different when one purchases with the hope profiting from an anticipated price increase. Now, this is speculative and timing is of the essence. Some would call this investing but some call it time gambling.
11. If this is what one is hoping with the purchase, then, all the best as any drop in price may spell financial disaster. The final outcome will depend on one’s financial prowess and holding power.
12. To the genuine buyers out there, now is as good a time as anytime. May you find your ideal unit.

Property Investment Musings

1. New property prices in Johor Bahru are at stratospheric levels and we suspect, on a square foot basis, it's probably the highest in Malaysia now. We don’t have statistical data to prove but it sure does feel like it.
2. Consumer goods as well as produce at the wet markets are obscenely priced and we wonder how the lower income group even survive these days.
3. When asked why Johor Bahru is experiencing this nasty phenomenon, the finger is readily pointed at Singaporeans. They seem to be at the receiving end on almost anything that has a price on it.
4. We think it’s not fair to blame them for everything that’s price related. To a large extent, Johor Bahru’s prosperity is largely dependent on Singapore. Just like most border towns of the world, prices tend to be higher than the national average.
5. It is said that over 100,000 people cross into Singapore on a daily basis for their employment. These Malaysian’s bring back valuable Singapore Dollar into Malaysia and enjoy a higher than average per capita income.
6. With a stronger purchasing power, these Malaysians also possess higher disposable income to spend on discretionary items such as a second property, holidays, better quality food, luxury items, etc. So, Johoreans who earn Dollars have also contributed to price increases.
7. The state of Johor has ample land for its entire population many times over. Look around and it’s still possible to see oil palm plantations within 25km radius of Johor Bahru City.
8. Then why has prices gone up? Well, if one were to see positively, we have to thank our Southern neighbours. Their strong Dollar has created demand and investors who bought into property many years ago are able to realise profits on their investment.
9. Singaporeans in a way have helped create wealth just by buying into new properties and older properties within the same area automatically increase in value. Isn’t this also enriching Malaysians?
10. To attract investments, our Government also improved infrastructures such as the Coastal Highway, fibre optic connections, tax breaks for returning Malaysians, etc.
11. Didn’t this improve the standard of living for Johoreans? Aren’t we able to reach home faster and have faster internet connections?
12. While they have contributed to price escalation, we must balance that criticism with the merits that Singapore has done for Johor Bahru. The city state not only provides employment, it also assisted in better lifestyle and helped create wealth and conveniences.
13. With that, we would like to wish a belated birthday to Singapore. May you prosper strength to strength!

Property Investment Musings

1. I recollect that in Year 2002, there was an exemption on stamp duty for property transactions to reduce the overhang that was plaguing the nation.
2. Developers were stuck with property that just could not be sold as many, especially the ones who speculated just before the Asian Financial Crisis, were still licking their wounds.
3. Genuine buyers also shied away as the weak economy either made it difficult to raise even the 10% down payment or be very cautious in their spending.
4. Interest rates were in the BLR + X% range and double storey houses could still be purchased below RM200,000.
5. The situation is in stark contrast today. Locations such as Nusa Bestari, Bukit Indah and Horizon Hills are retailing double storey units at nothing less than RM650,000. Once in a while, units do come at lower prices by these tend to be rare and far in between.
6. Herein lies an opportunity for early buyers to use their timing advantage and finance the purchase of a new unit. Rather than struggle to raise fresh funds for the inflated 10% down payment for the new unit, one just has to use their existing property to grow the asset portfolio.
7. Let’s say a double storey house was purchased for RM200,000 in Year 2002 with an initial loan of RM180,000 on a monthly instalment of RM1,200.
8. Assuming the valuation has risen to RM600,000 today, banks would be willing to lend up to 90% of this amount which translates to RM540,000.
9. Let’s say the original loan is now reduced to RM105,000. The owner can now apply for a maximum of RM435,000 in cash as a second loan on the same property. These funds can now be used to finance the purchase new units.
10. Theoretically, this scenario is only possible provided ones credit history with the bank is good and current income is capable of handling the increased loan amount.
11. Back to the increased loan. Now there will be 2 loans to service on the same property. Depending on the bank, the increased loan can either be charged at a rate that is similar to normal housing loans or as a collateralised personal loan.
12. If it’s treated as an increased housing loan, interest rates are relatively lower but the bank is likely to demand a valuation report as well as a fresh set of legal papers so as to register a new charge on the property.
13. This process can take slightly over a month and fees alone can take up to 2% of the new loan amount.
14. Where the new loan is taken as a collateralised personal loan, only stamp duty will be imposed for the extra loan and in most cases, valuation report can also be waived.
15. In essence it is a personal loan but with the property as collateral. Interest rates are thus lower than a regular personal loan but higher than housing rates.
16. The only drawback of the 2nd loan approach is that the borrower is stuck with the same bank as the loans cannot be split between separate lenders.
17. This may not be the most efficient form of financing as the original loan could be on a BLR + X% basis while the increased loan may be on BLR – Y% basis.
18. Where needed, the property can be refinanced with a new lender who may offer a more cost effective package.
19. Many people are unaware that monies can be taken out of their appreciated property this way. When used properly, this avenue can be used for cash flow management and capture opportunities as and when they arise.
20. Happy property shopping!