Seeing Into the Future

One key skill you must develop to become a professional property investor is to acquire the ability to accurately see into the future as property investment is for the mid to long term. As you acquire more knowledge and experience over the years, this skill will somehow become second nature to you.

For example, when I moved to Kuala Lumpur in early 1994, I took a long drive (there was no Sprint expressway back then) from Bangsar Baru to check out the landed properties in Taman Tun Dr. Ismail. Back then, the land at Bandar Utama was just being cleared and I was wondering why anyone would want to stay in a property so far away from town. If I recall, Bandar Utama double story link houses were being sold for around RM350,000 in those days. 16 years later in 2010, house prices there are more than RM750,000.

Today, I see a few upcoming and better designed townships (I am not going to give away any names!) that remind me of my 1994 Bandar Utama experience. Having seen over the years how Bandar Utama and the surrounding areas have been transformed from a piece of bare land, it’s not too difficult to imagine how these new townships will eventually look like in the hands of a reputable developer. Hence the risks for me to invest in these new townships are much lower compared to someone who is just starting out.

Net Worth Divergence

In a similar vein, there is a marked difference in the Future Outlook and Net Worth of people who are 100% into properties compared to the majority of people who usually diversify their capital into different asset classes.

Let me share a personal example. Many years ago in my younger days, I was heavily invested into stocks as that was the more exciting vehicle to make quick money compared to properties which was perceived to be boring and slow. A big problem I faced was that I found it extremely difficult to predict my Net Worth at the end of every year. In some good years, it could be up more than 30%, and even down by more than 50% in some extremely bad years. I also personally encountered many people who were wiped out during the 1997 Asian financial crisis.

I always used to secretly admire those students of mine who were 100% into properties. I used to tell them it was much easier for them to predict with 99% accuracy what their Net Worth would be like one year later.

Let me illustrate by using the example of Mr. Property and Ms. Diversity.

Mr. Property
Purchases a Medium Cost Apartment = RM120,000
Down-Payment = 20% or RM20,000
80% Loan = RM100,000 for 20 years at a fixed interest rate of 5% pa

Assumptions

Look at the following Loan Amortization Table and Chart:

In 20 years time, Mr. Property’s Net Worth would increase from RM20,000 (ie. his initial down-payment) to RM210,421 thanks to the twin benefits of property appreciation of 3% pa and loan reduction thanks to his “tenants hard at work”.

Ms. Diversity

She doesn’t quite like properties and is afraid of taking bank loans. She chooses to diversify her RM20,000 into paper assets instead. Ms. Diversity’s Net Worth grows to:

At 10% pa compound interest = RM122,318
At 12% pa compound interest = RM172,255
At 14% pa compound interest = RM241,114

Notice a few interesting conclusions from the chart:

1. Net Worth wise, Mr. Property is far better off as long as Ms. Diversity is unable to chalk up compounded returns of at least 14% pa every year.

2. Even at 14% pa compounded returns, Mr. Property is still better off for the first 18 years. Ms. Diversity can only “catch-up” and overtake Mr. Property after year 18.

From my personal experience in stocks and other markets, it’s extremely challenging to achieve a consistent return over the long term of even 12% pa every year. Further, markets in recent years have become a lot more volatile due to globalization. To achieve 12% pa return entails investing in higher risks instruments that may even go down by more than 30% in bad times. Depending on her choice of investments, Ms. Diversity’s net worth growth will not be smooth as shown in the chart. In fact, it will be very volatile in real life.  On the other hand, Mr. Property’s net worth growth will be very similar as shown in the chart.
 
What is ironical is that Mr. Property may be initially perceived to be taking high risks as his RM20,000 is invested or concentrated into one apartment and he owes the bank RM100,000. Whereas Ms. Diversity is perceived to be taking lower risks as she is diversifying her investments without any bank borrowings.

If you “crystal ball” and look into the future, you will actually realize that Mr. Property’s risk is much lower than Ms. Diversity. After all, as long as the apartment is purchased in a good location that is easy to rent out, there is actually very little risk as long as the right tenants are chosen each time.

This is what I mean when I mentioned earlier that I used to envy people who were 100% into properties. Today as I become older and wiser, instead of being envious, I have decided to join them and have shifted the bulk of my capital into properties. Boring and Slow is anytime better than Exciting and Uncertain Returns … over the long term that is!

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Article Contributed by
Milan Doshi
Financial Trainer and Best Selling Author of
“How You Can Become a Multi-Millionaire Real Estate Investor!”
For more information, visit www.milandoshi.com